Courting the Cup

March 12, 2010
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The economic strife of the past two years forced coffee behemoth Starbucks to close hundreds of underperforming stores, as countless U.S. coffee connoisseurs opted to pinch pennies by honing their home brewing skills. But Starbucks’ misfortunes have spelled opportunity for retailers.

In fact, data from Chicago-based Information Resources Inc. (IRI) show a 3.5 percent rise in dollar sales and a 2.3 percent jump in unit sales for the total coffee category during the 52 weeks ending Dec. 27, 2009 (supermarkets, drugstores and mass merchandisers, excluding Walmart). Private label coffee fared even better, with IRI reporting 4.0 percent and 2.9 percent increases in dollar and unit sales, respectively.

But a closer look at the data shows the real growth was limited to just two subcategories: ground coffee and whole coffee beans. The decaffeinated (both ground and instant) and ready-to-drink coffee segments realized dollar and unit sale drops, while sales of (caffeinated) instant coffee were flat.

But IRI’s data suggest a shift in coffee format preferences, not a shift away from coffee.

“Consumers still see coffee as an integral part of their everyday lives,” says Robert F. Nelson, president and CEO of the New York-based National Coffee Association of U.S.A. (NCA).

In its “2009 National Coffee Drinking Trends” survey, NCA identified 54 percent of the overall U.S. adult population as daily consumers of coffee. What’s more, the association reported a 5 percent upshot in at-home coffee preparation - and a 5 percent drop in out-of-home consumption at restaurants.

Not to be outdone, the tea category also posted strong dollar sales growth, although unit sales growth across the three tea subcategories was rather weak to negative. Leading the category was private label canned and bottled tea, which saw 62.3 percent and 66.5 percent increases, respectively, in dollar and unit sales.

“A predominant force driving tea’s new popularity is its convenience,” writes Joseph P. Simrany, president of the Tea Association of the U.S.A., in the association’s 2009 “The State of the U.S. Tea Industry” report. “Ready-to-drink tea in bottles, cans, aseptic packaging, plastic containers or any other packaging configuration brings the ultimate in convenience to consumers.”

Simrany also points to increasing health-consciousness on the part of American consumers and tea’s versatility as other factors accounting for the beverage’s rising popularity. And while coffee has lost a chunk of the out-of-home consumption business, tea really is just getting started there - for example, bubble tea outlets are popping up all over the United States.

“Given the experience of the last several years, the intrinsic qualities of tea, and the lifestyle and consumption trends that appear to have become firmly established in the marketplace, only one logical conclusion seems possible,” Simrany says. “The future for tea in the United States looks very hot indeed!”

Pour on the Trends

A number of trends taking place in the coffee and tea segments can help guide retailers in private label product development.

On the coffee side, consumers are demanding “better” brews, says Alberto Cohen, partner at Miami-based Café Bom Dia International. He also points to more concern on the consumer side about where coffee is sourced, with increased interest in “authentic” products.

Scott Ballard, CEO of New Orleans-based PJ’s Coffee, agrees, noting that more people are turning to better-quality coffee and making it at home. He’s also seeing a trend toward a darker-roast product.

Cohen says he sees some consumer “sensitivity” toward sustainability efforts in coffee sourcing and manufacturing, as well as value-added certifications such as carbon-neutral, fair trade and organic.

But Ballard contends most consumers still are not willing to pay a premium for such products.

“The greatest opportunities still lie in the mass production of coffee,” he says, adding that a coffee’s origins (e.g., Colombia Supreme) have a much stronger sway on today’s consumers.

Priscilla McGreevy, marketing and business development manager for Suffolk, Va.-based Massimo Zanetti Beverage USA, says packaging, value and new products are trends in private label, as are high-quality and fresh-roasted products. She also points out that fair trade and organic continue to grow, along with unique flavor blend pairings such as vanilla, hazelnut, chocolate and fruit flavors (such as chocolate raspberry).

“We are also seeing seasonal or limited editions like Colombian Peaberry from private label retailers,” she adds.

Brian Reilly, manager, channel marketing U.S. retail for Fort Worth, Texas-based Mother Parkers Tea & Coffee, says coffee blends - specifically breakfast blends and half-caffeine blends - also are a growing trend.

“High-yield coffee continues to make an impact both in branded and private label,” he adds.

And despite instant coffee’s recent less-than-impressive performance, Reilly says strong consumer interest in Starbucks’ new VIA instant coffee could indicate a turnaround.

“Now would be a good time to promote instant coffee or add a premium private label instant item [to] the mix,” he contends.

