US Coffee Market Outlook for 2017: Retail Slows as Foodservice Remains Hot

As coffee retail sales slow, how will the US market adapt in 2017?

Over the past five years, coffee retail sales in the US have grown at a healthy rate. IRI data shows that total dollar sales advanced at a compounded annual growth rate (CAGR) of 4.6% from 2012 to 2016: a very healthy expansion for a developed market. The rapid rise of the single-cup category transformed coffee retail sales in America. Back in 2012, single-cup brands made up just 21% of dollar sales, but they now account for 41%. In the meantime, all other categories have shrunk over the past five years—and some by significant levels. Instant coffee and whole beans are both down by 11%, while ground coffee declined by 9%. More recently, however, growth has been slowing, to less than 2% in 2016. The recent changes in the market’s composition help explain why coffee retail sales are winding down.
As the single-cup category matures, overall sales are down, and we could even see zero growth in 2017. A study by the National Coffee Association (NCA) shows that household penetration of single-cup brewing machines in the US has peaked at around 30%, after growing rapidly from just 9% in 2011 (see Figure 1). Fewer consumers are now willing to shift from drip coffee makers or from instant coffee to single-cup, resulting in slowing growth rates.

Figure 1. How Americans make their coffee: single-cup penetration peaking at around 30% of households

Source: NCA, Rabobank 2016

Brand saturation is also a reason for the cool-down, as practically all mainstream brands in America are now available in that platform, and there is less incremental growth as a result of new brand launches. Pricing has suffered in recent years, as more brands entered the category and as private labels’ share grew. Rabobank analysis shows that prices in single-cup coffee gained 30% during the early growth phase from 2006 to 2008, but have been on a declining trend since and are now at a similar level to what they were ten years ago.
Environmental concerns are another reason why consumers are pulling back, and the industry’s response will be crucial to ensuring additional future growth. With single-cup’s limited growth, total coffee retail sales will probably see gains of just 1% or less in 2017.
As retail sales are slowing down, out-of-home channel sales are accelerating in the US. Foodservice coffee sales should end 2016 around 3.3% higher than in 2015, according to Euromonitor estimates (see Figure 2). Low unemployment and continued economic growth have enabled consumers to increase their coffee consumption out-of-home, and this trend should continue in 2017. Shifts in household composition are favouring the steady rise in out-of-home coffee sales. More single households and fewer homes with underage children are reasons why fewer families have sit-down breakfast meals and choose foodservice alternatives in the morning, when the majority of coffee sales take place.

Figure 2: Growth in foodservice coffee sales picking up in the US

Source: Euromonitor, Rabobank 2016

The growing importance of millennials in the US also supports more out-of-home and premium coffee consumption. They now make up the largest generation in US history, and next year, they will have the highest combined spending power of any living generation. Customised cups made of local roasts and single-origin beans score high with millennials, and these differentiated alternatives have increased in foodservice and specialised cafe offerings. However, mainstream quick-service restaurants (QSR) and coffee chains are attuned to this trend. They are responding by expanding their menus and launching new alternatives, such as cold brew coffee, as they too want to benefit from a trend that started at the premium end of the market. Out-of-home sales should continue to be energised and grow in 2017, at a similar level as seen in 2016 of 3% or more.

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