Maturing Gracefully

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By Dan Bolton

Peaking at $5.7 billion in sales in 2016, demand for single-serve capsules has leveled off after capturing a significant portion of the US coffee market. Household penetration of single portion brewers continues to inch upward but the only significant sales gains in the segment are private label compatibles and capsules featuring select, better-tasting coffee.

The retail value of fresh ground roast in capsules grew 4.3% last year, according to Euromonitor International, a global market research provider. Retail value growth is forecast at just over $600 million during the period 2018-23. In contrast, the retail value of ready-to-drink (RTD) coffee is projected to grow almost $1.5 billion during that same period, according to Euromonitor.

Once Keurig and Nespresso demonstrated the convenience of single-serve machines, manufacturers rushed to produce less expensive compatible-capsule brewers and small-portion WiFi-enabled drip brewers capable of delivering a commuter-sized mug of coffee on demand. As a result, retail value from sales of capsule brewers fell 5.4% in the US in 2018 with unit sales down 5.1%, according to Euromonitor.

Matthew Barry, senior beverage analyst at Euromonitor, told participants attending a webinar hosted by the National Coffee Association (NCA) that the boom years when capsule sales leaped 82% are over. North America is now the slowest-growing pod region, reaching maturity without reaching penetration levels seen in Western Europe and Canada.

Barry’s presentation, based on the report U.S. Coffee Outlook 2019, offered a broad overview. “Retail RTD [ready-to-drink] has supplanted pods as the leading growth format for coffee,” he said. “Pockets of growth exist in other segments of retail as well, including inexpensive pods and emergent functionalities,” he said, but it is coffee shops that display vitality, driving growth “with cold beverages doing especially well.”

Every US home that wants one has a small-portion brewer (many have two). Consumers now understand the importance of water quality (in-brewer water filters). Even small manufacturers have fill-and-pack machinery that delivers precise grinds, with ultrasonic advances in sealing and high-barrier capsules to retain aroma. The most significant variables are the quality of the fresh-roasted coffee packed into capsules – and price.

“Rising incomes and interest in better coffee means consumers are spending more on coffee,” observes Barry, but while premiumization is the key to growth, consumers are seeking value. Pods are relatively expensive–certainly when compared to drip–but variety and convenience are a plus.

“If the industry wants to reach higher rates it will need to undergo some major changes to try to recapture some of the old excitement and get those growth rates back up,” says Barry. “The most plausible way to do that, in my opinion, would be to make major gains in sustainability and convince consumers, especially younger ones, sitting out for environmental reasons that they can drink pod coffee without feeling guilty about it.”

Private label

Martyna Fong, unit manager packaging at AMI based in Bristol, UK., is working toward that sustainable solution.

The rigid capsule market will consume more than 60 billion metal and plastic units this year. It is “a dynamic market segment with a complex value chain” undergoing disruptive changes, says Fong. The segment, long dominated by Keurig and Nestlé, is “rapidly losing its oligopolistic nature” explains Fong.

A more fragmented supply chain affects the overall profit pool and the way consumers make their choices, she says.

Compatible capsules made up 23% of total units in 2018 with greater demands for quality and shelf impact. Mono-layer PP (polypropylene) and PBT (polybutylene) are giving way to high barrier technologies including co-extrusion thermoforming, co-injection, barrier IML, barrier coatings and barrier compression molding. “Thermoformed single serve capsules account for nearly 70% of the global plastic capsules demand,” she says. Suppliers are innovating, determined to introduce a truly green capsule. That could convince environmentally-minded consumers who have avoided the category to abandon their objections, writes Barry. But it is likely to come at a price.

Keurig’s pricing legacy

In a 2017 blog post, Barry asserted that “Keurig’s dominance is proving a hindrance to pod coffee expansion in North America.” Keurig enjoyed a near monopoly in brewers (office and home) in 2012. Courts then ruled manufacturers could market Keurig-compatible pods and growth at the behemoth tapered. This slowing of market value growth in the k-cup segment and declining prices due to the strong presence of private label marked a new phase beginning about three years ago as revenue flattened.

“Sales of both Keurig-owned and Keurig-licensed brands have largely been stagnant since 2013 and the wide emergence of low-cost unlicensed competitors,” he writes. “Keurig still enjoys a great deal of pricing power. A liter of coffee brewed from pods is six times as expensive as a liter brewed from standard ground in North America, compared to four times in Australasia and just two times in Western Europe. This disparity strongly suggests that there is still a base of consumers who are being priced out of the category,” according to Barry.

At the higher price points, Nespresso is gaining acceptance at food service and fine dining with lower incursion from private label competitors. Nespresso innovates both in machines and single-origin and special causes coffee (aiding Somali growers, for example).

“I think Nespresso has been successful in establishing itself as the premium pod choice in the US market and that has protected it from the price pressure that has affected the Keurig pods. In non-US markets where Nespresso is the leading pod brand, you do see it subject to this sort of competition from unlicensed products but in the US the consumers who are looking for affordable pods are on the Keurig system. The key long-term will be making sure consumers feel they are getting real value in exchange for the higher price they are paying, and it seems like for now they are doing that successfully.

“The most likely future for North America is continuation of the status quo,” but Barry explains that falling prices could bring in consumers concerned about expense. Keurig could be the impetus of this by offering deep discounts to compete with private label brands, or a value-oriented competing pod system could successfully enter the market and begin a price war (current number-two Nespresso is unlikely to do this because of its premium positioning).

According to Barry a brand capable of producing environmentally friendly capsules, delivering great coffee taste in an inexpensive but fully biodegradable pack type, for example, would energize the segment, unlocking huge market potential.

Volumes in the US are probably less than half of what they could hypothetically be, based on analysis of comparable markets where pods are more developed, he writes.

A sizeable prize indeed.

Learn more: The ​second edition of AMI's international Single-Serve Capsules conference will take place March 5-6, 2019 at the The Westin Buckhead Atlanta, Georgia.