Coffee -
Canada
HEADLINES
- Total coffee sales reach 98,700 tonnes in 2010, up by a
little over 1%, while off-trade value sales rise by 5%, to C$953 million
- Coffee is a mature category, but more consumers are
favouring premium and fair trade coffee, contributing to value growth
- Unit prices increase in 2010, driven by rises in world
coffee bean prices and premiumisation in the domestic market
- Kraft Canada Inc leads a fragmented category, with an
off-trade volume share of 29% in 2010
- Total volume sales of coffee are expected to grow at a
CAGR of 2% between 2010 and 2015, to reach a volume of 110,200 tonnes
TRENDS
- Coffee sales grew by a little over 1% in total volume
in 2010, maintaining the positive trend observed over the review period.
However, the category is mature and growth slowed gradually over the
review period.
- According to the Coffee Association of Canada, 81% of
Canadian adults drink coffee regularly, and 63% consume it daily, based on
a survey carried out in 2003. The specific rates might have changed to a
degree by 2010, but the proportions are likely to have remained similar,
because coffee is not merely a consumer good but is rather part of the
daily routine for many Canadians. For many consumers, coffee is closely
associated with breakfast.
- The popularity of coffee has been maintained by the
growing network of speciality coffee chains, such as Starbucks and Tim
Hortons, which are found widely in urban areas. As of 2010, Tim Hortons
operated over 3,000 outlets, while Starbucks had about 1,000 stores. In
addition to these chains, most cities have local trendy cafés, which
typically attract different types of consumer, such as students or young
professionals. Non-chained coffee shops actually account for a higher
percentage of on-trade sales, with 63% of on-trade value in 2010. The
success of these shops partly stems from their image as part of the local
culture. For instance, small coffee shops in Italian areas attract a
significant number of customers because of the “authenticity” of the shops
and the association with Italy and its coffee culture. Although the
recession in 2009 put a damper on on-trade consumption, 2010 saw sales
bounce back strongly. In volume terms, on-trade sales grew by 3% in 2010,
following a 1% rise in 2009. The price differentials in on-trade coffee
hedged the category from further declines. Tim Hortons, for instance,
offers its coffee products at relatively low prices, so that consumers do
not feel that they are spending excessively. In contrast, chains such as
Starbucks charge higher prices, with a typical mid-sized (12oz) latte
costing between C$3 and C$5. The recovery of on-trade sales led to a
proportionally smaller rise of off-trade sales in 2010, with only a
marginal increase in volume terms.
- Like coffee chains, specialist stores selling fair
trade and organic coffee beans are becoming more popular. Their growth
suggests an emerging niche market for premium and gourmet coffee. Stores
such as Café Rico in Montreal and Fair Grounds Café & Roastery in
Toronto import coffee beans in bulk from Latin America, Africa or
Indonesia, and sell them directly to consumers or supply them to local
cafés and markets. In the case of Fair Grounds, the beans are imported
fresh and roasted on-site in Toronto. Such stores are very popular
locally, as their coffee is seen as fresh and of premium quality compared
with grocery store coffee. Moreover, their message of importing only fair
trade coffee, which benefits developing countries, is seen in a strongly
positive light. The rise of such stores is slowly changing the
distribution breakdown for coffee. As of 2010, grocery retailers remained
the largest channel for off-trade sales, accounting for 89% of volume.
However, sales through this channel were eroded over the review period,
with grocery retailers having accounted for 92% of volume sales in 2005.
Within the grocery retail channel, discounters have been growing at the
expense of supermarket/hypermarket chains, claiming 15% of volume in 2010.
Non-grocery store-based retailers represented 9% of volume in 2010, up
from 8% in the previous year.
- Canadians show a strong preference for fresh coffee
over instant coffee, with a split of 94% to 6% by total volume in 2010. Of
total fresh coffee volume sales, 87% consists of ground fresh coffee, as
opposed to beans. Ground coffee is seen as more convenient and
time-saving. Coffee beans, on the other hand, require a grinder as well as
a coffee maker. However, several grocery stores sell coffee beans in bulk
with a coffee grinder on-site, allowing consumers to choose their fresh
beans, without the inconvenience of grinding them at home. Specialist
stores offer the same service, grinding the coffee on the spot should the
consumer wish it. Hence, the consumer is ultimately purchasing ground
coffee, although he/she is choosing from a selection of coffee beans.
