Retail Coffee Favored in Volatile Economy
July 23, 2008 -- Considering the current economic climate, consumers are increasingly changing their routines to cut expenses. According to a new report from market research publisher Packaged Facts, titled "Coffee in the U.S.: Retail, Foodservice and Consumer Trends," retail channel coffee sales will grow faster than foodservice sales as consumers trade in their favorite coffeehouse for packaged premium coffees that they can brew at home for a fraction of the price. In fact, Packaged Facts projects that while foodservice will grow by about 36 percent to nearly $52 billion by 2012, it will retain its current 87 percent share of a projected $59.4 billion market. Meanwhile, retail sales are expected to grow by nearly 37 percent, reaching $7.8 billion and holding onto a 13 percent share. Read on to find out how this trend is in effect for big name coffee shops and grocery store brands alike.
Hard Times Call for Store Closures
Early this month, Starbucks Corporation announced its decision to close approximately 600 underperforming company-operated stores in the U.S. market. This decision was a result of a rigorous evaluation of its U.S. company-operated store portfolio and includes the 100 stores targeted for closure in previously announced plans. In a statement, Starbucks Chairman, President and CEO Howard Schultz said, "Poor real estate decisions that were made, coupled with a very troubled economy, convinced us that these stores would not reach acceptable levels of profitability." A complete list of U.S. store closures was released by Starbucks late last week. In addition, Starbucks now expects to open fewer than 200 new U.S. company-operated stores in fiscal 2009.
While the closing of these 600 stores is expected to help improve the company's profit margins and sales at its older stores, some industry analysts say lower consumer spending will hurt Starbucks into next year. Deutsche Bank analyst Marc Greenberg told CNNMoney.com that Starbucks may have to make further cuts because it is still opening a large number of stores in overseas markets like Western Europe, where growth is slowing down and profit margins are lower.
At-Home Brewing Pays
Grocery store brands are not exempt when it comes to volatile commodity prices, but IRI data shows that sales of packaged coffee increased 5 percent during the 52 weeks ending April 20, 2008, to $3.6 billion. Currently leading this market is Kraft Foods (Maxwell House, Starbucks ground and whole bean only, General Foods International, Seattle's Best and Yuban) followed closely by Procter & Gamble Company (P&G) (Folgers, Dunkin' Donuts and Millstone).
However, according to Packaged Facts, several relatively small marketers that largely have regional distribution are enjoying the fastest consistent growth. For example, Green Mountain Coffee Roasters Inc. reported net sales for the second quarter of fiscal 2008 were up 46 percent to $120.9 million as compared to $82.9 million in the second quarter of fiscal 2007. Driving this growth was the shipment of approximately 193,000 patented Keurig Single-Cup Brewing systems, a 130 percent increase from 84,000 Keurig brewers shipments during the second quarter of 2007. In addition, the Green Mountain Coffee segment shipped more than 155 million K-Cup portion packs, which was 68 percent more than the year-ago quarter.
Lawrence J. Blanford, president and CEO, says, "It was, by all measures, an outstanding quarter for Green Mountain Coffee Roasters, driven by the success of the patented Keurig Single-Cup Brewing system. Looking forward, we believe we are at the crest of a new wave in coffee making, with Keurig leading the introduction of single-cup brewing to coffee, tea and hot cocoa lovers." Financial results for the third quarter of fiscal 2008 are due out July 31, 2008.
Similarly, in the first quarter of 2008, net revenue at Peet's Coffee & Tea Inc. increased 17 percent to $67.1 million from $57.5 million for the corresponding period of 2007. "We made great progress toward our eastern U.S. grocery expansion goal for the year," says Patrick O'Dea, president and chief executive officer of Peet's Coffee & Tea Inc. "In addition, we realized significant operating and procurement related cost improvements that helped to offset some of the increased commodity related costs and a softer, though still positive, retail store performance despite a more challenging economic environment." Second quarter results for Peet's Coffee & Tea are also due out on July 31, 2008.
Upping the Ante
A number of companies - including coffee houses and those selling store brands -- are positioning themselves to take advantage of the trend toward store-bought brews.
Most notably, The J.M. Smucker Company no doubt boosted its value in the at-home brewing market when it announced plans to acquire the Folgers coffee business from P&G in June 2008 for $3.3 billion. While Folgers has been the nation's No. 1 ground coffee brand and one of P&G's billion-dollar brands, it has historically faced increased competition from Starbucks and other coffee makers. But, according to industry analysts, the deal came at a good time, with the economic downturn prompting consumers to make coffee at home instead. Assuming Folgers is owned for all of Smucker's fiscal year 2009, net sales are expected to increase to approximately $4.7 billion.
According to Packaged Facts, the nation's No. 2 coffeehouse chain, Caribou Coffee Company Inc., is leveraging cross-branding opportunities between the foodservice and retail channels. The company is currently developing or engaging in a series of deals that bring its packaged coffee beans into six regional supermarket chains in the Northeast and Southeast. Although sales through grocery stores and other non-coffeehouse venues presently account for only about 6 percent of Caribou's total revenues, the company is working to build that figure, according to the Packaged Facts report.
Recognizing the economic impact to coffee consumers, Eight O'Clock Coffee is upping the value proposition for coffee drinkers, which will certainly impact its bottom line as well. The company recently launched a program called "Accumul8 Rewards," which allows those who purchase Eight O'Clock Coffee to accumulate rewards toward merchandise offers that range from TV show downloads to VISA gift cards. "Eight O'Clock Coffee has had an extremely loyal following for almost 150 years," says Alisa Jacoby, senior brand manager at The Eight O'Clock Coffee Company. "This is our way of saying 'thank you' by adding to the experience and value of enjoying great-tasting coffee at home."
