-By Bob Phillips

While Starbucks may have created an on-premise coffee culture that lasted throughout the ’90s and into the new millennium, after the economic bubble burst in 2008, austerity measures began to take hold, even among formerly free-spending affluent consumers. Earlier in the year, Starbucks announced that it would close 200 of its U.S. stores in 2009. Without a doubt, the recession has resulted in many consumers questioning the need for daily coffee beverage purchases, normally in excess of $4 per cup.

As coffee aficionados began cutting back on trips to their favorite restaurant or coffeehouse, and brewing more of their hot beverage of choice at home, one might have expected to see a corresponding bump in take-home bean sales in the grocery channels. But, to date, that has not occurred, at least in the mainstream. According to data provided by The Nielsen Company, dollar sales of coffee in supermarkets with $2 million or more in annual sales — primarily ground coffee, bulk beans and instant — have continued to increase in each of the past four years. And, in fact, the $3.3 billion generated during the 52-week period ending March 21, 2009, represents the all-time high-water mark for the category.

However, concurrent with the dollar surge has been a corresponding decrease in unit volume. According to Nielsen data, unit volume of the category as a whole has trended downward in each of the past four years. The same trend can be seen in each of the major subsegments (ground, whole bean and soluble coffee) with the sole exception of soluble (or instant) coffee that saw exactly one marginal uptick (0.4 percent) in unit volume for the 52-week period ending March 22, 2008. Higher unit volume combined with fewer dollars can mean just one of two things: price increases or shrinking margins. In the coffee category, it’s a little bit of both.

In 2007, a shortfall in beans imported from Brazil forced the three largest roasters in the United States — Procter & Gamble, Kraft and Massimo Zanetti Beverage USA — to raise prices averaging 4 percent to 5 percent, or about 10 cents to 20 cents on 10.5-ounce to 13-ounce units. A similar increase occurred in 2008, fueled by increases in transportation and distribution costs. As recently as March of this year, another significant bump in price was seen in beans originating in Colombia due to a poor crop.

And while prices have risen significantly, the economic freefall — that started in the first quarter of 2008, gained steam throughout the year and has thus far refused to change course — has made many retailers hesitant to pass along those cost increases.

“Prices are up, but margins are down,” observes John Coleman, wine, cheese and coffee buyer for Balducci’s, a 10-store specialty chain based in Bethesda, Md. “Our costs are up, but we haven’t been passing them along in this economy. Because think of it: They’re buying it, if not daily, then certainly weekly. And that’s a lot for consumers to absorb week after week.”

While cross-merchandising the category can be a challenge, many smaller-format retailers have successfully placed coffee displays near related general merchandise items — coffee cups and mugs in particular. That challenge has been heightened during the current downturn.

“In this economy, it’s really tough,” agrees Mike McMahon, grocery buyer for Carson, Calif.-based Bristol Farms, a unit of Supervalu, Inc. that caters to an educated, affluent clientele. “In normal circumstances, you’ve got loads of cross-merchandising activities, particularly with coffee mugs.”

But the times today are anything but “normal.”

“The glassware, along with all the accoutrements that go along with making the coffee, such as grinders, that’s all discretionary spending — and that’s pretty much gone out the door,” notes McMahon.



High End Thrives
All the news in the coffee category isn’t bleak, however. Indeed, many retailers we spoke with saw no discernible drop-off at all in coffee sales. In many ways, the coffee category has followed the path set by beer and bottled water, where low-end products prop up the volume, while dollar growth and profitability are driven at the high end.

At Southern Season, a 28,000-square-foot specialty food retailer located at the University Mall in Chapel Hill, N.C., coffee is offered at three price points, offering something for everyone.

“That way, price-driven customers have sale coffees to choose from each month,” explains Caroline Cahan, tea and coffee buyer for A Southern Season. “Those interested in moderate prices and better coffees have mid-range options, and the high-end customer still explores the higher-end and micro-lot coffees. I would say we are seeing an increase in sale coffee purchases, but not at the expense of the high-end coffees.”

While most of the supermarket coffee business is done with either bulk beans (whole or ground) or mainstream branded coffee, retailers would be well advised to pay close attention to the trends happening today in the health and specialty channels as a blueprint for future profitability.

