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Coffee Market

Global Coffee Market Overview

Coffee is the third most widely consumed beverage, globally, after water and tea.

Coffee is a multi-billion-dollar industry, and experts predict the coffee industry will grow despite slowdowns in other parts of the export market.

Some of the primary factors driving the growth of the global coffee market include rising disposable income, urbanisation, changing consumer behaviour, innovative packaging, demand for ready-to-drink (RTD) coffee, and specialty coffee products.

Brazil is the largest coffee producer globally. Brazil has been the world's largest producer of coffee for the last 150 years, currently producing about a third of all coffee. Other noteworthy coffee-producing countries are Vietnam, Colombia, Indonesia, and Ethiopia. These five nations are the most important producers; they account for almost 75% of global production.

Coffee offers consumers a range of benefits. Research has found that coffee offers nutrients like manganese, potassium, niacin, and other compounds. Studies have also found coffee consumption helps to reduce the risk of cancer and type 2 diabetes, heightening the functional similarities between coffee and tea.

Coffee also offers consumers a high caffeine content (an average of 95 mg of caffeine in a cup of coffee), elevating the energy level of drinkers and reducing fatigue. The real and perceived energy benefits of coffee account for many coffee drinkers' habitual consumption of the product.

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Market Size And Growth

The global coffee market has an estimated value of US$471.3B in 2022 and is expected to grow annually by 5.28% (CAGR 2022-2025). The United States accounts for the most significant share of revenue in the global coffee market; the revenue of America's coffee market will be around US$90.3B in 2022.

The roast coffee segment experienced the highest growth rate in the global coffee market, accounting for US$334.6B in 2022, while the instant coffee segment contributed revenue of US $125.4B in the same year. However, the instant coffee segment is expected to experience the highest growth from 2022 to 2025. This growing coffee segment is expected to reach US$149.1B by 2025.

Market Forces

Coffee is prevalent in many established markets due to dominant coffee cultures. Premiumization, urbanisation, and disposable income have helped the coffee market grow in established markets (e.g., United States).

Brands using premium pricing rely on research and customer analysis to guide price increases, to capture the highest amount consumers are willing to pay, without driving them off. Established coffee brands positioning themselves in such a way, often use an omnichannel approach (e.g. using their website, social media channels and in-store displays to promote the brand and products) for marketing coffee.

Disposable income of the urban middle-class drives coffee consumption and market growth. Millennials are the age group that most frequently consume premium and specialty coffee. The average American millennial spends $2,008 on coffee annually, 2.8% of the average annual income (US$ 71,566).

Within the last eleven years, the out-of-home coffee market has grown; numerous coffee shops and cafes have been opening worldwide. Countries like Germany, Italy, Spain, and the UK, are nations that strongly reflect this trend of out-of-home coffee consumption. In the Netherlands, the average Dutch consumes one cup of coffee at home per day, and two cups of coffee out of the home.

Consumers' lifestyles (e.g., an emphasis on convenience), increasing green coffee consumption in emerging economies, and a willingness to spend, are driving coffee demand. The increasing palatability of coffee through processing innovation (e.g., Nitro coffee) and ingredients (e.g., cream), also drives the coffee market forward. This trend is strengthened by increasing the convenience of accessing coffee (e.g., RTD coffee).

Many established coffee retailers are positioning their products using value-based pricing to capture such growth, hoping to profit by appealing to a wide customer base. Established coffee brands positioning themselves in such a way often use convenient distribution and strong branding in marketing coffee.

Market Opportunities

Ready-To-Drink Coffee (RTD) Is Ready To Grow

Ready-to-drink (RTD) coffee is one of the fastest-growing market segments in Europe, and this coffee trend continues into 2022. RTD coffee is perceived to be healthier than sodas, and growth in the iced coffee segment helps fuel RTD coffees’ premium status.

Specialty Coffees Are Increasingly Special

Most consumers still buy mainstream coffee blends (e.g., Folgers), yet there is rising demand, and a willingness to pay, for high-quality coffee. High-quality coffee has cupping scores of over 80 points.

