Coffee Market in UK

Coffee in the United Kingdom

 

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Headlines

·         Coffee sees 2% growth in volume terms in 2008 to reach over 54,000 tonnes, and current value growth of 3% to £830 million

·         Growth continues to be driven by fresh coffee with 7% current value growth in 2008

·         Espresso fresh ground coffee shows the fastest development in 2008 with growth of 12% in retail value and 11% in volume sales

·         Average unit prices increase marginally in 2008

·         Nestlé UK remains the clear leader in coffee in 2008 with a retail value share of 43%

·         Coffee is predicted to see volume growth of 8% over the forecast period to reach over 58,000 tonnes, and a slight decline in constant value terms, reaching £827 million in 2013

Trends

·         The development of Britain’s cafe culture has been a strikingly rapid phenomenon. In the space of just over 10 years, the ubiquitous Starbucks, Costa and Cafe Nero can be found on what can feel like every corner. On-trade sales of coffee have shot up as the UK consumer has been converted to espressos, Americanos, lattes and cappuccinos. This has provided a marvellous opportunity for the retail sector as well and suppliers have been at great pains to try and catch up with the demand for quality coffee in the UK.

·         While it seems that the deteriorating economy has led consumers to think twice about popping into Starbucks on the way to work; retail sales of fresh coffee have continued to prosper. A greater array of quality coffees and increasingly diverse ways to prepare a cup of coffee has led to fresh coffee’s value sales growth of 7%.

·         Nevertheless, instant coffee maintains the lion’s share of the overall coffee sector accounting for 80% of the sector value sales. Value sales of instant coffee grew at just over 2% in 2008. Within that figure the performance of standard instant coffee which grew at 3% was much stronger than decaffeinated where sales were flat. In instant coffee, there were particular areas of strong growth. More premium offerings of instant coffee such as Kenco’s Carte Noire have been successful as have instant flavoured coffee offerings such as cappuccino and latte. Flavoured offerings are particularly popular amongst young consumers and they serve as an entry point for many consumers into the coffee sector. Cappuccino is the most popular instant coffee type after “standard”.

·         As in the tea sector, ethical consumption continues to play a crucial role in coffee. Initially spearheaded by niche ethical brands like Cafe Direct in fresh coffee, Fairtrade is also now big business in instant coffee where growth outpaces that of standard instant coffee. Recognising the potential in this area, the big coffee producers are now following suit. Kraft for example has signed up to the Rainforest Alliance for the production of all its Kenco coffee. There is confusion however, amongst consumers as to what these particular accreditations mean. There is a danger that certificates such as “Fairtrade” or the “Rainforest Alliance” are seen merely as brands, with consumers unable to distinguish between them.

·         Espresso fresh ground coffee showed the fastest growth in retail volume and current value terms of all categories in 2008. UK consumers are becoming increasingly exposed to different ways of preparing coffee. The Espresso pot, used to prepare espresso on stove tops, is an increasingly common kitchen accessory as consumers seek to recreate the taste they experience in Italian restaurants, during European holidays or the coffee shop chains. Those European brands with a heritage in Espresso coffee such as Lavazza and Illy are becoming all the more recognisable among UK consumers.

·         A key innovation aimed at replicating that coffee shop experience has been the introduction of coffee pod machines. Products such as Kraft’s Tassimo along with Douwe Egberts Senseo and more recently Nestlé’s Dolce Gusto pod machines have transformed the off-trade fresh coffee subsector by offering a convenient option for a range of premium coffee. With pods retailing for about £0.30 to £0.40 per serving, these products are a key source of value creation in the off-trade. This particular channel grew at over 20% in 2008. While the machines currently offer an expensive barrier to entering this arena, one would expect that prices will soon fall and Christmas promotions will see the reach of these machines increasing.

·         Unit prices grew marginally in 2008; an increase that largely can be attributed to customers switching away from standard instant coffees to more expensive premium options. The overall increase in unit prices was however quite measured, given the rising cost of the raw materials with both Robusta and Arabica beans rising above 10% in price. It would seem that suppliers and retailers may have seen a slight fall in profit margins accordingly.