- Instant coffee, which makes up 6% of coffee volume
sales, is viewed as a lower quality substitute which does not offer the
same quality of flavour as fresh coffee. When choosing fresh coffee,
consumers have several options, based on the origin of the product and
characteristics such as roast and body. Instant coffee, which typically
lacks these descriptors, is more generic in the eyes of the consumer.
However, some brands, such as Nescafé, have a premium range which focuses
on the coffee origin. Compensating for these disadvantages, instant coffee
is advertised for its convenience and in some cases enhanced drinks. For
instance, Nescafé offers a speciality range which consists of instant
coffee drinks such as cappuccino and macchiato, which are usually bought
in the on-trade.
- Coffee pods still represent only a small segment in
overall ground coffee, but Canadians are becoming more familiar with the
product. In 2010, pods still accounted for rather less than 1% of fresh
ground coffee, although the share did increase from the previous year.
Pods require specific brewers, such as Nespresso or Tassimo brewing
systems, which are increasingly visible in specialist stores and, in the
case of Tassimo, grocery stores as well. These brewers are advertised not
only as easy-to-use, single-serve coffee-makers, but also as a stylish
addition to modern households. They aim for a niche market of consumers
who want premium coffee and an elegant design. The pods themselves have
varying degrees of availability in Canada, depending mainly on the brand.
Tassimo’s partner brands, which include Starbucks, Carte Noire and Nabob,
are distributed by Kraft Canada, which ensures them shelf space in grocery
channels. Nespresso, on the other hand, is only available through
Nespresso stores or on-line, through the company’s website. Pods are
available in various flavours and varieties, especially for Nespresso,
which has 16 different flavours of black coffee, as well as flavoured
variations. This makes pods convenient for entertaining, as each guest can
choose their own type of coffee.
- There are several constraints to the expansion of
coffee pods, including price and compatibility issues. In terms of cost,
coffee pod brewers can range from C$89 to C$799, depending on the brand,
but more importantly, coffee in pod format is more expensive than regular
packaged ground coffee. For instance, a carton of 12 Tassimo Starbucks
House Blend T-discs retails for C$10.99. With a pod weighing 16g, the
average unit price is C$63.90/kg. In contrast, a regular 226g pack of the
same brand, Starbucks House Blend, in regular fresh ground format costs
C$8.59, corresponding to a unit cost of C$38/kg. In this particular case,
shifting from loose coffee to pods implies an almost 70% premium. Another
source of concern for consumers is the restricted pod options once a
brewer is purchased, because of the partnership deals between coffee
machine makers and coffee brands, such as Tassimo and Starbucks. Starbucks
coffee pods are specifically designed to function with a Tassimo coffee
maker, and a consumer who owns a Tassimo can only choose among the brands
partnered with Tassimo. Nespresso operates under a different model,
retailing its coffee maker and capsules under the same brand name, which
means that owners of a Nespresso machines can only purchase Nespresso
pods.
- In line with the tendency observed over the review
period, unit prices rose in 2010, fuelled by higher world prices of coffee
beans, with higher off-trade prices as a result. Premiumisation of coffee
sales in Canada also contributed to rising average prices. More Canadians
are buying niche and gourmet coffee, or shopping at specialist coffee
stores, thus driving up prices. Fresh ground coffee, including beans and
ground coffee, saw its average unit price grow faster than instant coffee
over the review period.
COMPETITIVE LANDSCAPE
- The coffee category is led by Kraft Canada Inc,
followed at some distance by JM Smucker and several smaller players,
leading to a fragmented competitive environment overall. However, in
recent years, there has been a degree of consolidation in the premium and
gourmet segments, thanks to acquisitions, including Green Mountain Coffee
Roasters Inc’s recent acquisition of Van Houtte.
- Kraft Canada Inc accounted for 23% of off-trade value
sales in 2010, and is followed by six players with share of between 6% and
10% of off-trade value sales. The same disparity is observed in volume
sales, with Kraft Canada accounting for 29% of off-trade volume, and other
competitors, with the exception of JM Smucker Canada Inc, with 15%,
accounting for less than 10% of sales individually.
