It couldn’t be much simpler, just hot water and ground beans, but the humble cup of coffee continues to represent a dynamic opportunity to drive sales and build buzz for restaurants.
“Good coffee didn’t flame out because it wasn’t gimmicky,” says Mark Inman, president of California-based organic roaster Taylor Maid Farms and chair of the Specialty Coffee Association of America’s 2008 annual conference. “It’s taking something old and updating it.”
Thousands of years after it was first developed, the drink is still grabbing headlines as major fast-food chains upgrade their coffee offerings and established coffeehouses like Starbucks strive to maintain their edge.
Specifically, quick-service segment leader McDonald’s put its own spin on mainstream coffee in 2006 when it began making lattes in Michigan and selling them for less than $3. By the end of 2007, 800 McDonald’s in the Midwest were part of the test, with plans for a wider rollout this year, says spokeswoman Danya Proud.
Fierce competition and exponential growth in the coffee segment keeps operators on their toes, but recent years appear to have started a vibrant new chapter in coffee’s long history.
Last year, coffee passed soft drinks to become America’s number-two beverage after water, according to the annual National Coffee Drinking Trends study conducted for the National Coffee Association. Experts say there’s still room for growth.
“McDonald’s getting into it is the writing on the wall,” Inman says. “This trend hasn’t even started yet. It’s where fast food was in the 1960s.”
Coffee has already come a long way from when upscale java first began to catch on in the United States in the 1960s and ’70s. Back then, quality coffee was a small niche, says Peter Giuliano, founder of 12-year-old roaster Counter Culture Coffee in Durham, N.C.
“It seemed like either you were a total gourmet buying fancy coffee, or sort of a beatnik type that liked to hang around coffeehouses,” he says.
The rise of specialty coffee to widespread popularity mimics that of the upgrading of many other American consumables, including wine, bread, cheese or chocolate. In each case, once consumers tasted better quality, for many there was no turning back.
Another factor boosting coffee’s popularity is that it’s an affordable luxury. The best gourmet coffee sold in the U.S. today costs perhaps 32 cents a home-brewed cup, says Ric Rhinehart, executive director of the Specialty Coffee Association of America, or SCAA. In hard times, consumers may buy cheaper wine, but coffee is relatively recession-proof.
“You can drink specialty coffee anytime and not feel bad about it,” Rhinehart says.
Chicago-based market research firm Technomic reports that consumption of hot specialty coffee has grown 14 percent in each of the past three years. Some 82 percent of American adults are coffee drinkers, up from 79 percent in 2004.
The SCAA reports the specialty market topped $12 billion at the end of 2006.
Additionally, the number of coffee shops in the United States has grown from 1,640 in 1991 to nearly 24,000 at the end of 2006.
The bulk of those, about 11,000, belong to the Seattle-based company that coffee-watchers agree almost single-handedly brought specialty coffee to the masses.
“Starbucks capitalized on the trend to better coffee by offering a unique new presentation of that coffee,” Rhinehart says. “Americans weren’t used to espresso-type drinks. We were starting to take more meals and beverages out of the home. Starbucks was in that perfect spot of having a unique product, they offered great value, there was a new consumer pattern…and they were cognizant of their place in the social fabric, as a third place for people to gather.”
Though Starbucks’ stock price has declined lately amid news of its scaled-back expansion plans, the reaction may be a bit of a tempest in, well, a coffeepot. The company opened 2,571 stores worldwide in its fiscal 2007, and now plans to open 2,500 in ’08, a decrease of about 3 percent.
Though small, many feel the company’s first cutback indicates Starbucks may be a victim of its own success. Between new competition from other restaurants and Starbucks’ own self-cannibalizing growth, traffic was down 1 percent at U.S. stores, the company said in November.
“They have an incredible number of regional competitors, and now McDonald’s and Burger King and Wendy’s,” says Technomic’s executive vice president Darren Tristano. “The competitive environment has gotten much worse for Starbucks, with more locations to get better-quality coffee.”
At Dunkin’ Donuts, for instance, espresso-based beverages rolled out after a 2003 test. Dunkin’s customers took to the idea of lattes priced around $2. Dunkin’—which gets 63 percent of revenue from beverages—now touts six flavors of coffee, including Cinnamon Spice, French Vanilla and Hazelnut.
Senior director of brand marketing Scott Hudler says customers can expect more coffee products to be introduced in the future.
“Everyone has to bring their ‘A’ game, because the competition is increasing,” he says.
Still, there are many regions of the country where good coffee has yet to gain mass acceptance. After seeing the better-coffee scene take off in San Francisco in the late 1980s, Giuliano moved to North Carolina in 1996 to start Counter Culture, as he says the South lagged behind the trend.
At Counter Culture’s headquarters, 30 to 40 customers now turn up on Fridays to attend company cupping sessions and taste new brews, a sign of the coffee passion locals have developed.
Giuliano says the future likely will see new gourmet-coffee trends emerge. For instance, a coffee bar where you see films and learn more about your coffee’s country of origin could offer an adventure-travel experience.
He also thinks better coffee may be melded with fine chocolate. For instance, Counter Culture recently started working with high-end chocolatier Cocoa Bar in New York, which offers premium coffee and coffee-tasting events.
“Coffee’s been stuck in the latte thing, and chocolate in the candy bar thing,” he says. “I think retailers leading consumers through a combined experience of those two will be celebrated in the future.”
Dunkin’ Donuts Hudler is expecting future studies on health benefits from coffee to spur sales. Also on the health front, at Starbucks the new emphasis is on their “Skinny” line of lattes made with nonfat milk and sugar-free syrup.
“We’re seeing an increased customer interest in health and wellness,” says spokeswoman Bridget Baker.
Others think that with 74 percent of coffee still drunk at home, the big growth in specialty coffee will come in the grocery aisles. At San Francisco-based Peet’s Coffee & Tea, senior public-relations manager Erica Hess sees huge opportunity for better-coffee inroads in grocery ahead, particularly in the Midwest and East, as well as in fine-dining restaurants in those regions.
Demographic trends also weigh in favor of future category growth. The National Coffee Drinking Trends study shows adults ages 18 to 24 drink more espresso-based beverages and more gourmet coffee in general than any other age group.
Taylor Maid Farms’ Inman expects to see gourmet coffee get even more gourmet, as rarer coffees are introduced at higher prices.
“I think coffee ought to be $1 a cup, $45 or $50 a pound,” he says, “and it’s slowly moving in that direction.”