Coffee Market in France

Coffee Market in France

HEADLINES

• Coffee off-trade sales increase by 3% in value terms to reach EUR2.4 billion in 2010

• The main growth driver in 2010 is coffee pods, which increases by 10% in 2010

• While unit prices continue to rise, volumes decline by 1%, thanks to the “coffee by the cup” trend

• Kraft Foods leads in coffee with a 36% share in value terms in 2010

• Constant value sales are likely to increase by a CAGR of 2% over the forecast period

TRENDS

• The main event in coffee was obviously the strategic and juridical battle that started in France with the introduction of the two copycats of Nestlé’s Nespresso, namely L’Or Espresso and the coffee pods from Ethical Coffee Company (ECC) distributed by Casino supermarkets and hypermarkets. For the first time, the strategic monopoly of Nespresso on the strategic segment of high pressure pods for espresso was being threatened by other players. The features that could lead to the erosion of Nestlé’s position are not only the lower prices of such me-too offerings, but also the fact that they are biodegradable. Even so, some sources deem this new competition to be good news for coffee pods and even for Nestlé’s Nespresso and Nescafé Dolce Gusto machines.

• In 2010, sales increased by 3% in value terms, which was in line with the growth over the review period. Despite the ongoing sluggish economic climate, the sector benefited from the good performances of fresh ground coffee, especially pods. Coffee beans continued the 2009 reversal of the previous trend experiencing a 3% increase thanks to new espresso machines with grinders that are boosting coffee beans sales.

• Fresh ground coffee experienced robust growth, increasing by 4% in 2010 in value terms due to the ongoing double-digit growth of coffee pods. The success of expensive pods continued unabated despite the economic climate. However, such success posed a real problem for manufacturers and consumers. Two kinds of pods exist: supple and rigid. Supple ones are usable on standard machines; rigid ones, such as Nespresso are usable only on specific machines, referred to as “owner systems” or “owner pods”, tying the consumer to the brand via specific products. Some manufacturers have made strategic choices, which resulted in the aforementioned juridical battle between Nestlé, Sara Lee and ECC and a new reactivation of coffee pods sales.

• Unit prices increased by 5% in 2010 in ground Arabica and by almost 4% in overall sales of coffee, mostly due a new rise of raw materials and production costs at the end of 2010, and also stimulated by pods. For example the Nespresso pod is available at EUR0.35 when a traditional cup of coffee at home is under EUR0.10. Supple pods are less expensive nonetheless, despite their maturity, and also contributed to the high level of prices.

• Meanwhile, off-trade volume sales waned in 2009-2010, at least in weight terms due to the “coffee by the cup” trend. While they still previously only drank filter coffee a decade ago, French people discovered Senseo and Nespresso prior to the review period, and then via the continued expanding niche of espressos. While a significant volume of coffee is still used by drip filter machines, the growing usage of coffee pods and other single-serve coffee machines reduced waste and thus volume sales.

• During the last couple of years of the review period, a significant event was the recovery of coffee beans value sales in 2010. Up 3% on 2009, this category still stagnated before 2009 due to its lack of convenience. However, coffee beans are ideal for espresso amateurs, the numbers of whom have increased in recent years. This was illustrated by the explosion of automatic or semi-automatic espresso machines among the upper-middle classes in France.

• For instant coffee, the decline of previous years almost halted in 2010 thanks to efforts in innovations and marketing by the leader Nestlé. However, the unit price of instant coffee strongly declined in 2010 due to intense competition around promotions. In comparison with coffee pods, this category reached maturity and in order to increase its market share needed impetus from promotions or innovations, activities that are not always cost-effective.

• With an 82% share in 2010, off-trade volume sales continued to represent the bulk of total coffee volume sales. The off-trade channel benefited from the majority of new products developments and the ongoing expansion of coffee pods, new machines and the cocooning trend. Consequently, despite the development of coffee by the cup, the off-trade channel witnessed a much lower decline in its volume sales than in on-trade. Sales in foodservice were directly hit by a dramatic drop of traffic in cafés/bars and full-service restaurants after 2008. In addition, innovative products are not so prolific in the on-trade channel, and consequently volume sales tended to further decline. As on-trade outlets mainly use coffee beans, the major on-trade players such as Cafés Richard specialise in this type of coffee.

• The recent explosion of coffee shops in France was not sufficient to avert volume decline in on-trade sales of coffee. Indeed, at the time of writing, coffee shops are still a niche market in France in comparison with the dozens of thousands of traditional French cafés. However, their rampant success in 2009 contrasts with the ongoing disastrous drop in traffic in other cafés/bars. Thanks to the expansion of chained outlets such as Starbucks Coffee, consumers discovered various types of coffee, flavoured and sweet. These coffees are an alternative to the traditional espresso consumed in cafés. As consumers want to benefit from a large choice of coffees at home, they tend to buy instant speciality Italian coffee and coffee pods, which can provide tasty cappuccinos and café lattes. With the explosion of McCafé outlets in 2009/2010, Starbucks was no longer able to sustain the development of specialist coffee shops in France alone and by 2010 there were already hundreds of outlets in this category.

