Data / Categories / Beverages / Private Label vs. National Brands / Tactics

Category Insight: Store Brand Coffee & Tea - Caffeinated Convenience

Single-cup coffee, refrigerated RTD drinks and instant tea are the buzz in caffeinated beverages.

May 29, 2014
Trans

If convenience is a primary theme of private label this year, coffee and tea could easily be main characters. The private label single-cup coffee category is revved up and growing, while convenient ready-to-drink (RTD) tea and coffee beverages find their spots.

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Private label single cup coffee sales were at $7 million (up 1,218 percent) for the 52 weeks ending December 30, 2012, according to IRI. By the 52 weeks ending March 23, 2014, sales were up 328 percent to $221 million. With just a 2 percent share, private label has plenty of room to grow.

“The single-cup segment has grown from nearly $1 billion in sales and shy of 11 percent market share in 2011 to $3.1 billion and nearly 27 percent market share in estimated 2013 sales,” notes Mintel’s September 2013 “Coffee—U.S.” report. “This increase has eroded roasted coffee’s market share from nearly 67 percent in 2011 to just shy of 52 percent in estimated 2013 sales. Yet, the roasted segment’s sales are nearly double that of single-cup, showcasing that the roasted segment is still the preferred option for most coffee drinkers.”

While that gap will close over time, coffee products will continue to show great diversity.

Susan Lambert, business development manager, corporate brands for Massimo Zanetti Beverage USA (MZB), feels the total coffee category is growing, and that growth is led by single-serve—but also by premium ground coffee. “Ground canned coffee, still the workhorse of the category, comprises over two-thirds of category pounds in the United States, enjoying some modest growth in pounds and holding its own in this dynamic category. The coffee category growth overall has been fueled by package and flavor innovation that has added consumers and occasions,” she said.

 

Fuel for Growth

Lambert explains that while single-serve is beginning to see a leveling-off of dollar growth, there is still plenty of growth ahead.

“One trend that is emerging and which will impact single-cup dollar share overall is the increase in promotional levels and the subsequent deflation of average price due to competition in this segment of the coffee category,” said Lambert. “With the recent significant price increases in the coffee commodities markets, I would expect to see ground coffee prices rise at a faster pace than single-serve, which will impact single-serve dollar share as average price of ground coffee rises. Combined, these trends will level out the dollar growth and share of the total category over the next five years.”

Lambert also suggested that “we are seeing a dual usage trend emerge between single-serve and traditional ground coffee, where consumers will brew a full pot for the morning occasion and then use a single-serve option for the afternoon or evening occasion.”

In its report, Mintel found one-quarter of people who drink coffee bought at retail are drinking it at home more often in 2013 than in 2012.

 

Effective Tactics

The key to having the right mix is in the space allocation of this important center-store category, noted Lambert. “Evaluating segment and brand performance and productivity for both national brands and private label will allow a retailer to maximize assortment variety and efficiency.”

According to a category study commissioned by MZB, roughly one-third of coffee consumers will walk away and not buy any coffee rather than switch from their preferred choice. “With 83 percent household penetration in a category that is growing, getting the coffee category section merchandised properly, with the appropriate amount of space, product mix and promotion, could be the single-biggest grocery initiative in the next 12 months.”

Lambert suggests retailers have a private label offering in every segment of the coffee category, including a tiered approach for single-serve that combines traditional coffee consumption with the preference for variety: “The majority of coffee consumers drink coffee in the morning, so having a mainstream single-serve product mix that includes, for example, Colombian, Breakfast Blend, Decaf Breakfast Blend and the like could be first-level single-serve. A more-premium offering that captures origin coffees, organics and third-party certifications, as well as popular flavors, should be offered in a premium-tier private label brand to satisfy the need for variety and incremental occasions.”

Premium bag coffee is also contributing to packaged coffee growth in traditional retail, while assortment in this segment is inspired by other channels. “Overall trends indicate that packaged retail coffee growth is being driven by what is happening outside of traditional grocery retail in small, local coffee shops,” she said. To capture more of that business, she suggests retailers should stock single-origin, estate-grown or other artisan-style coffees that “surprise and delight.”

 

Category Dynamics

“As far as flavors go, caramel is certainly having a moment, and salted caramel can be found pervasively in coffee and food products,” said Lambert. Additionally, she noted seasonal flavors like pumpkin spice and holiday blends make great in-and-out shipper programs at retail.

All of the early research in single-serve coffee, noted Lambert, shows roughly the same consumer “likes and dislikes.” Single-serve consumers like the convenience and variety in the new format, but dislike the cost and packaging waste. “Interestingly, in all household studies I’ve seen, quality was listed as both a positive and a negative in the early launch of single-serve products,” she said. “Because of these consumer ‘likes and dislikes,’ there is great opportunity for a good-quality, 100 percent Arabica store brand—one that delivers better taste through better extraction, as well as variety and price point, while also reducing packaging materials. We are seeing very large shares of private label single-serve as a percentage of total single-serve coffee in areas where these consumer needs are being met.”