Consumers are increasingly willing to pay for coffee with a good story related to its environmental and social aspects. Such findings align with reports on socially conscious consumers looking for an authentic experience.

Coffee businesses looking to tap the specialty market should focus on high-scoring products with strong eco-conscious roots.

Single-Cup Coffee Is A Brewing Market

Homebrewing is changing; consumers are choosing new equipment. In the US, consumers are 24% less likely to choose traditional drip coffee machines than in 2015.

Single-cup brewers have risen 50% from 2015 to 2022, and coffee pods and capsules are the primary drivers. Experts anticipate the global market for single-cup brewer machines to nearly double by 2025, reaching US$29.2B.

Potential For Agri-Tourism In The Coffee Industry

Agri-tourism is an increasingly viable market in the coffee industry. This trend parallels the wine industry, in which vineyard visits and tours are common.

Agri-tourism is a manifestation of the idea that consumers want an authentic experience. Consumers who value such experiences are willing to seek out coffee growers for tours, tastings, and learning experiences.

Growers in exporting countries may look to attract tourists; viticulture shows growers in almost any region can attract tourism.

Market Constraints

Strong tea cultures in eastern markets threaten coffee with a substitute product, constraining growth.

COVID-19 has constrained coffee market growth in the past 2-3 years, among strong western coffee markets (e.g., America, Australia).

Promoting coffee consumption in developing countries is an ongoing challenge for marketers; developing nations often have limited foodservice sales of ready-to-drink coffee.

The fluctuation of raw material prices, such as the increased cost of agricultural inputs, increases the price of coffee beans. Similarly, weather variations constrain the coffee market; rain during harvest is problematic for farmers, who rely on the sun to dry their beans. Too much rain during the growing stage leaves trees susceptible to mould and fungus. Pests present a constant threat, dampening coffee production. For example, the coffee bean borer, a tiny beetle which lays its eggs in coffee beans, costs Brazil USD $300M a year in lost harvests.

Urbanisation can also constrain the coffee market over the long term. Towns and cities are expanding rapidly across Central America and Africa, pressuring producers to develop their land. This raises concerns that, over time, some of the world’s best coffee-growing land will be redeveloped, leading to uncertainties regarding the industry’s future.

Coffee Market Segmentation

Segmentation By Region

The coffee market can also be segmented based on region. There are four general regions in the international coffee market:

  1. North America
  2. Europe
  3. Asia-Pacific
  4. Rest of the world

This article offers a quick overview of select markets within these regions.

North America

The North American coffee market is very competitive. This competitive landscape is dominated by global and regional players, which capture a significant share of the market. Companies that have emerged from the competitive rivalry are Starbucks, Tim Hortons, Dunkin' Donuts, and McCafé.

U.S Coffee Market

Delays in the coffee supply chain and weakening downstream demand contributed to dampening the coffee market revenue. This dampening of coffee markets is not limited to the US; a similar phenomenon is happening globally, primarily due to COVID-19.

Growth is expected to resume at a CAGR of 9% through 2025.

Europe

Europe is the seat of coffee’s power worldwide because of several significant coffee drinking nations (e.g., Germany, Italy, France).

United Kingdom (UK) Coffee Market

The UK makes up a small portion of Europe's total coffee market. The contrast in UK coffee consumption is significant compared to other European countries; for example, Finland consumes about 4x more coffee than the UK.

The roasted coffee market in the UK was valued at GBP 215M in 2020, with the average person spending GBP 0.41 on coffee per week. Looking ahead to 2025, experts predict the UK coffee market will grow more strongly than the US, with an 11% CAGR over the next five years.

Asia-Pacific

The Asia Pacific coffee market was valued at USD $106.3M in 2020. Coffee is expected to drive transformation in Asia Pacific’s beverage sector.

China Coffee Market

The sheer size of the Chinese market allows the coffee industry to generate billions in revenue, despite coffee consumption per capita being relatively low, at just 0.06kg per person. By contrast, tea consumption in China is 1.82 kg per person.