- Kraft Canada Inc lost share over the review period to
smaller, specialist coffee stores and brands. Kraft focuses on mass-market
sales through grocery channels, but the growing shift towards speciality
coffee, including fair trade and organic products, is taking sales away
from the company. Smaller chains, such as Brûlerie St-Denis and Van
Houtte, which used to sell only through their own stores, are now
negotiating more shelf space in grocery stores, making their premium
brands more accessible to the public. Stores such as Fairgrounds Café,
which import and roast fair trade coffee beans, are also a growing threat
to mass-market brands.
- Kraft Canada is particularly strong in fresh ground
coffee, where it is positioned both in the mid-priced and premium
segments, with Maxwell House and Nabob, respectively. Maxwell House is the
top selling brand of fresh ground coffee, accounting for 26% of off-trade
volume in 2010, while Nabob comes in fourth position with 8% of volume.
Since ground coffee is the largest category within coffee, Maxwell House
is by extension the best selling brand of coffee overall, with 23% of
off-trade volume. Maxwell House and Nabob are also available in pod
format, compatible with the Tassimo single-cup coffee brewers.
- In addition to its own brands, Kraft Canada currently
has a partnership to distribute Starbucks fresh coffee in grocery stores.
Under the terms of the distribution deal, profits from the sales of
Starbucks packaged coffee are distributed between Kraft and Starbucks. In
November 2010, however, Starbucks officially announced its intention to
withdraw from the contract, in order to find a different means of
distribution. Should both parties agree to the terms of the exit, it could
become effective as of March 2011, with a consequent impact on market
shares. Kraft’s overall volume will be lower, and it will have a direct
competitor to its own premium brand Nabob. However, as of December 2010,
the issue remained unresolved.
- Folgers Coffee, from JM Smucker Canada Inc, occupies
second place in terms of overall coffee sales, with 10% of off-trade value
and 15% of off-trade volume in 2010. Folgers is a mass-market brand of
ground coffee sold in the lower-to-mid price range. It offers both plain
and flavoured coffee, such as Hazelnut and French Vanilla. One of the
products to stand out from the line is Folgers Simply Smooth, which is a
low-acid coffee that is less irritating to the stomach. This speciality is
still a niche in Canada, and no other mainstream brand offers such a product.
Given the ageing population of Canada, the proportion of consumers with
sensitive stomachs is likely to be on the rise, giving Folgers a
competitive edge with its product.
- In off-trade volume terms, Van Houtte Inc and Tim
Hortons Inc are very close, in third and fourth positions, both with
shares of around 6% of sales. However, Tim Hortons ranks only sixth in
value terms. Both are popular “local” coffee chains, but their different
positioning explains the discrepancy in volume-value rankings. Van Houtte
has an upscale, European image, and offers a range of specialist premium
coffee beans, which it sells through its café-bistros, in grocery stores
and to workplaces. Van Houtte also maintains its success through its
innovative operational and marketing strategies. For instance, for grocery
retailing, the company operates a direct-to-store distribution model, and
has its own customised display space in several grocery chains, such as
Loblaws, IGA and Metro. It uses its customised shelves not only for the Van
Houtte line, but also for its other brands, such as Brûlerie St-Denis,
offering the brands high visibility and making them instantly noticeable
when compared to other coffee brands on regular store shelves. Moreover,
in 2010, Van Houtte started a new labelling initiative for its products,
inspired by the taste profiles used by the Société des alcools du Québec
(SAQ) for wine. Under the new plan, each packaging specifies one of the
six taste profiles that the company has indentified, namely fruity or woodsy,
in bold, mild and well-rounded versions for each. Although it specialises
in coffee beans, Van Houtte also retails ground coffee in loose packaging
and in pods compatible with Keurig single-cup brewers. Tim Hortons, for
its part, competes on price and volume. Tim Hortons mostly sells its
products through its own extensive chain. As of 2010, it had over 3,000
outlets selling coffee, pastries and other food items. Tim Hortons coffee
is also available in grocery stores, packaged in metal tins, but it has a
rather low profile.
