Category Reviews / Food Reviews
Category Insights: Coffee and Tea

Single-Serve Coffee Ready To ‘Explode’

Private Label Makes Rapid Inroads In Single-Serve Segment

March 14, 2013
Trans

Between coffee and tea, Chicago-based SymphonyIRI Group said the categories brought in more than $11 billion in sales in 2012.

Private label remains a small player within those categories, collecting about 8.8 percent of the dollar share in coffee, less than 3 percent in ready-to-drink coffee and teas, and about 7.3 percent of the tea bags.

But there is one area where sales, and private label sales in particular, are set to expand in 2013. The world of single-serve coffee has been dominated by Green Mountain Coffee and its Keurig machine. But with the expiration of patents from Green Mountain on its signature K-cups, the devices that bring coffee to its Keurig machines, the world of private label single-serve coffee opened.

Sales of private label single-serve coffee totaled about $7.3 million in 2012, according to SymphonyIRI. That is less than a tenth of a percent of the $7.8 billion coffee category. But while overall coffee sales rose 12 percent last year, private label single-serve coffee sales rose 1,218 percent.

That’s 1,218 percent. Not a misprint. Four figure sales increase year-over-year.

In case you think it’s out of place, unit sales rose 982 percent. Three figures, yes, but still impressive.

“The market’s getting inundated with people who are suddenly able to make compatible products for the Keurig machine,” said Miles Small, the editor of CoffeeTalk magazine for more than a decade. “The category itself is a proven category, and I think it’s just going to explode. You see K-Cups everywhere; they’re one of the dominant coffee products in the coffee aisle of most grocery stores.”

Among the first manufacturers to enter the private label single-serve market was the Rogers Family Company. The company makes single-serve cups for Safeway, and was able to get a jump on the fall expiration of Green Mountain patents because it claimed a different kind of cup used to deliver the coffee to Keurig machines.

“Our product is totally different than the Keurig product,” said Jon B. Rogers, president of Rogers Family Company. “Our product starts with a plastic ring, which will soon be biodegradable, attached to a mesh bottom. Put the coffee in and seal the top.”

Rogers said that the company has gotten “very favorable feedback” from its product since it launched.

“We do private label for Safeway and they just expanded the number of items considerably,” he said. “That part of the business (single-cup coffee) is just taking off. … We are able to handle the business that we’re seeking.”

Rogers said the company has been in single-serve coffee for a little more than a year, and after “phenomenal” sales on the branded side, expanded into private label. Rogers Family Company added three machines to manufacture the single-serve cups and expects growth to continue in 2013.

“Our private label is the same quality as our branded product,” Rogers said. “That’s the best quality we can make. We did a product test ourselves, we sent a new product to 300 homes that had machines, and the results we got back on the Internet were phenomenal. I’ve been in this business a long time, and usually if you get 45-50 percent wins it’s great. We had 80 percent who preferred it to what they were using. Whether that’s the brewing system or that we use very good coffee, I think it’s both.”

However, the advantage the private label brings to the single-serve category will be price and value. Small said that would be important for home buyers.

“The reason Green Mountain was so successful is it cost 10 cents to make one of those little cups, they sell them for 50 cents, that’s not a bad margin,” he said. “Then they’re sold for 80 cents or so in the grocery store. The biggest complaint any consumer has about the Green Mountain product is it’s too expensive.”

However, Small said that recent studies have shown that Keurig and single-serve coffee home users are not always in search of a Starbucks-quality product at their home.

“There’s a huge coffee world out there that has absolutely nothing to do with the perfect cup of coffee,” he said. “Specialty coffee represents about 20 percent of the total market out there for coffee sales, so 80 percent is drunk by people who don’t really care that much about coffee the way I do. To them it’s a question of convenience, cleanup, and economy. Once you step out of the specialty coffee world, people who buy a K-cup aren’t as inspired by the perfect cup of coffee as getting a decent cup fast and conveniently.”

All of which sets the category up to be highly successful in private label, Small said.

“I think there’s going to be an explosion,” he said. “I think the category itself has proven itself. It has all the key ingredients to be a long-term viable option.

“It’s no longer 75 cents or 80 cents a cup to use the K-cup. It’s going to be dominant. If I was a roaster I’d get one of those machines and put anybody’s label on it to move my coffee.”

NOT JUST FOR HOME

But single-serve private label coffee won’t just be for home use, or for grocery retailers lining their shelves with single-serve cups of regular and flavored coffees.

In fact, some of the brightest opportunities in private label could come through office coffee service.

“If you have office coffee service buyers who start to drift to price over quality because they have budgetary obligations they have to maintain … that is almost a description of private label,” Small explained. “Take a product that is generally accepted, repackage it, focus more on price than quality and go for that market. It’s driven for convenience and all the other things single serve is made for. I think the future is glowing.”

Demand at the office already is there. Roger Stewart, the director of coffee and water service for the National Automatic Merchandising Association, said his group found that consumers are interested in good coffee all day long.

“One of the things we looked at was broadening the increase of beverage consumption,” Stewart said. “The majority of people who had access to specialty drinks said their consumption would increase. The only way to do that is to have single serve.

“Generation Y, or the younger generations, like what I call the foo-foo drinks, the specialty drinks, or what’s known as the espresso-based drinks. About 22 percent of employees with coffee service have access to gourmet or specialty coffee, and a lot of people see single-cup systems there.”

Coffee systems single-cup use increased from 18 percent to 32 percent since 2005, Stewart said, and with consumers asking for better quality from their coffee at work, Small said there were clear opportunities for private label in a market that is larger than most would expect.

“All the C-level guys from vending machine companies are thinking that’s a whole piece of the industry for the single-serve business,” he said. “No one talks about it, but that represents 30 percent of all coffee drunk in the U.S. And their dominant platform right now is going to be single-serve products.

“The vending guys, office coffee service, are all freaked out because if the big-box office supply companies get into it … You get Staples, OfficeMax, jumping right past the traditional coffee market, you could very easily have a line of OfficeMax or Staples coffee designed by private label guys that would become one of the leaders in the single-serve business. The dynamics of the marketplace in single-serve go well beyond Ma and Pa having one on the kitchen counter. They show up in small to medium size offices and corporate campuses all over the United States.”

And office coffee services companies are making sure they keep their audience, Stewart said, rather than losing market share to outside influences.

“Most people still have their first cup of coffee at home, and from a refreshment services point of view it’s making sure they have their second cup of coffee at the office, not stopping at the local 7-Eleven or coffeehouse or anywhere else,” he said. “So that you drink one at home on the way to work, and everything after that you drink at work.”

The proliferation of coffeehouses such as Starbucks or Caribou Coffee have changed the way coffee has to be made at the office, Stewart said, which sets up single-serve opportunities.

“They have educated the consumer, and they demand a better cup of coffee. If (price) were the case you’d see a barrage of upstarts out there … but even during the toughest part of the recession, the operators had some requests to take out the more expensive coffees, but they found they weren’t taking out more … because the employer would have a revolt on their hands,” he said. “We’ve finally gotten to the point where office coffee is much higher quality, and people are saying, ‘I’m not willing to give that up.’”

Stewart said that employers had reason to want to improve the quality of their office coffee to keep employees satisfied.

 “One of the things our research did find which was interesting was that drinking coffee at the office was not so much about productivity as it was relaxing, and it provides a good way to get energy,” he said. “But it really is about relaxing. When you have a cup of coffee with a fellow employee, the average time to get coffee at the office is about 4.5 minutes. It’s 15 minutes if you go out of the office.” 

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