Coffee in the USA – Part 3

In this blog we will see how companies come together in alliances, crossing boundaries inside and outside the coffee industry, ending up in the hegemony of only 4 blocks. Thousands of small and medium businesses have to find their niches in order to operate. Also something about habits and new trends in consumption.

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Coffee in the USA – Part 2 

Summary In the previous blog we looked at the history of coffee consumption in the United States and how the second wave caused changes in the coffee industry and consumption. Here, using the examples of Starbucks and Keurig Green Mountain, we explore two ways in which small pioneering companies have managed to grow and position themselves among the main players in the coffee industry in the United States. In the next blog more about alliances, habits and new trends in consumption.

Coffee in the USA – Part 2 

April 14, 2023, Jos Algra

Two roads to change the industry: Starbucks

At the beginning of the 20th century, “diners” arose, places where one could enjoy a meal and a coffee and meet friends, the “third place”, after home and work or school. To date they exist, probably for cheap.

After World War II, espresso spread mainly to the Italian diaspora in the United States. Espresso bars were seen as places for the Italian working class, a subculture that persists to this day in many parts, especially on both coasts of the United States, where there are significant colonies of Italian immigrants.

In reaction to the poor quality of coffee from the big brands, a Dutch immigrant opened a coffee shop in Berkeley in 1966 called Peet’s Coffee. He began roasting quality coffee, roasting darker and serving a stronger cup of coffee. Today it is the fourth chain of coffee shops in importance and the fifth among roasters.

Jerry Baldwin, Gordon Bowker and Zev Siegl were inspired by the example of Peet’s and opened their first coffee shop in Seattle’s historic Pike Place Market in 1971: Starbucks, a character from the novel Moby Dick. It was noted for the quality of the coffee and in 1980 they already had 4 coffee shops in Seattle.

In 1982 Howard Schultz was hired as marketing manager and in 1983 he was sent to a fair in Milan. Schulz was shocked to learn that there were 1,500 coffee shops in Milan and wanted to adapt the Italian model to Starbucks, but the founders opposed it and Schulz left Starbucks in 1985 to found his own coffee shop: Il Giornale, which he quickly expanded to several cities.

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First Starbucks coffee shop in Seattle, Britannica

In 1987 Baldwin and Bowker decided to sell Starbucks, Schulz quickly bought it and merged it with Starbucks, applying the Il Giornale business model, but using the Starbucks name. A rapid expansion began, first in the United States and then in other countries, and Starbucks acquired several coffee shop chains, such as Seattle’s Best. In 2022 Starbucks had 35,711 coffee shops in 84 countries. In 2020, it set a goal to grow to 55,000 coffee shops by 2030.

In 2021 Starbucks represented 42.9% of all coffee shop sales, 57.8% of the specialised chains, followed by Dunkin’ Donuts with 16% respectively 19.3%. In Canada the position is even more dominant: Starbucks with 34.2% of the total and 60.2% of the chains, leaving behind number two Second Cup Coffee (as the name already expresses) with 7% respectively 4% of the market.

The great success of Starbucks has been that it has returned the consumer to the coffee shops and the consumption of coffee (with a lot of milk), it has reinvigorated the coffee culture, the concept of the third place (with the help of the internet connection). It has expanded interest in quality coffee, pioneered by Peet’s, the origin of coffee, the environment, the people behind the coffee. This is known as the second wave.

It has also been important in creating the space for the specialty coffee movement, the third wave. Highly specialized third-wave roasters are challenging coffee shop chains over coffee quality and consumer experience. Starbucks’ response has been the creation of Reserve Roasteries, of which there are only 6 in the world (Seattle, Shanghai, Milan, New York, Tokyo and Chicago), which have to innovate the entire process with state-of-the-art technology and educate the consumer. They are linked with coffee shops where you can get the experience of select coffees.

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Starbucks Reserve Roasteries

In 2002 Starbucks introduced its Preferred Supplier Program, which since 2004 is called Coffee and Farmer Equity (C.A.F.E.) Practices, criteria for purchasing coffee and projects to support producers. In 2002 Starbucks also began to purchase Fair Trade coffee, of which it is currently the second largest buyer worldwide. The emphasis continues to be on the C.A.F.E. Practices, with which the company claims to have 99% of its purchases under sustainability criteria.

Two roads to change the industry: Keurig Green Mountain

Bob Stiller started in 1981 in Vermont Green Mountain Coffee Roasters a small coffee shop and specialty coffee roaster that also a few restaurants. The company was successful and Stiller decided to take it public, listing it with the NASDAQ stock exchange in 1993, which began a long series of acquisitions in the United States and Canada. His main acquisition was in 2002 Keurig (Danish for excellent), a company that produced pods for personal consumption known as K-cups. In 2006, when the purchase was completed, Green Mountain changed its name to Keurig Green Mountain. In 2009 and 2010 Green Mountain also acquired four additional Keurig licensees, Tully’s Coffee, Timothy’s World Coffee, Diedrich Coffee and Van Houtte.

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With the acquisition, Green Mountain combined a high-quality coffee roaster operating nationwide with a company that produces high-tech coffee brewing machines. The machines are offered at a cheap price to sell expensive capsules, as Gillette does with its razors and razor blades. Keurig with the high margins became the generator of most of the company’s revenue. In 2014 Keurig generated revenue of $822 million from the sale of coffee brewing machines and $3.6 billion from the sale of K-cups.

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In 2014 the original patent expired and with it the many pirated brands. By then Keurig Green Mountain had already left Nespresso behind and dominated the US capsule market, the fastest-growing product for years. Keurig Green Mountain also began producing capsules for Dunkin’ Donuts and Starbucks in 2011; in return, they sold the coffee brewers in their coffee shops. It currently produces for several other brands: Starbucks, Peet’s Coffee (JAB Holding), Dunkin’ Donuts, Folgers (JM Smucker), Maxwell House, Gevalia (Kraft) and others.

The Van Houtte acquisition opened up a market in Canada, where Keurig Green Mountain also became a leading coffee roaster. In 2022 Keurig Dr. Pepper, as the company is now called (more on the partnerships in the next blog), had a 20.5% retail market share, followed by Nestlé / Nespresso – Starbucks (13.5%), JM Smucker (9.9%) and Kraft (3.7%). In Canada, the percentages are Keurig Dr. Pepper 26.5%, Kraft 20.5%, by Nestlé / Nespresso – Starbucks 13.1% and JM Smucker 4.8%.

Since 1989 Green Mountain developed a great interest in the origin of coffee and in issues of environmental conservation and social responsibility, exploring the possibility of launching its own verification system. He did not pursue it but began selling Fair Trade coffee in 2002, initially under the Newman’s Own Organics brand, 100% organic coffee and high-quality Arabica. It was an important factor in growing the Fair Trade model in the United States and today it is the main buyer worldwide.

In 1996, the importation of 1.6 million bags of organic coffee was recorded, with Peru and Honduras as the main origins. This market largely overlaps with that of Fair Trade, 60% is double certified, whose volume is estimated at 1.5 million bags in 2021. There are no data for the other certifications.