While decaf will never account for more than 20 percent of the market, organic coffee is a growing segment that should be closely monitored because of its promise.

“It’s all we carry,” explains Chuck Alwine, owner of Grapevine Natural Foods, an independent natural grocer in the Philadelphia suburb of Newtown, Pa., with over $1 million in annual sales. “We used to carry 14 or 15 SKUs of bulk coffee, but I’ve narrowed it down to about seven or eight now. You streamline it, you figure out what the best sellers are.

“So now we carry two decafs and about six different roasts, and they all sell pretty well. That’s for our customers who like to buy in bulk and save a little bit. They have the option of taking it home and grinding themselves or grinding it here. It’s probably about 50-50.”

A similar theme can be found in Chapel Hill, N.C.

“Currently, in our market, we’re seeing a higher degree of interest in organically grown and sustainable coffees,” notes Cahan, who explains just how much coffee is starting to mimic the microbrew phenomenon, where self-proclaimed “beer geeks” find themselves on a perpetual mission to find the next great small-batch brew. “There’s an emphasis on small- or micro-lot coffees, those coffees singled out for their unique characteristics, and marketed as single lots, with the expectation that when that coffee lot is gone, you move on to a new lot with perhaps different characteristics.”

Another niche to consider: instant organic coffee.

“I carry one SKU, Mount Hagen,” explains Alwine. “It’s not cheap. It sells for around $8 for an 8-ounce jar. But you know something? It’s good. I have a jar of it in my freezer at home, and when I run out of coffee, I’ve got something to make a cup of coffee.”

While flavored coffee was the rage about a decade ago, with French vanilla and hazelnut offerings bringing new consumers into the category to sample what was then considered exotic, today flavors are old hat. Rather, the sophisticated coffee consumer seems to be far more interested in the bean’s point of origin than in bells and whistles.

“Flavors were pretty big about 10 years ago, but people today are looking for more refined taste in coffee,” explains Balducci’s Coleman. “Flavored coffee is intense, but it’s just one flavor, whereas single-origin beans are more subtle, with complex flavors. Coffee consumers have become quite sophisticated.”

Another thing that upscale consumers look for in their coffee purchases: the fair trade logo. That ensures that the farmer and the workers have been paid a fair market price rather than being played against competing producers in order to drive prices down.

“It makes a difference,” says McMahon. “It protects the price of the bean, which guarantees a better lifestyle for the workers and allows the farmers to sustain their farms.”



It’s not unlike consumers willing to pay extra for products from manufacturers and suppliers that have invested in renewable energy resources to reduce their carbon footprint.

“People care,” continues McMahon, adding that fair trade generally produces higher-quality beans as well. “Agriculture is a tough business to be in, and when you’re playing one against the other, you can drive the price down quite a bit, but the quality and standards are lowered, too. With fair trade, you get a better bean, and you’re supporting the agricultural workers.”

One thing you don’t find is a lot of promotional activity by manufacturers and suppliers. Perhaps that’s because coffee isn’t so much a beverage in this country as it is a ritual; a staple.

“I’d say it’s more an affordable luxury than it is a staple,” says Coleman. “That means when people cut back, they’re not eliminating it from their lifestyle, but rather just changing venues. Instead of ordering it out, they’re probably brewing it more at home.”

And because it is a daily ritual for most consumers in the category, brand loyalty plays a far more important role in the purchase decision than price promotions.

“It’s not like cold, ready-to-drink beverages, where you see constant brand-switching depending on which product is being deep discounted at any given time,” explains McMahon. “There’s huge brand loyalty in coffee. So regardless of whether or not another brand is on sale, people are going to go with what they’re familiar with.”

In good times and bad times, Americans have proven that they will drink their coffee. It has become as much a part of Americana as baseball and apple pie. To think that they would forsake their coffee because of economic adversity is a specious notion at best.

“They’re not going to give it up,” concludes McMahon. “Coffee is their peace of mind. That’s how they get started in the morning and [what] gets them to work. It’s a habit that will remain with them through whatever harsh economic times we face.”