Consumers are trading up to higher margin, premium coffees and teas.

By Marilyn Odesser-Torpey, Associate Editor.

While coffee remains the workhorse of the morning daypart, a growing number of consumers are looking for their cups to come with a pedigree. The New York-based National Coffee Association (NCA) reported that almost half (46%) of all cups of coffee consumed in the U.S. in 2012 were either “traditional coffee-gourmet” (NCA’s description for premium coffee) or espresso-based beverages (including cappuccinos, lattes, macchiatos, and café mochas), up from 37% in 2011.

Validating the movement toward specialty beverages is their increased presence on restaurant menus. Los Angeles-based Datassential research company found that between 2008 and 2012, inclusion of café Americano (espresso with hot water) rose 24%, machiatto (espresso with a bit of milk) 22% and double espresso 13%.

The Dataessential report emphasized that though coffee is such a highly penetrated product on restaurant menus (96.5% of menus feature it), there is still room for growth through higher margin, higher profit specialty products.

In its “Coffee and Tea Foodservice Trends in the U.S.” report, Rockville, Md.-based research firm Packaged Facts agreed that “coffee and tea consumption are in the midst of transformational change, driven by flavor, variety and quality innovation.” The change, the report continued, is driven by “specialty” coffee and tea. “Competition by distribution channel is fierce,” the report explained, “but ultimately the beverage industry as a whole is the winner, as specialty coffee and tea products are priced higher than the more commoditized products they are replacing.”

Coffee Cornerstone
For some c-store retailers such as United Supermarkets-owned United Express c-stores based in Lubbock, Texas, upscale coffees and teas are integral image enhancers. At its second freestanding United Express convenience store that opened shortly after Christmas, the company introduced a drive-through window for made-to-order service of its proprietary Arriba brand coffees, espresso drinks and teas.

“We want to be on par with any other coffee retailer anywhere,” said Eddie Owens, United Supermarkets’ director of communications and public relations. “The cornerstone of our company and our mantra is customer service first and foremost.”

Owens explained that the premium Arriba brand, which was developed in conjunction with a local coffee company, has had “very good success” selling by the self-serve cup in the first freestanding United Express store that opened close to two years ago. The newest United Express store is the first to have a barista-service model, and Owens said that United Supermarkets has plans to built two more with drive-through and barista service.

Inside the store, customers can deck out any of the six flavors of Arriba coffee with seven syrup shots, including several sugar-free varieties, and three sauces. During the winter holiday season, peppermint and pumpkin spice sauces are added to the options.

In the new store, baristas whip up a wide variety of hot espresso-based beverages including Café Americano, three types of lattes and Caramel Macchiato. A featured “Drink of the Month” is promoted at a special price of $2.99 for any size. Tea drinkers can opt for a chai latte.

December also marked a big change in the coffee offering at the Bolla Market 21-store chain of high-end convenience stores in New York. That is when the company introduced its switch to organic, Fair Trade and Bird Friendly shade grown coffee.

Java With a Purpose
While promoting its new proprietary, organic line of Bolla-branded coffees, Bolla Management’s President and CEO Harry Singh said that upgrading to an organic, sustainable coffee demonstrates that “quality and convenience can go hand in hand at affordable prices at convenience stores.”

The 44-store chain features daily selections of light and dark roasts as well as limited time offerings of seasonal flavors and single origin roasts.“We’re in the heartland of Dunkin’ Donuts and Starbucks country, so we needed to have a strong light roast to capture the Dunkin’ drinkers and a dark roast to win over the Starbucks’ drinkers,” said Brett Atherton, Bolla Management’s director of marketing. “We knew we also had to have a great decaf and a flavor portfolio, but we didn’t want to have too many flavors because that could take up too much space and create a lot of waste.”

Bolla settled on four full-time varieties of coffee including hazelnut, the flavor that has proven to be a long-time customer favorite in the company’s family of stores, which also operate under the United Supermarkets and Market Street banners.“Our strategy was to develop a short, strong portfolio that captures the right customer base,” Atherton said. Four different self-serve flavor shots as well as an assortment of sweeteners and whiteners are also available for by-the-cup customization.    

To cover the added expense of providing its premium coffee brand, Bolla raised its retail price by 10 cents per cup. But, Atherton said, customers have not complained. In fact, he noted, the company has already seen a 10-15% lift in sales in some of the stores. “We raised the quality a lot and our customers recognize the importance of reducing our carbon footprint and focusing on protecting the environment,” he explained.

Besides, he said, the stores’ coffee program is not price driven. “It is an important part of our overall message that customers will find healthful products, including meal solutions and snacks, here.”

NCA identified that consumers of premium brews and espresso-based coffees tend to skew younger, mainly in the 25-30 year-old age group. It is also important for retailers to know that, according to a recent survey by NPD Group, the number of 18-24-year-olds who reported drinking coffee sometime within a two-week period rose from 25% in 2002 to 39% in 2012.

In its “2012 National Coffee Drinking Trends” report, NCA noted that the mean age at which consumers start enjoying java is 19 and that consumers between the ages of 18-24 who drink coffee tend to drink 2.4 cups per day on average. Younger consumers are much more likely than their older counterparts to buy coffee prepared outside the home, including at c-stores/gas stations. And younger consumers are more likely to consume coffee while traveling/commuting.

NCA also found that ethnicity plays a role in coffee consumption. In its recently released “Ethnicity and Coffee” report, the association found that 74% of Hispanic-Americans drink coffee daily, 12% more than other Americans. The higher levels of Hispanic-American consumption also extends across age groups. When it comes to consuming premium coffee types, Hispanic-Americans also appear to be ahead of their non-Hispanic counterparts. Forty-six percent say they drink gourmet coffee beverages daily versus 29% of non-Hispanics and, for daily espresso consumption, 32% versus 11%. “As the Hispanic-American population grows, it’s essential for the
coffee industry to meet their needs by understanding how they buy, prepare and drink coffee,” said Robert Nelson, NCA president and CEO.

Packaged Facts estimated that coffee sales reached $10 billion last year and would increase by 4.6% this year. Tea sales were estimated to reach $8.7 billion in 2012 and rise by 4.7% in 2013. Like coffee, Generations X and Y are the primary specialty tea drinkers, as they look for varieties such as chai, oolong, rooibos, mate and kombucha. As proof that specialty tea varieties are hitting the mainstream, Packaged Facts noted that chai tea is consumed by almost 40 million consumers age 18+, while oolong and rooibos are used by 31 million and 20 million consumers respectively.