In 2020 the Chinese coffee market generated USD $9.4B in revenue. Experts predict China's coffee market to grow at a CAGR of 11.6% from 2020 to 2025.

Rest Of The World

Australian Coffee Market

The Australian coffee market was valued at USD $7.8B in 2020, and is a major coffee-drinking nation.

COVID-19 impacted the Australian coffee market. Revenue declined by 18.9% in 2020, yet experts predict to see a CAGR of 8.6% in the Australian coffee market from 2020 to 2025.

New Zealand Coffee Market

New Zealand, like Australia, is a nation of coffee drinkers. The average coffee consumption per capita in New Zealand is higher than in Australia and the UK. 70% of New Zealanders drink at least one coffee a day.

The effect of COVID-19 on reducing revenue in the New Zealand coffee market was not as significant as other places in the world. New Zealand's COVID-19 measures enabled consumer-facing businesses and supply chain partners to get back to normal more quickly.

The coffee market in New Zealand is expected to reach USD$ 388.89M, increasing at a CAGR of 4.23% annually until 2025.

Coffee Market Analysis

Porter’s Five Forces Analysis

​​Bargaining Power Of Suppliers

The bargaining power of suppliers within the coffee market is low. Coffee companies occupy a position of strength, as they have many suppliers from whom they can buy.

Suppliers are often willing to gain economies of scale by offering a favourable contract to coffee companies with significant sales. When coffee retailers are able to demonstrate their sales volumes to suppliers, it can further enhance their bargaining power.

Bargaining Power Of Buyers

The bargaining power of buyers in the coffee industry is high; there are many coffee providers, most of whom lack radical differentiation in the market.

Some customers in the coffee market show brand loyalty. But, the Law of Double Jeopardy exposes that the benefits of brand loyalty are not evenly distributed. This law states that brands with less market share have so because they have far fewer buyers (first jeopardy), and these buyers are slightly less brand loyal (second jeopardy). As market share declines, both penetration and brand loyalty drop together.

Switching behaviour is expected in the coffee industry; consumers have many choices and no switching cost. Consumers can choose from many international and local brands, maintaining buyer power. Many coffee companies provide consumers with offers to actively remain part of their consideration set, ensuring their products are considered when consumers have narrowed down their choices based on their screening criteria (e.g., price).

The Threat Of New Entrants

The threat of new entrants in the coffee industry is high. There are few barriers to entry; those present are not complex and are surmountable.

There are low capital requirements to enter the coffee industry; small brands can be launched online or in brick-and-mortar locations (e.g., coffee shops). Further, the skills required to start a coffee business are not highly technical; the skills required are also trainable (e.g., barista skills and coffee roasting can all be learned).

The growth of the coffee industry (from USD $360.3B in 2016 to USD $409.9B in 2021) also attracts new entrants, increasing the threat of new businesses entering the market.

The Threat Of Substitutes

Substitutes highly threaten coffee products. There are many alternatives available within the coffee industry (e.g., coffee brand A vs. coffee brand B), and many substitutes (e.g., coffee vs. tea, coffee vs. energy drink). The number of coffee substitutes increase continually, posting a threat to the industry.

Tea is one of the major substitutes for coffee; in many countries, consumers have a strong propensity to substitute coffee for tea. In some markets (e.g., Japan, China) tea is highly preferred to coffee, and other local hot beverages may also offer a threat of substitutes to coffee due to local customs or habits.

Competitive Rivalry In The Market

The coffee market is growing at over 4%, yet, the industry faces a fierce rivalry. Many small to midsize competing players, and several large brands, drive up rivalry in the coffee market.

Starbucks leads the coffee industry with annual revenue of USD $22.38B; Tim Hortons comes in second with a revenue of USD $3B per year. Other major brands in the market are Panera Bread, Lavazza, Costa Coffee, Peet's Coffee, Dunkin Donuts, and Caribou.

Players competing in the coffee industry are international players with massive financial strength; they pose a heightened competition for each other. These global brands (e.g., Starbucks) are present in countries, alongside local and online brands, intensifying the coffee industry's competition.