What's Brewing?
Financial results at the close of 2008 will undoubtedly reveal just how much consumer behavioral changes have affected the coffee market. In the November issue of CGT, our Financial Advisory Board members will provide further insight into how consumer goods companies are fairing as consumers exercise cost-saving buying trends.
Hard Times Call for Store Closures
Early this month, Starbucks Corporation announced its decision to close approximately 600 underperforming company-operated stores in the U.S. market. This decision was a result of a rigorous evaluation of its U.S. company-operated store portfolio and includes the 100 stores targeted for closure in previously announced plans. In a statement, Starbucks Chairman, President and CEO Howard Schultz said, "Poor real estate decisions that were made, coupled with a very troubled economy, convinced us that these stores would not reach acceptable levels of profitability." A complete list of U.S. store closures was released by Starbucks late last week. In addition, Starbucks now expects to open fewer than 200 new U.S. company-operated stores in fiscal 2009.
While the closing of these 600 stores is expected to help improve the company's profit margins and sales at its older stores, some industry analysts say lower consumer spending will hurt Starbucks into next year. Deutsche Bank analyst Marc Greenberg told CNNMoney.com that Starbucks may have to make further cuts because it is still opening a large number of stores in overseas markets like Western Europe, where growth is slowing down and profit margins are lower.
At-Home Brewing Pays
Grocery store brands are not exempt when it comes to volatile commodity prices, but IRI data shows that sales of packaged coffee increased 5 percent during the 52 weeks ending April 20, 2008, to $3.6 billion. Currently leading this market is Kraft Foods (Maxwell House, Starbucks ground and whole bean only, General Foods International, Seattle's Best and Yuban) followed closely by Procter & Gamble Company (P&G) (Folgers, Dunkin' Donuts and Millstone).
However, according to Packaged Facts, several relatively small marketers that largely have regional distribution are enjoying the fastest consistent growth. For example, Green Mountain Coffee Roasters Inc. reported net sales for the second quarter of fiscal 2008 were up 46 percent to $120.9 million as compared to $82.9 million in the second quarter of fiscal 2007. Driving this growth was the shipment of approximately 193,000 patented Keurig Single-Cup Brewing systems, a 130 percent increase from 84,000 Keurig brewers shipments during the second quarter of 2007. In addition, the Green Mountain Coffee segment shipped more than 155 million K-Cup portion packs, which was 68 percent more than the year-ago quarter.
Lawrence J. Blanford, president and CEO, says, "It was, by all measures, an outstanding quarter for Green Mountain Coffee Roasters, driven by the success of the patented Keurig Single-Cup Brewing system. Looking forward, we believe we are at the crest of a new wave in coffee making, with Keurig leading the introduction of single-cup brewing to coffee, tea and hot cocoa lovers." Financial results for the third quarter of fiscal 2008 are due out July 31, 2008.
Similarly, in the first quarter of 2008, net revenue at Peet's Coffee & Tea Inc. increased 17 percent to $67.1 million from $57.5 million for the corresponding period of 2007. "We made great progress toward our eastern U.S. grocery expansion goal for the year," says Patrick O'Dea, president and chief executive officer of Peet's Coffee & Tea Inc. "In addition, we realized significant operating and procurement related cost improvements that helped to offset some of the increased commodity related costs and a softer, though still positive, retail store performance despite a more challenging economic environment." Second quarter results for Peet's Coffee & Tea are also due out on July 31, 2008.
Upping the Ante
A number of companies - including coffee houses and those selling store brands -- are positioning themselves to take advantage of the trend toward store-bought brews.
Most notably, The J.M. Smucker Company no doubt boosted its value in the at-home brewing market when it announced plans to acquire the Folgers coffee business from P&G in June 2008 for $3.3 billion. While Folgers has been the nation's No. 1 ground coffee brand and one of P&G's billion-dollar brands, it has historically faced increased competition from Starbucks and other coffee makers. But, according to industry analysts, the deal came at a good time, with the economic downturn prompting consumers to make coffee at home instead. Assuming Folgers is owned for all of Smucker's fiscal year 2009, net sales are expected to increase to approximately $4.7 billion.
According to Packaged Facts, the nation's No. 2 coffeehouse chain, Caribou Coffee Company Inc., is leveraging cross-branding opportunities between the foodservice and retail channels. The company is currently developing or engaging in a series of deals that bring its packaged coffee beans into six regional supermarket chains in the Northeast and Southeast. Although sales through grocery stores and other non-coffeehouse venues presently account for only about 6 percent of Caribou's total revenues, the company is working to build that figure, according to the Packaged Facts report.
Recognizing the economic impact to coffee consumers, Eight O'Clock Coffee is upping the value proposition for coffee drinkers, which will certainly impact its bottom line as well. The company recently launched a program called "Accumul8 Rewards," which allows those who purchase Eight O'Clock Coffee to accumulate rewards toward merchandise offers that range from TV show downloads to VISA gift cards. "Eight O'Clock Coffee has had an extremely loyal following for almost 150 years," says Alisa Jacoby, senior brand manager at The Eight O'Clock Coffee Company. "This is our way of saying 'thank you' by adding to the experience and value of enjoying great-tasting coffee at home."
What's Brewing?
Financial results at the close of 2008 will undoubtedly reveal just how much consumer behavioral changes have affected the coffee market. In the November issue of CGT, our Financial Advisory Board members will provide further insight into how consumer goods companies are fairing as consumers exercise cost-saving buying trends.