·         The most significant change in dynamic between the off-trade and on-trade was the rise of fresh coffee in the off-trade relative to the on-trade. The off-trade now sells 48% of all fresh coffee and as consumers become increasingly savvy about the modes of preparation and varieties of coffee available, it is inevitable that the off-trade will soon take over as the leading supplier of fresh coffee, particularly with a severe recession looming.

Competitive Landscape

·         Nestlé’s Nescafé brand continues to dominate the total coffee sector with a retails value share of 43% thanks to its enormous share of the instant coffee subsector. That share has however been relatively stable in recent years as Nestlé has struggled to assert itself in the faster growing areas. This has however been addressed in the coffee pod category where Nestlé’s Dolce Gusto has quickly established itself as the second largest player in the sector with over 30% of sales, despite being relatively slow to market compared to Kraft Food’s Tassimo machine and Dolcé Gusto Senseo.

·         Kraft Foods saw its share fall slightly to 14% of sector value sales as a result of the poor performance of its secondary and tertiary brands. In the instant coffee subsector, there was significant consolidation as the big brands like Nescafé, Nescafé Gold Blend, Kenco Really Rich and Kenco Really Smooth perform strongly while weaker brands like Kraft’s Maxwell House are cleared out by retailers to make way for the increasingly fragmented, but faster growing fresh coffee subsector. Kraft has also been heavily pushing its Tassimo machine and the partnership agreement between Kraft Foods and Starbucks which sees Starbucks coffee being prepared in the Tassimo machine is good news for both parties and will serve to reinforce the ongoing adoption of the at home “café culture”.

·         Lavazza has responded to the wave of coffee pod machines by bringing its A Modo Mio machine from Italy over to the UK market. The distinctive brand of Lavazza will make it a popular choice amongst coffee connoisseurs, but it is unlikely to compete in volume terms with big brands like Nescafé.

·         Growth in Fairtrade brands like Café Direct has stuttered somewhat as big brands such as Kraft’s Kenco have pushed their ethical credentials by signing up to the Rainforest Alliance and backing the move with the type of substantial advertising investment that a niche producer like Café Direct simply cannot afford.

·         Innovation continues to be largely focused at the premium end of the market, both in instant and fresh coffee, with suppliers expanding their repertoire with higher quality offerings. Nestlé is for example launching Nescafé Suraya, a blend of 100% Arabica beans. An exception to this trend has been the move of the Options brand owned by R Twining and Co Ltd into the flavoured coffee category having previously been established in hot chocolate. This move comes in the wake of another brand in the Twining stable, Twinings, launching into coffee the previous year, despite being better known for its tea. The Options brand provides a low calorie instant alternative to other flavoured coffee products, such as Kenco’s Cappio range.

·         Private label is particularly significant in terms of volume share in this sector, accounting for 27% of sales. While private label has a presence across the different subsectors, increases in share have largely come from increased sales of instant coffee as consumers turn to affordable but trusted alternatives to the more expensive branded products.

Prospects

·         Initial signs seem to be that in times of economic difficulties Britons turn to the kettle. There is the possibility that the long-term trend of premiumisation in the coffee market may suffer a slight slowdown while sales of cheaper instant coffees may temporarily pick up. Nevertheless, there is unlikely to be a significant change in the retail sales of coffee as a whole as a result of economic hardship. There are already signs on the other hand that within the on-trade, sales are being and will continue to be, severely affected by the economic slowdown. The Starbucks on the way to work is clearly seen as something of an indulgence that consumers are looking to cut back on as conditions worsen.

·         Nevertheless, in the long term, it is expected that premiumisation will continue to drive the development of the sector over the forecast period, as consumers’ expectations of coffee made at home rises to what they might expect out of home. For this reason, during the forecast period fresh coffee is expected to grow by 17% in constant value terms. Instant coffee on the other hand is likely to experience a small decline as consumers opt for more premium fresh alternatives.

·         Pod machines appear to be here to stay and one would expect there to be a large push for these machines at Christmas. Such is the profitability of pod sales, one would expect the prices of pod machines to fall in order to ensure customers are forced to buy their particular brand, much as one sees with electric toothbrushes or razor handles.

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