PESTLE Analysis

  1. Political Factors
  2. Economic Factors
  3. Social Factors
  4. Technological Factors
  5. Environmental Factors
  6. Legal Factors

Political Factors

Political factors address how, and to what degree, a government interferes in the economy. Political forces shaping coffee markets vary from country to country.

Such factors often fall within seven broad categories:

  1. government policy
  2. political stability
  3. foreign trade policy
  4. tax policy
  5. labour law
  6. environmental law
  7. trade restrictions

The coffee market depends heavily on international trade.

The world’s largest coffee producers are in South America, Asia and Africa: Brazil, Vietnam, Columbia, Indonesia, and Ethiopia are the top five coffee producers.

Yet coffee is most popular in North America and Europe. Americans consume around three cups of coffee per day, and Finland, the largest European coffee market, consumes around four cups of coffee per day.

Trade relationships between countries that produce and consume coffee significantly impact the final price tag of the beverage, which affects sales. Currently, several international trade agreements ensure the success of the coffee industry, such as the International Coffee Agreement (ICA).

Economic Factors

Economic factors affect the operation and profitability of a business within the coffee industry.

Economic factors include:

  1. Economic growth
  2. Interest rates
  3. Exchange rates
  4. Inflation
  5. Disposable income of consumers and businesses

Such factors may be macro or micro in nature, and both significantly impact business operations. Macroeconomic factors affect market demand and include variables such as interest rates, taxation, and government subsidies. Microeconomic factors reflect how consumers spend their money. These factors strongly impact B2C businesses, such as coffee companies.

There's a common benefit to any growing economy: consumers have higher disposable incomes and can spend more. Increasing disposable income hugely impacts consumer goods industries (e.g., consumer electronics) and food and drink industries.

As consumers become more affluent, they are more likely to consume premium beverages (e.g., specialty coffee, specialty tea). Consumers are also more likely to splurge on higher quality products, such as premium coffee.

Social Factors

Social factors, also called socio-cultural factors, reflect the attitudes and beliefs of markets, and changes in the population itself. To effectively bring coffee companies’ products to market, marketers must understand these factors.

Social factors include:

  1. Population growth (e.g., Pakistan, the biggest coffee importer in 2020, is growing at 2%)
  2. Age distribution (e.g., Millennials and Gen Z are more likely to consume coffee blends)
  3. Health consciousness (e.g., coffee to help lower stress levels)
  4. Consumer behaviour (e.g., buying online, coffee subscriptions)
  5. Attitudes of social causes (e.g., products that support social causes, like empowering coffee farmers)

The 21st century ushered in an era of health-conscious consumers. Many consumers prioritise eating better food, avoiding certain habits, and maximising their wellbeing.

Coffee contains large amounts of caffeine. A segment of consumers choose to give up caffeinated beverages for improved mood, sleep, and health. If this segment grows, it may dampen coffee demand. However, the growing demand for decaffeinated coffee products will likely offset this demand reduction.

Another social factor affecting the coffee market is the rising significance of Fairtrade, an international movement to better compensate farmers. This movement is positioned against the many middlemen in the coffee industry that have historically enjoyed huge profits.

The coffee industry is one of the main targets of the fair trade movement, which shapes consumer behaviour. Consumers show greater demand for Fairtrade coffee products, which allows them to feel virtuous and impactful.

Experts predict the social movement toward fair trade will not affect the industry's overall size unless Fairtrade coffee prices drive away consumers if they become too high.

Technological Factors

The technological landscape changes rapidly. This rate of change impacts the way coffee companies bring their products to market; it also affects marketing.

There are three distinct ways technological factors affect coffee businesses:

  1. New ways of producing goods (e.g., agricultural and processing innovation)
  2. New ways of distributing goods (e.g., distribution and logistics innovations)
  3. New ways of communicating with target markets (e.g., digital marketing and branding innovation)

Technological factors include:

  1. Technological innovation in coffee (e.g., home brewing machines)
  2. Mechanisation across the coffee vertical
  3. Digital marketing innovation
  4. Business model innovation (e.g., subscription)
  5. Automation (e.g., email marketing)

Technology shapes the coffee industry in two main ways: genetic engineering and advanced coffee machines.

