Single-Serve Slows
A decline in what consumers are willing to pay for capsules is evident.
By Dan Bolton
Growth in household penetration of single-serve brewers has slowed.
The National Coffee Association’s (NCA) annual National Coffee Drinking Trends (NCDT) survey reported 29% of American households owned single-serve brewers in 2017 but drip machines in the home still accounted for the majority of cups prepared.
Household penetration of brewers increased an anemic 2% over 2015, (compared to five years of double-digit growth with a peak 10 million units sold in 2014). The NCDT found that 32% of single-cup brewer owners, who drank coffee the previous day, said their coffee was brewed with a drip coffee maker; 13% reported drinking coffee brewed with an espresso machine and 7% said they drank instant.
Unit sales of capsules slowed to 1.6%, according to market research firm IRi.* Capsule sales totaled $4 billion at multi-outlet stores, plus convenience outlets last year, according to IRi. Folgers, Keurig, Eight O’Clock, Newman’s Own, Caribou Coffee, and Dunk’n Donuts branded capsules all lost dollar share in 2017. Private label saw a dollar sales increase of 23% to claim 4% market share with $80 million in sales.
TreeHouse Foods chairman and c.e.o. Sam K. Reed told Food Business News that syndicated marketing data counts units in traditional channels and not the totality of the marketplace. Sales at local coffee shops and online, for example, are not tallied. He believes that “household (brewer) penetration has passed the 30% level, which is quite a substantial improvement.”
“If you do it on an equivalent cup basis, the private label business is still growing very strong, double-digit in units, and over a broad scale,” Reed said.
Price compression in the $4.5 billion category is a greater concern, according to Jim Watson, senior beverage analyst at Rabobank. In a September webinar hosted by NCA, he said single-cup dollar sales growth last year “slowed drastically” from 45% per year in 2013 to 2%. Volume growth “tells a better story” at 8%, he said, but pricing, which declined 6% in 2017 is “extraordinarily weak.”
“In America, capsules remain relatively expensive,” he said.
Lower unit prices are why sales of private label capsules increased almost 25% and now account for 16% of the single-serve market in the US, a notable leap from zero in 2011. He said single-cup has not reached its peak. It is merely transitioning from early-stage adoption to a more mature (and less vigorous) wave of growth. “Will the rise of private label continue; can it get much bigger?” he asks.
“Yes,” but Watson cited several obstacles. His biggest concern is that US pricing is high compared to other brewing methods and against single-serve systems in other countries. The North American market is not in balance, he says. That is why the price of capsules fell 6% year-to-date. In North America, pods represent 11% of unit volume but a disproportionate 37% of sales revenue, according to Watson. In Europe, unit volume is 17% and pods account for 34% of sales. “Nature abhors a vacuum,” he warned. Watson presented examples of “bargain” capsules selling for 32 cents. Third-party grocery comparisons show Lidl prices are 14.6% lower than Kroger and 5.7% lower than Walmart Supercenters. In Europe, Lidl sells 10 capsules for €1.99 or 23.5 cents each.
He did not cite taste, which in prior studies was a significant concern.
NCA discovered that owners of single-cup brewers are genuine coffee fans. Brewer owners are more likely than non-owners to drink coffee daily 68% vs. 52% and they are more likely to drink all coffee beverage types (from traditional to specialty gourmet).
“Convenience is king in coffee and across the consumer universe. It provides a great foundation for future volume growth,” Watson said, predicting long-term and healthier 8% growth, he said.
Watson sees the slowing as temporary. “In markets with little competition, innovation suffers. Single-serve is waiting for the next spark,” he said.
Keurig changes strategy
No one asked Keurig to make an expensive DRM (digital rights managed) brewer. Customers instead wanted an eco-friendly My Cup they could fill with their favorite ground roast. No one demanded a capsule filled with syrup and CO2 crystals to make soda. What they wanted was an environment-friendly, economical capsule with sufficient volume to fill a travel mug instead of forcing them to use two. Commuters wanted a push-button option for stronger brew. They like colors that match their kitchen decor.