On the shelf, the trend runs toward micro-segmentation, notes Joe Prewett, vice president of marketing for Portland, Ore.-based Coffee Bean International.

“It’s not just cans and bags, and it’s not just three-tiered,” he explains, “but it’s making sure you have an answer for the various types of drinkers entering the aisle. That means local roasters, more eclectic sets, more organic or otherwise sustainable coffees, plenty of middle-tier coffees, etc.”

As for tea, ready-to-drink formats continue to attract consumers, the Tea Association’s report states, and tea also is catching on as a value-added ingredient in functional beverages/juices.

David Eben, CEO of the Carrington Tea Co., Oradell, N.J., says herbal teas are picking up steam, and that consumers, in general, seem to be drinking more tea.

“People are very price-conscious,” he adds. “But buyers are looking for more creative packaging, as well as sustainable packaging.”

For both coffee and tea, product quality and food safety are paramount, Cohen adds. Consumers increasingly want to trace a product to its origin, and their interest in product production processes and controls continues to grow.

Full Steam Ahead

At-home consumption of coffee and tea is showing no signs of a slowdown. But retailers can take a number of steps beyond product development to further encourage private label share growth in both categories.

“The success of sales growth in the coffee category is [dependent on] close collaboration between the retailer, their design agency and [the] manufacturer in developing a strong brand identity statement from concept to launch,” McGreevy stresses.

The right packaging, of course, is part of that strategy. Reilly encourages retailers to look at a wide range of packaging formats: can, bag, instant and bulk coffee offerings; 100-count tea and 20-count specialty tea packages.

Creative boxes and cans help capture consumers’ attention on the tea side, Eben notes, especially if such packaging differs dramatically from what the national brands are offering.

Reilly points to sustainable materials such as composite cans as becoming more prevalent on the coffee side. Sales of cup-in-a-box formats - K-Cups - also are growing, he says, and coffee cans continue to move to peel-top formats with valves.

“Packaging is the epicenter of private label coffee, and the trend is differentiation and innovation,” McGreevy notes. “Private label coffee brand messaging is clearer, and store sub-brands are being defined by simplifying design and with color.

“Retailers are reaching for foil and holographic metalized film options to make their mainstream coffee exciting and fresh,” McGreevy adds, “and matte and varnish film options to make their premium store brand [stand out].”

Ballard recommends clearly communicating the product’s origin right on the label.

“If you can tell a story [on the label],” he says, “even better.”

To further encourage trial of store brand coffee and tea, Reilly recommends in-store sampling - as long as product for purchase is provided close to the sampling station.

For specialty coffee, Prewett encourages retailers to use their “house files” to target free samples to buyers of the leading national brand, as well as to invest in 2-ounce sampler packs.

“Retail these samplers with clip strips or on shelf in a corrugated display,” he recommends. “Serving your private label coffee in the deli/bakery area is another great option, but you have to commit to quality with a tremendous amount of training to be successful.”

Building on the deli/bakery coffee or tea concept are a growing number of in-store beverage cafes. And some retailers are taking full advantage of the concept by serving only their own brand beverages.

“This is the future in building strong core store brand equity within the coffee/tea category within the retail channel,” McGreevy says.

She points to Price Chopper Supermarkets as a success story here. The retailer takes a “360-degree total coffee solution approach” to its own Central Market Classics coffees, she says, building the owned brand connection to the consumer with retail and its “store-within-a-store” Central Market coffee cafes.

A little merchandising creativity can go a long way, too. Cohen points to Sam’s Club, which tied its Sam’s Club Fair Trade coffee launch to Fair Trade month, as well as a teacher essay contest linked to the retailer’s sustainability commitment.

Thematic store-within-a-store merchandising can help retailers position unique product attributes, Cohen adds. And cross-merchandising with other coffee- or tea-related items such as coffee makers/tea pots, filters and recipe books creates a coffee or tea “destination” within a store.

On the promotion side, Reilly says overall profitability improves when national brand and store brand items are promoted together.

“Promote complementary items across categories to create trial,” he suggests. “For example … ‘buy two boxes of branded breakfast bars and get a free small can of private label coffee.’ Many times, branded partners are willing to pay for the end cap or ad space.”

Finally, McGreevy encourages retailers to be sensitive to price points.

“We are seeing the pricing distance between private label and national brands narrow,” she says. “National brands are promoting aggressively at shelf to defend market share as the economic downturn has consumers reaching for private label based on value and size, quality, price and new products. Successfully balancing both private label and national brands to achieve overall category growth in this economy is where we are today.” PLB

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