Genetic engineering is one of the most significant technological trends across all food and drink industries. Genetic engineering modifies produce at the genetic level to improve yield, taste, shelf-life, and other product attributes.

Genetically engineered coffee (which carries the “GMO” label) is growing quickly in popularity. Because genetic engineering allows producers to generate larger profits (and be more climate-resilient), this technology should help grow the coffee industry. However, some consumers prefer not to consume genetically engineered products due to purported side effects.

The advent of new, coffee-specific appliances is also changing the industry. Coffee grinders, drip machines, and espresso makers are now easily available and affordable at most electronics stores.

These appliances make it easier to consume coffee, encouraging consumers to consume specialty coffee at home. Adopting this technology may result in more consumers making and drinking coffee at home, with fewer consumers drinking coffee outside of the house in cafes and coffee chains.

Environmental Factors

Environmental factors are market-driven; they are either enforced by natural constraints (e.g., lower production volumes due to climate change) or consumer behaviour (e.g., purchasing decisions).

Companies must respond effectively to environmental factors to ensure they are positioned for long-term growth.

Environmental factors include:

  1. Climate change
  2. Pollution and toxicity
  3. Scarcity of raw materials (e.g., water)
  4. Consumer pressure for more carbon-neutral business operations
  5. Consumer pressure for more sustainable products and packaging

The world faces multiple environmental issues, some of which strongly affect the food and drink industries. Notably, unsustainable farming processes can result in land degradation and deforestation. Another long-term concern related to farming is water consumption, which in some regions strains the availability of a scarce resource.

Either through resource scarcity or certification requirements, sustainability issues are likely to increase the cost of coffee for the consumer, which may affect the industry.

Legal Factors

Legal factors represent mandatory requirements, enforced by governmental branches.

Legal factors include:

  1. Health and safety
  2. Equal opportunities
  3. Advertising standards
  4. Consumer rights and laws (e.g., returns)
  5. Product labelling and product safety

Companies must know what is legally required to trade successfully. If a coffee company trades globally, this becomes more complicated as each country has its own rules and regulations.

Because coffee is intended for human consumption, it falls under food and drink regulations in nearly all jurisdictions. As such, coffee is subject to a wide range of laws on how it should be grown, processed, stored, transported, and brewed.

These standards are only becoming stricter, increasing the legal constraints faced by actors in the coffee industry (e.g., producers, retailers). But compliant coffee handling is manageable and unlikely to be a fatal limitation.

Coffee Market SWOT Analysis

Strengths

  • Increased demand for coffee, especially in the U.S., China and India.
  • Increased urbanisation in emerging economies means more people are starting to consume coffee.
  • An expansion of coffee culture, particularly the global expansion of coffee shops and capsules.

Weaknesses

  • Coffee production depends on the weather, leaving it vulnerable to fluctuations in quantity and quality.
  • Price fluctuation in commodity-grade and specialty-grade coffee presents a challenge. Reduced bean production has increased coffee prices.
  • Coffee producers are unable to predict pricing trends and plan for the future.
  • Unreliable incomes for producers and consumers may make it more difficult for coffee brands to price their products effectively.

Opportunities

  • There's a surge in demand for certified coffee products, allowing some coffee brands to drive product sales.
  • Consumers are embracing single-serve coffee brew systems.
  • Emerging "café culture" trend amongst the younger consumers (e.g. Millennials, Gen Z).
  • Rising demand for ready-to-drink coffee, gourmet, and specialty coffee allows coffee brands to embrace premiumization.
  • Many millennials prefer coffee because of its status, experience, and personalization.
  • Consumers are increasingly aware of coffee's health benefits. Studies indicate that coffee may offer benefits beyond energy, such as a reduction in mortality among regular coffee drinkers.

Threats

  • Competing coffee brands crowd the market.
  • Many product substitutes (e.g., tea) present a constant threat.
  • Climate change will affect coffee production, increasing coffee deficits.

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