- In September 2010, three years after its acquisition by
a private equity group, Van Houtte Inc entered into an acquisition
agreement with Green Mountain Coffee Roasters Inc, whereby the latter will
become the parent company once the deal is closed. The acquisition cost
was valued at 9.9 times Van Houtte’s EBITDA, which is equivalent an
estimated C$915 million. The transaction enables Green Mountain Coffee
Roasters Inc to consolidate its presence in Canada and strengthen its
position in the gourmet coffee segment, following its recent acquisition
of Toronto-based Timothy’s World Coffees. The acquisition not only fits
with Green Mountain Coffee Roasters Inc’s line of business, but also
represents a case of vertical integration in the coffee category. Van
Houtte coffee pods are licensed to Keurig K-Cup, which is owned by Green
Mountain Coffee Roasters. Thanks to the acquisition, Green Mountain will
be able to develop the pod business in Canada and expand the Van Houtte
brand in the US.
- Taking the sixth spot by off-trade coffee volume,
Nestlé Canada Inc is the leader in instant coffee, where it accounts for
41% of sales by volume, ahead of Kraft, with 34%. Nestlé offers the brands
Nescafé and Tasters Choice, which are available in both regular and
single-serve packaging.
- After gaining volume share for three successive years,
sales of private labels fell slightly in 2010, to account for 23% of
volume. However, considering the fragmentation of the category, the share
of private label is still strong. Private labels not only compete on
price, but also quality. For instance, the President’s Choice line of
coffees has premium offerings based on the country of origin, including
Kenya and Costa Rica, and offers fair trade and organic options. In a move
to challenge premium brands, the packaging on President’s Choice coffee
now indicates the body, acidity and roast of each variety. Private labels
are present in both fresh and instant coffee, but they are not yet offered
in pod format. The decline observed in 2010 is linked to the economic
recovery, both directly and indirectly. On one hand, consumers are feeling
less pressure to trade down, and on the other they are also changing their
shopping patterns. Private labels are only offered in grocery stores, and
many consumers are shifting to specialist stores to buy speciality
coffees.
PROSPECTS
- Coffee sales are expected to grow at a total volume
CAGR of 2% over the forecast period, to reach 110,200 tonnes in 2015.
Since the category is mature and presents limited opportunities for innovation,
growth will slow down year-on-year, but at a very gradual pace. Progress
will be concentrated in fresh coffee, with annual average growth in
instant coffee of just 1% in terms of volume. In contrast to the review
period, on-trade sales will drive growth, with a volume CAGR of 3%.
- Consumers are developing more of a taste for speciality
and gourmet coffees, which will lead to growth in niche segments over the
forecast period. This will have repercussions both on the competitive
environment and on distribution. In terms of competition, sales of
mainstream brands could experience further erosion, as premium and
speciality brands gain strength. As for distribution, it could imply lower
sales through grocery channels, as consumers turn to speciality coffee stores.
However, the growing interest in these products could lead more grocers to
stock speciality imports. As in the case of Van Houtte, which has a
direct-to-store model of distribution and has its own customised shelves
in grocery stores, other coffee chains or speciality shops might form
alliances with grocery distributors. This would represent a win-win
situation for the speciality coffee store, which gains wider coverage and
greater accessibility to consumers, and the grocery chain, which benefits from
renting out store space and potentially higher in-store coffee sales.
- Changes of ownership and distribution agreements which
occurred in 2010 will have an influence on the competitive landscape
during the forecast period. By integrating Van Houtte into its portfolio,
Green Mountain Coffee Roasters Inc will be able to streamline its
single-serve pod business with its premium coffee business. After an
initial period of assimilation, the Van Houtte brand is likely to go
through a period of expansion, backed by the financial resources and
expertise of its parent company. Its competitive positioning will
potentially be enhanced over the forecast period.
- In 2011, the distribution agreement between Kraft
Canada Inc and Starbucks is set to end. If mutual consent to the
termination is not reached, Starbucks is likely to buy out its stake of
the partnership. In any case, the separation of the two parties will
affect competition in the category, especially in the premium segment.
Volume sales of Kraft will decrease as its portfolio will be short of one
brand. Moreover, it will then have a new competitor in the premium
segment. As for Starbucks, which initiated the break-up, it is likely to
adopt a more aggressive strategy as it seeks to develop its packaged
coffee business.