“As far as flavors go, caramel is certainly having a moment, and salted caramel can be found pervasively in coffee and food products."

As packaging waste is listed as a top concern in so many single-serve studies, Lambert noted the real winner will be the single-serve provider who offers a truly 100 percent recyclable solution to this growing concern. “In the meantime, the soft pod format generates consumer preference in packaging and quality extraction and is favored heavily over the rigid cup format for reduction of packaging waste,” she said. The soft pod single-serve cup offers 35 percent less plastic packaging versus the rigid cup, according to Lambert, which makes it more environmentally friendly than the hard cup format.

Origin coffees, estate-grown coffees, socially responsible products like UTZ certified, and certifications like organic are also trending well now, and will continue to grow, noted Lambert.

 

Coffee Not Your Cup of Tea?

The single-cup trend has also expanded into other beverage options, such as tea, chai lattes, and hot chocolate.

“Private label single-serve tea is just getting started and gaining traction with retailer acceptance and placement,” said Marty Reynolds, customer marketing director of single serve beverages for Bay Valley Foods.

The best-performing items to date, according to Reynolds, are chai latte, black tea, green tea, and herbal tea. “As it develops, private label single-serve tea has the potential to mimic the trends that can be found in the bagged and loose leaf teas.

“Today we see retailers going down two different paths,” continued Reynolds. “One is to look at their top-selling branded single-serve teas and then match those as national-brand-equivalent private label offerings. The other is to take what they have in their bagged tea offering and match those in a single-serve offering. The bagged tea offerings tend to be more innovative, which allows more unique flavors to those single-serve lineups.”

Growth in the bagged tea category is driven by specialty types, suggested Reynolds. While IRI reports that private label bags/loose tea overall is up 3.37 percent in dollar share, she notes private label specialty tea was up 12.9 percent, per IRI, for the 52 weeks ending February 23, 2014.

“The bagged teas have a very broad appeal across many consumer segments with a wide range of age, income and other demographics,” said Reynolds. Shoppers seeking single-serve teas tend to be 35–54 years old, college-educated, with a household of three and an income of $70,000-plus, notes Reynolds. She also noted that retailers need to get behind these products via promotional tactics. “Merchandising is a critical vehicle for single-serve, as over half of consumers become aware of private label single-serve through secondary placement.”

Another take on tea is liquid beverage enhancers (LBEs). Given that 85 percent of the tea consumed in America is iced, there is a large opportunity to create an authentic brewed tea experience with LBEs, explained Reynolds.

“Private label currently makes up 18 percent of all LBE sales, and will definitely have a share of the growing tea market. New tea line extensions for LBE are aimed at the customer brand buyer who is a tea enthusiast.”

When including sweeteners in an LBE, such as for Southern sweet tea, natural sweeteners like stevia, resonate well with shoppers. LBE tea flavors are also expanding to include RTD favorites like Arnold Palmer (half tea, half lemonade) and fruit-flavored black and green teas.

 

Cool Is Hot

In a nod to convenience, private label refrigerated RTD coffee had a 1,900 percent dollar sales increase to more than $4 million per IRI—and coming in at No. 3 on this year’s Food Hot List.

In its September 2013 “Coffee—U.S.” report, Mintel suggests that the increased attention on RTD coffee makes it a “prime time for manufacturers to launch new products, such as new multiple-serving iced coffees as well as single-serving innovations… In addition, some companies are pushing the traditional boundaries of iced coffee from a sweet and creamy drink to options with functional ingredients, as well as sparkling iced coffee.”

Meanwhile, private label refrigerated teas increased sales by over 6 percent to more than $99 million, with a 15 percent share of the market, per IRI.

“Consumers are increasingly looking for products with stories,” said Monte Ammons, director of sales for Beverage House, Inc. “Historically, that advantage has gone to branded products. However, we believe there are several white spaces where private label could have inherent advantages over national branded RTD tea products.”

Viable story points might include details related to local sourcing or minimal processing or “no preservatives” for refrigerated products. Refrigerated juice and drink smoothies have been seeing upward success in this area, and new types of coffee and tea products could, as well. RTD teas hand-crafted in the store might also spell private label success, answering consumers’ call for more customization and a coffee-shop vibe in their grocery stores.

Another area, Ammons noted, is adding flavors with regional appeal, such as tea with cider notes in the upper Midwest or blackberry tea in the South. “While these are niche opportunities with lower volume than traditional private label RTD, they are differentiated offerings that can command premium pricing,” he said.

