Coffee Tides Changing.
In 2001, Datamonitor estimated that retail channels, including supermarkets, drug stores and discount clubs, accounted for 50 percent of U.S. coffee sales. But by the end of 2006, that share had fallen to 34 percent. Meanwhile, the total market climbed more than 50 percent during the same period, according to Datamonitor, and is expected to grow another $10 billion to $39 billion by 2011, driven mainly by coffee shops.
"It's a complete shift in thinking by the consumer," said Lauren DeSanto, analyst with Morningstar. "You suddenly had premium coffees come available, and people responded well, by really opening their wallets."
Not only are people drinking anywhere from one- to two-thirds of their java outside the home, but specialty brands are increasingly invading the supermarket aisles that were once the purview of Maxwell House and Folgers. And they are seeing success: Brands such as Newman's Own, Intellegentsia and Green Mountain are all gaining market share, largely at the two titans' expense.
Patrick Schumann of Edward Jones said the old reliable brands aren't likely to pick up any lost sales. "The brands that have been established as being higher-quality really are the brands that are going to be able to show continued momentum," he said.
Translation: If Kraft and Procter & Gamble want to save, rather than sell, their coffee businesses, they're going to have to make a product their own executives will drink.
"These companies don't throw very many people at it," said Dan Cox, president at coffee-tasting service Coffee Enterprises, who worked with McDonald's to turn around its coffee business in 2005. "What does their president drink? It doesn't work unless it comes from the top down."
Cox pointed to the boots-on-the-ground efforts of regional roasters and their tendency to hire people who are passionate about coffee. P&G and Kraft, by comparison, rely more on TV advertising than the grass-roots marketing that has built brands such as Starbucks.
But even traditional ad outlays have fallen for one supermarket stalwart. Kraft spent only $17 million on Maxwell House last year, according to Ad Age's Leading National Advertisers report, down more than 33 percent from $25.6 million the year before. Folgers, meanwhile, spent about $73 million in measured media -- up more than 137 percent.
For P&G, which controls 35 percent of the ground-coffee market -- valued at $2 billion in food, drug and mass merchandisers excluding Wal-Mart, according to Information Resources Inc. -- the outlook is somewhat sunnier than at Kraft, which IRI said holds 34 percent. P&G also owns Millstone, which has had fair success in the grocery channel, and is licensing the Dunkin' Donuts name for a supermarket brand.
P&G's total coffee sales were $727 million for the 52 weeks ended July 15, IRI said. Yet lingering production problems from Hurricane Katrina (P&G's facilities are in New Orleans) and increasing commodity prices have made business difficult and a sell-off likely.
Kraft, meanwhile, has announced that it's switching its coffee blend from cheaper robusto beans to fuller-bodied Arabica. "We believe it's going to put Maxwell House on a new growth trajectory," said spokeswoman Bridget MacConnell.
Kraft also has a licensing agreement to market Starbucks-branded coffee in grocery stores. According to the company, its Starbucks grocery business grew 8 percent in 2006 and has already risen 11.4 percent percent in 2007.
But according to IRI, Kraft's Starbucks-brand whole-bean sales in supermarkets totaled $108 million in the 52 weeks ended July 15, just a fraction of Maxwell House's $697 million. So why, then, if Starbucks is selling briskly in street-corner shops, aren't consumers buying more of it at the supermarket to brew in their kitchens?
"Most consumers have a difficult time making a decent cup of coffee at home," Cox said. "They don't own commercial brewing equipment and they're impatient."
That makes all the more serious signs that Maxwell House has been flagging. The company closed its Texas roasting facility earlier this year, and activist shareholders have been pushing for divestments.
"They're not even roasting their own coffee anymore," Cox said. "That was a real signal."
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|Date:||Aug 21, 2007|
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