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Industry Analysis: Coffee Retailing

Coffee retailing is a mature industry in the United States that has been growing at a
steady rate in the past five years and is forecasted to have continued growth in the future.
The growth in the coffee retailing industry can be attributed to primarily two major
factors increase in per capita coffee consumption and an increasing demand for
premium quality gourmet coffee.
Industry Overview and Segmentation
The primary activities of the industry comprise of retailing whole or ground coffee beans,
retailing fresh-brewed coffee, retailing ready-to-go bottled coffee, making to-order
espresso-based beverages, and making fresh-brewed coffee. The coffee retailing market
includes sales from all major retail channels, including specialty stores, general
merchandisers and Internet retailers.
Major products and services in this industry are fresh brewed coffee, instant coffee,
ready-to-drink coffee, single-cup brewer coffee and coffee beans and grounds. In 2014,
fresh brewed coffee is expected to account for 37.0% of industry revenue, followed by
coffee beans and grounds at an estimated 30.0%. The remaining 33% is comprised of
ready-to-drink coffee (15%), single-cup brewer coffee (13%), and instant coffee (5%).
Historical Growth in the Coffee Retailing Industry
In the past five years, the coffee retailing industry has been growing at an annual rate of
2.6% and is projected to become a $27.1 billion industry by the end of 2014. During
2008 and 2009, the recession had caused a signification decrease in this industry as
consumption of coffee fell with the economy. With the improvement in economic
conditions, coffee consumption recovered and grew by 4.9% in 2011.
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One of the leading factors for the growth in the coffee retailing industry is the increased
demand as more and more consumers are including coffee in their daily consumption
habits. According to the National Coffee Association (NCA), 61% of US adults (above
the age of 18) consume coffee on a daily basis. This has increased the per capita coffee
consumption, thus leading to higher sales volumes for coffee retailers.
Furthermore, consumer preferences are shifting towards higher quality, specialized
gourmet coffee, such as espresso-based coffee with Arabica coffee beans and coffee in
single-cup packaging. According to the National Coffee Drinking Trends study by the
National Coffee Association (NCA), 34.0% of respondents drank gourmet coffee in 2014,
up from 31.0% in 2013. As a result of preference towards high-margin specialized
gourmet coffee, profits in the coffee retailing industry have increased from 5.5% in 2009
to 6.0% in 2014.
Threats and Emerging Issues
World Price of Coffee
A key determinant of operational costs and profits in the coffee retailing industry is the
world price of coffee. Coffee beans are a key input commodity in this industry and an
increase in their price generally increases price in retail coffee. Price increases typically
have a negative effect on demand for coffee by consumers. Owing to the adverse weather
conditions in Brazil and other major coffee producing countries, the world price of coffee
has been escalated in 2014 and may pose as a threat to the coffee retail industry.
Consumption of Tea
Another potential threat to this industry is the growth in consumption of tea and tea-based
beverages. Health-orientated consumers are becoming more drawn to tea as an alternative
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to coffee. This demand shift towards tea is becoming more apparent due to overwhelming
publicity and promotion of teas health benefits that has encourages consumers to
perceive tea as the healthy choice in beverages. As a result, revenue and consumption in
the tea industry have been increasing over the past five years. However, despite this
threat, the per capita coffee consumption is forecasted to increase annually by 0.4% over
the next five years.
Major Players in the Coffee Industry

In the coffee retailing industry, a major player is any company that generates more than
5% of industry revenue. Starbucks Corporation accounts for 33.7% of the market share in
the coffee retailing industry. The company is involved in preparing ready-to-drink coffee
beverages and selling whole bean, ground coffees, and single serve products, through
channels such as grocery stores, company-operated stores, warehouse clubs, specialty
retailers, etc. In 2013, Starbucks revenue in the retail coffee segment alone grew by 7.3%,
which can be attributed to the company's successful strategy of catering to consumer
preferences and tastes and also lowering operational costs.
Other Companies
The coffee retailing industry is fragmented and comprises of numerous retailers and
restaurants. Besides the major player, Starbucks, other companies make up 66.3% of the
market share in this industry. These include companies such as Dunkin' Brands Group,

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Inc. (Estimated market share: 2.0%), Caribou Coffee Company, Inc. (Estimated market
share: 1.4%), J.M. Smucker Co., etc. Considering the highly fragmented nature of the
industry, it is estimated that there will be approximately 349,990 establishments by the
end 2014, where coffee will be sold in numerous formats.
A Bright Future for the Coffee Industry
In the next five years, coffee retailing industry revenue is projected to grow at an annual
rate of 2.7% to reach $30.9 billion in 2019. This will be primarily driven by stronger
demand for more expensive gourmet specialized coffee, less volatile coffee bean prices
and demographic changes.
Revenue Outlook of Coffee Retailing Industry (2015 2020)

Revenue (in millions)

$ 27,648.9
$ 28,456.1
$ 29,246.1
$ 30,276.2
$ 30,908.4
$ 31,712.0

Growth (%)

Preference for Gourmet Coffee

In the next five years, the coffee industry and retailers within this industry will largely
benefit from more and more consumers viewing gourmet coffee as a staple. Projections
are that consumers will move towards drinking higher quality gourmet coffee in smaller
volumes, as compared to plain coffee. In addition, other trends such as increasing demand
for espresso-based coffee (such as lattes), coffee in single-cup packaging (such as Kcups), and instant coffee in new flavors, will stimulate coffee retailing industry revenue

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Less Volatile Coffee Beans Prices

Profits of industry revenue are forecasted to rise from 6.0% in 2014 to 6.5% in 2019. This
can largely attributed to less volatile prices of coffee beans. Compared with previous
years, coffee bean prices are projected to be less volatile, which will allow companies
within the coffee retailing industry to lower their purchase costs by securing much less
expensive coffee beans. Furthermore, this will cause a reduction in coffee prices over the
next five-year period, which will likely increase demand for coffee consumption.
Demographic changes will stimulate revenue
Forecasts suggest that in the next five years, population demographics will also play a
role in shaping the coffee retailing industry's competitive landscape. According to a
report by the National Coffee Association, the largest share of daily consumption of
gourmet coffee in the United States is by Latinos. Taking this into consideration, growth
in the Latino population will be a factor in driving demand for gourmet specialized coffee
in the future. To successfully reach out to this market share, many retailers within this
industry will open stores and franchises in proximity to this demographic.
The coffee retailing industry is a well-established industry in the United States that has
shown steady levels of growth in the past and is projected to exhibit continued growth in
the future years due to high per capita consumption of coffee, preference for expensive
gourmet coffee, low volatile input commodity prices and changes in demographics.

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Euromonitor International Report: Coffee in the US, May 2014
IBISWorld Industry Report: The Retail Market for Coffee in the US, May 2014
MarketLine Industry Profile: Hot Drinks in the United States, November 2013
Mintel Market Sizes: Coffee in US, October 2014
National Coffee Association Report: National Coffee Drinking Trends, 2014

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