In 2016 Keurig’s very capable engineering team, after the company was acquired by JAB Holding for $13.9 billion, settled down to basics and did all the above.
“We’ve heard that some of our users are seeking a stronger cup,” said Scott Moffitt, Keurig’s chief brand and beverage officer. “We’re addressing that need by giving consumers the option to personalize their coffee even further by introducing an enhanced strong brew feature in a stylish, easy-to-use coffee maker.”
The new select line brewers (with strong brew button) are priced at $129. Keurig’s high caffeine REVV dark roast offers: No Surrender, Afterburner, and Turbocharger pods all taste just fine.
Under new management Keurig focused on sourcing, roasting, and packaging coffee. Lawsuits, intimidating distributors and patent battles are in the past. Efficiency is in. Prices of nationally branded capsules from Folgers, Maxwell House, McDonalds (Kraft), and specialty offerings from Peets, Caribou Coffee, and Starbucks all sell well below the $1.50 cost of shop coffee. Mid-priced Keurig label varieties and private-label ranges from Costco and Walmart can be marketed for a very reasonable 35-cents.
Consumers queried by Mintel International say capsule prices are “expensive (34%) and 17% say capsules are “bad for the environment.”
Global gains
Keurig remains a US brand while Nespresso, its European counterpart, is distributed globally. Each company generated $5 billion annually selling brewers at the peak of adoption and continue to generate billions in capsule sales.
“The global coffee pods market is highly competitive and diversified due to the presence of a large number of regional and international vendors across the globe,” observes Manjunath Reddy, a lead analyst from Technavio, specializing in research on food sector. “It has been observed that these vendors are increasingly competing against each other based on factors such as price, quality, innovation, reputation, and distribution to gain maximum traction in the market,” he writes.
Technavio expects the global coffee pods market to grow at a combined annual rate of 7% for the next five years. While largely limited to the developed markets, “the premium price tag of the product has enabled the category to have a substantial impact on the value of the global coffee market,” writes Reddy.
Reddy cites three emerging trends: compostable coffee pods; demand for organic and fair trade pods and integrated marketing communications.
Eco fears in perspective
While it is true that billions of single-use capsules are piling up, media and marketers are no longer treating capsule use as earth-ending. It’s all garbage after all and while 8.5 billion capsules end-to-end would circle the earth 10.5 times their total weight is about 25,500 metric tons (approximately 0.01% of the 251 million metric tons of solid waste generated in the US each year). Forbes in July calculated that worldwide sales of plastic bottles tops a million a minute. Americans discard 60 million plastic bottles a day. Annual consumption is projected at more than half a trillion bottles by 2021, a 20% increase, mainly in bottles containing water. Placed end-to-end the 480 billion drinking bottles sold in 2016 would extend halfway to the sun.
Coffee consumers’ preference for convenience and their relative affluence make it unlikely quantities are going diminish. Dunkin’ Donuts seriously considered ending its K-cup business in 2015 but, after examining its profitability, expanded production instead. Capsules sales were $220 million last year.
The bigger concern is switching to recyclable polypropylene pods. Keurig expects to produce half its pods using this material by 2018 and 100% by 2020.
“Our goal is 100% Keurig K-cup pods diverted from landfills by curbside recycling,” Monique Oxender, Keurig’s chief sustainability officer told the Chicago Tribune. “The consumer is going to brew it, peel and empty it, and pop the pod into the recycling bin in the same behavior they would do with a yogurt cup. We want to make it a habit.”
The problem is packaging, not single-serve, say, politicians. In 2016, Loblaw Companies launched Biodegradable Products Institute (BPI) certified 100% compostable single-serve pods. Lavazza launched a patented compostable coffee pod in 2017 and Ethical Bean Coffee launched 100% certified compostable single serve pod “to entice consumers looking for environment-friendly products,” reports Reddy. “It is expected that more players are likely to come up with new product launches of compostable coffee pods, which will help the global coffee pods market to grow during the forecast period,” says Reddy.