• Vending was a limited distribution channel in overall sales of coffee in 2010. However, thanks to the popularity of hot drinks and primarily instant coffee in railway and petrol stations and commercial centres, coffee was clearly ahead of carbonates and snacking products in vending. However, like many other products available in vending, coffee sales slowed in this channel in 2009-2010 notably due to lack of suitable sites, a similar situation to European countries. As such, vending players prefer to capture from other companies the best sites by acquiring their intermediaries/operators instead of searching for new locations.

• Instant speciality coffee is constituted by 3-in-1 instant speciality or Italian coffee. Thanks to their individual packaging, instant speciality coffee offers both convenience and individual pleasure. Furthermore, individual sticks are in line with the current snacking trend and on-the-go consumption. As a consequence, instant speciality Italian coffee represented less than one-third of overall instant coffee value sales in France in 2010.

• The number of coffee machines declined slightly, notably due to the decline in traditional filter coffee machines and other non-espresso machines. Meanwhile, the number of espresso machines (with or without pods) continued to take off. In terms of coffee pod sales, Senseo managed to maintain its leading position within coffee pods sales mainly thanks to huge promotions and an innovation strategy. However, it is nonetheless heading towards maturity. French supermarkets/hypermarkets tended to allocate more shelf space to the Dolce Gusto or Tassimo coffee pods brands in 2009 and 2010, which had a negative impact on other coffee pods brands such as Jacque Vabre by Kraft Foods or the eponymous Legal that can be used along with any coffee pod machines. Meanwhile the number of Nespresso machines (built by Krup and Magimix) and sales of the eponymous coffee pods still progressed in 2010.

COMPETITIVE LANDSCAPE

• In a rather concentrated competitive environment, Kraft Foods continued to lead the sector both in value and volume terms. This stemmed from its strong presence through its brands Jacques Vabre, Carte Noire, and Grand’Mère - three brands present in both ground coffee and pods – as well as with Tassimo and its specific pods, and Maxwell in instant coffee. Thanks to the growing success of its various pods ranges, the company recorded an increase in its volume share during the bulk of the review period but made less progress than its main contender Nestlé France towards the end of the review period.

• Despite the risk of a slight slowdown during the second half of the year due to competition from Nespresso’s me-too product, Nestlé was by far the most dynamic player over 2009-2010. This was concomitant with the ongoing impressive breakthrough of Nespresso pods and, from early 2009, the success of Nescafé Dolce Gusto pods. In addition, Nestlé France is also the leader in instant coffee with a 50% market share for standard and 44% for specialities. In instant coffee, Nestlé was the only company to increase its shares in 2009 and 2010. Meanwhile, Kraft Foods enjoyed an increase in its volume share in instant coffee in 2009-2010 but experienced a slight decline in value terms due to strong promotions.

• Douwe Egberts ranked in second position with an 18% volume share but ranked third in value terms behind Nestlé in 2010. During the bulk of the review period, Douwe Egberts benefited from the success of its supple pods, Senseo. This brand is the leader in supple pods and Douwe Egberts focused on innovation and regularly introduced new pods tastes to support this domination. However, while L’Or Espresso pods came at the right moment to counter-balance the hegemony of Nespresso in espresso pods, its Senseo pods began to reach maturity in 2009-2010 due to the competition from private label.

• International companies dominated the sector thanks to their large presence in all coffee categories. In the second part of the ranking, French player Legal competes with Italians Lavazza and Segafredo; Legal is present in most categories: beans, ground, pods, Arabica and Robusta, relying on its premium Legal Café Noir to halt the decline of previous years. Other domestic players are present in niche products such as organic and fair-trade coffee. Malongo claims the first brand of fair-trade coffee and tried to develop in supple pods in recent years. However, competition to achieve shelf space in supermarkets/hypermarkets is very difficult to endure for small companies, as well as in pods. Lobodis, a regional player which is in both organic and fair-trade coffee and which experienced a slight decrease in 2010, met the same difficulties, to which it tried to respond via TV advertising in 2010.

• Against the upsurge of a growing number of players in pods and capsules and the risk of losing ground or opportunities in the mass market, manufacturers focused on launching machines with exclusive pod systems. One of the best ways to make more loyal clients, keep intact margins and limit or delay the entrance of private label was to launch single-dose machines with its specific pods or capsules. That was the case of Lavazza A Modo Mio in the middle of 2009 that could accept only Lavazza capsules. Multi-task machines were also a priority as illustrated by the possibility to make coffee, tea and chocolate in the aforementioned Nescafé Dolce Gusto in 2009.

• A surge in promotional activity and advertising was also instrumental in the recovery of coffee sales in 2010. Kraft Foods and Douwe Egberts were said to be the most aggressive players in terms of promotions. Nestlé was probably the top spender in above-the-line communication with Nespresso, Nescafé and Nescafé Dolce Gusto. While the former forged ahead with a new campaign featuring George Clooney and John Malkovich in November 2010, Dolce Gusto also benefited from a huge media campaign.