In general, strawberry, raspberry, pomegranate and lemon remain popular standalone tea flavors, said Ammons, but he’s also seeing fruit flavor combinations like strawberry-melon.

“In addition, we are seeing fruit-flavored teas infused with herbals to impart the perception of additional functional benefits,” said Ammons. “Ginger and hibiscus are two herbs which seem to be gaining particular interest. Although still relatively small in the United States, chamomile also appears to be on the upswing. Pairing of flavors from different global regions also seems to be gaining popularity—especially with Millennials. Also, we are seeing increased interest in using green tea as base for flavor-forward teas.”

Appealing to the growing Hispanic marketplace is another potentially profitable path for private label teas. According to Ammons, single-serve RTD teas have historically done relatively well with value-conscious segments of the Hispanic marketplace. “The growing use of traditional aguas frescas flavors, such as hibiscus, mango, melon, guava, strawberry and passion fruit, as tea flavoring is increasingly appealing to the Hispanic palette—as well as the pocketbook. Given the traditionally larger size of Hispanic families, multi-serve RTD teas using popular Central and South American flavors could also be growth opportunities.”

In its July 2013 “Tea and RTD Teas—U.S.” report, Mintel noted men ages 18–34 are more likely than other group to purchase RTD tea, which includes full- and reduced-calorie, single-serving and multiple-serving tea products.

Many retailers are seeing success merchandising multi-serve RTD teas in the deli, or bundling multi-serve RTD teas with prepared meals. Placing RTD teas with other all-natural products and in the produce department can also help capture impulse purchases from health-conscious shoppers.

 

The Store Branded Café

Retailer-branded coffee and tea cafés can draw shoppers into stores by providing  new and exciting options they ideally can’t find anywhere else, noted Jo’el Ellis, director of marketing for Massimo Zanetti Beverage Food Service.

“One way to accomplish this is through education of how the coffees/teas were sourced, roasted and blended to create the perfect taste profile,” said Ellis. “Perhaps there are opportunities throughout the year for a retailer to hold consumer panels to discuss the coffee/tea origins and taste new blend flavors. A retailer should also about think broadly about how best to create a ‘total beverage experience.’”

Ellis also suggested retail cafés  should adapt to meet morning, afternoon and evening preferences. “An example would be having standard coffee for the morning rush, ice for iced coffees in the afternoon and milk/syrups or other items for specialty beverages like espressos, cappuccinos and lattes in the evening.

“If education becomes an element of your program, it also offers an opportunity for a retailer to be a thought leader,” continued Ellis. “More and more consumers want to know where their food is sourced from, no matter if it is private label or branded. By being transparent and providing that level of insight, consumers become more emotionally connected with the retailer.”


The Bottom Line

• Single-serve is hot, but retailers can expand offerings to gain more premium sales

• Look toward new formats like liquid beverage enhancers (LBEs) to fuel tea expansion

• Refrigerated RTD coffee and tea have gained significant ground—and have room to grow


EYE ON THE NATIONAL BRANDS

The Coca-Cola Company and Green Mountain Coffee Roasters announced in February that they signed a 10-year agreement to cooperatively introduce the Keurig Cold single-serve beverage system in fiscal 2015. The system will use single-serve pods to dispense teas and various other cold beverages, including carbonated drinks.

“As the Keurig cold-beverage maker gains consumer acceptance, it provides a private label opportunity to provide high-quality beverages at a value versus the national brand,” predicted Marty Reynolds, customer marketing director of single serve beverages for Bay Valley Foods.


ONLINE EXCLUSIVE

Private label is now poised to embrace the “third wave” of coffee, with those details best related through creative storytelling. For an online exclusive analysis of how to best convey the finer points of these tales, see “The Story Behind Coffee.”


STAKE A CLAIM

Package claims could help set store brand single-serve coffee and teas apart, such as on-package caffeine labeling. According to Mintel’s February 2014 “Beverage Packaging Trends—U.S.” report, packaging claims are shifting as consumers become more educated, with functionality claims growing less important and identification of specific ingredients on the rise.

While Mintel found people ages 18–34 are less likely than their older counterparts to agree that they cannot get through their day without drinking coffee, these consumers “are more apt to support on-package caffeine labeling and to say they are cutting back on their coffee consumption overall for health reasons.”

 The report also found over one-third of respondents consider label claims related to nutrients, all natural, and no high-fructose corn syrup in their top-five claims, with nearly as many swayed by those related to reduced sugar levels or sugar-free and no artificial sweeteners. “Sugar content and type is a concern for consumers,” said the report, “fueled by the recent attention to artificial sweeteners in the U.S. beverage industry.” 

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