• Private label gained considerable ground in volume sales during the last couple of years of the review period but did not strongly progress in value due to its lower prices. Not only present in each category, but it strengthened its position in each one, including coffee beans and ground Arabica where it ranked second in volume and supple coffee pods, where it also ranked second in 2010. Despite the battle for shelf placement, retailers continued to propose organic and fair-trade products from private label or brands such as Malongo or Lobodis.

PROSPECTS

• More than ever, sales of coffee should be governed by the launch of new concepts of coffee pods and machines. According to local experts, the battle of pods is far from over and in fact is just beginning with the trial between Nestlé, Douwe Egberts and ECC. Paradoxically, the main victim of these copycats may not be Nespresso but Tassimo or Douwe Egberts’s Senseo pods. Indeed, owing to more accessible prices, the users of such machines could be tempted to trade up to the Nespresso or Nescafé Dolce Gusto technology first with L’Or Espresso or Casino pods and then switch to real Nespresso pods.

• Even so, constant value sales of coffee are likely to increase by a CAGR of 2% over the forecast period, which may even be lower than they were during the previous five years. Despite the upgrading toward coffee pod machines, competition between Nespresso, Sara Lee and Casino for pods could dampen added value. In addition, while coffee pods are likely to become more popular, standard fresh ground coffee sales could drop due to growing consumer disinterest. The success of pods may be sufficient to compensate for the decline of standard coffee sales but will not be enough to provide a strong impetus to the overall sector’s sales.

• The on-trade channel is likely to suffer from a lack of innovation and mainly the ongoing structural decline of traffic in cafés/bars, resulting in a negative performance in volume terms over the forecast period. Coffee shops, however, are likely to expand in France thanks to the development of chained specialist coffee shops such as Starbucks Coffee or McDonald Café, the number of outlets of which are increasing in France. Helped by the aforementioned innovations and the enlargement of distribution capacities with products benefiting from more widespread availability, off-trade volume sales are predicted to decline much less than on-trade over the forecast period.

• Regarding potential forecast threats to growth, people deem that the expansion of coffee pods could be hampered by ecological worries. Currently, rigid pods are not eco-friendly and they cannot be recycled in France as they can in other countries, such as Switzerland. As a result, ecological associations are worried about the predicted ongoing success of espresso coffee pods.

• Indeed, included in fresh ground coffee (which is expected to grow by 10% in constant value terms over 2010-2015), espresso coffee pods still posted impressive double-digit value growth in 2010. If the economy does not experience a new downturn, such pods are expected to continue their development in terms of assortment and brands. Manufacturers are likely to focus on innovation in the form of flavours and coffee origins in order to satisfy all consumer needs creating an obligation among their respective consumer bases to find pods compatible with their machines. For other consumers, pods and even ground Arabica are much too expensive, and as such, Robusta and coffee beans could benefit from new interest.

• Unit prices posted irregular movement in recent years, thanks to opposing trends and market forces. On the one hand, strong erosion is possible due to aforementioned battle of pods and a strong promotional pressure on retailer shelves. On the other hand, the global cost of coffee strongly increased again in autumn 2010, which should translate into new peaks of value sales in the short term. In addition, French consumers are increasingly seeking individual coffee experiences. Thus, instead of making a whole pot, people prefer methods that enable them to make a high-quality cup of coffee to meet their specific tastes and preferences. This should result in a rise of 11% in the average unit price of coffee over 2010-2015.

• Launched in December 2008, L’Or Pépites d’Arôme by Douwe Egberts was expected to perform well in the short term as it corresponds to an alternative between standard ground coffee and expensive coffee pods. However, by 2010 success had still not been forthcoming, with the brand accounting for only 1% of Arabica value sales. Nevertheless, Douwe Egberts claims to be confident and plans to back the product with a notable advertising campaign.

• Nestlé is likely to expand its range of coffee pods through its Dolce Gusto and Nespresso machines in order to attract a wider consumer base. Meanwhile, Nestlé is about to develop its offer targeted at high income households by expanding its Nespresso product range. Other key coffee players such as Douwe Egberts and manufacturers of domestic electrical appliances, including Philips, are expected to continue to cooperate and expand their ranges of coffee pods machines over the forecast period. All players of pods will have to create new varieties in order to increase the market and prevent customers from switching to competitors.

• For instant coffee, there is no innovation like pods therefore growing maturity should lead to intense competition based on promotions. The leader, Nestlé will be the only company to increase its market share, thanks to its efforts in advertising and innovation such as its Nescafé Green Blend. Meanwhile, speciality Italian coffee is likely to be the subject of greater development in the future in France given that manufacturers are likely to introduce new original flavours such as hazelnut and almond. Coffee players could also launch other types of instant coffee in the near future, such as 3-in-1 instant coffee which has been absent from French supermarket shelves thus far.