Hot Drinks - Denmark
EXECUTIVE SUMMARY
Retail volume sales decline
2010 witnessed a continuation of the
trend firmly established over the review period, namely, an ongoing decline in
retail volume sales. However, the magnitude of the decline seen in 2010 was
smaller than that recorded in previous years of the review period. Both coffee
and tea witnessed a retail volume sales decline of 1% in 2010.
Consumers grow increasingly
demanding
Segmentation is a key driver of hot
drink sales, with players seeking to appeal to the increasingly demanding and
diverse needs of the modern Danish consumer. Consumer demand for convenience,
high quality, and sustainable/ethical and organic hot drinks played a role in
shaping product innovation and performance in hot drinks in 2010. Products that
were previously defined as niche, such as organic hot drinks, are increasingly
appealing to a wider audience. Consumer demand for advanced product offerings
served to reduce the impact which the harsh economic climate had on retail
value sales growth in 2010.
Increasing concentration
Hot drinks in Denmark is very much
characterised by a defined and concentrated number of players. This is in part
due to active grocery retailer strategies to limit the number of brands that
they carry. Coffee and tea continued to be dominated by four and three players,
respectively, while other hot drinks was largely dominated by a single player.
With the exception of BKI Kaffe, all of the leading players in hot drinks in
Denmark in 2010 were multinationals or owned by multinationals. This in turn
saw leading international brands, such as Nescafé and Lipton, enjoy strong
positions. While private label has a role to play, its potential is limited by
ongoing consumer demand for their favourite brands, owing to strong brand
loyalty.
Discounters
While supermarkets/hypermarkets
continued to account for a leading share of hot drinks retail volume sales in
2010, the channel saw an ongoing loss of sales share to discounters over the
review period. As coffee and tea are consumed on a daily basis in Denmark,
consumers consistently seek good value when shopping for these products.
Discounters provide a convenient venue to find private label and marked-down
branded products, for hot drinks as well as other food and beverages.
Discounters became an increasingly popular retail channel in Denmark over the
review period, which was reflected in its growing share of hot drinks value
sales. As the Danish economy tackled the far ranging impact of the global
economic downturn, discounters emerged as an increasingly attractive channel
for hot drinks sales expansion.
Return to positive retail volume
sales growth projected
Hot drinks volume sales are expected
to return to seeing positive growth over the forecast period. Consumer health
and wellness concerns, allied to growing demand for convenience, are expected
to continue to shape performance over the forecast period. However, a prolonged
deterioration of the economic climate represents a strong threat to coffee’s
forecast performance. If the economy weakens further over the coming years,
Danish consumers are likely to reduce their consumption of premium products and
migrate to standard, economy and private label alternatives.
KEY TRENDS AND DEVELOPMENTS
Hot drinks turn to sustainable
sourcing
The green movement has infiltrated
all aspects of consumers’ lives, from the need to conserve energy and reduce
fuel bills, to what people eat, drink and wear, and how they travel.
Reducing one’s carbon footprint has
become a catchphrase of the new millennium, whether achieved through recycling,
increased energy efficiency, buying organic or local foods, using
phosphate-free detergents, travelling shorter distances, carbon offsetting,
sharing transport or using alternative energies.
Prior to 2008, rising disposable
income levels enabled consumers to become more selective about what they
bought, often leading them to pay a premium for safer and more eco-friendly
products and services. However, ongoing economic uncertainty may adversely
impact this trend over the short term, as consumers look to reduce expenditure.
Current Impact
As consumers become increasingly
conscious of where products are sourced and how they are produced; concerns
over fair trade, environmental impact and sustainability are emerging as key
areas of interest for manufacturers across all industries. This is particularly
true as regards hot drinks, where both branded products and private label goods
are increasingly sold with some reference to sustainability.
Most hot drinks players are making
significant efforts to adopt social and ethical concerns, while consumers are
paying more attention to corporate practices. This trend is encouraging the
growth of players that pay particular focus to sustainable sourcing. The
domestic concern, Urtekram is an example of a player that has successfully
built a niche for itself on this basis.
Organic hot drinks are in the
process of moving from niche to mainstream, as they become more widely
available through major chains. Producers are helping to develop the trend and
all of the major players in coffee now offer consumers organic products. Such
is the popularity of organic hot drinks in Denmark; organic private label
coffee appeared over the review period.
Outlook
Demand for green products and
services offers significant growth potential. Over the forecast period this
will be driven by factors such as legislative changes, efforts by companies to
make their operations greener, and the influence of media and NGO campaigns on
consumer preferences.
Although many consumers remain
unenthusiastic about buying green products, it is likely that constant exposure
to environmental issues through the media will lead them to make greener
purchasing decisions in the future, whether consciously or subconsciously.
Future Impact
The growing number of leading
manufacturers following the sustainability trend will put pressure on others to
make their practices more ethically and environmentally sustainable. However,
not all demographics are equally concerned about the environment, and many will
continue to consume certain coffee products, despite the absence of an ethical
label. As such, there remains a place for companies that are not interested in
joining the ethical and environmental trend. However, these products are not
expected to grow as quickly in value and volume sales terms over the forecast
period.
The major influence of this trend is
likely to be seen in packaging, with players expected to shift towards
minimising the packaging for their products. Other packaging trends that are
expected to emerge include the use of biodegradable cartons with soy ink, as
well as the omission of strings and tags in an attempt to decrease
environmental impact. Consumers are likely to respond favourably to such
changes, provided companies clearly outline the reasons underlying their
decisions.
Manufacturers are also expected to
introduce new ethical products with a greater emphasis on price segmentation.
While most fair trade certified products are currently priced at a premium,
economy fair trade coffee products are expected to become more commonplace over
coming years, as illustrated by the introduction of private label fair trade
products over the review period. For such products, the fair trade label will
act as an additional selling point to complement the proposition of low price
with higher quality. This development shows that potential exists for
sustainable products at any point in the price spectrum. Early adopters in this
regard are likely to stand out, while those who do not take these developments
into consideration will be increasingly left behind.
The impact of declining average
household size
The average household size in
Denmark is falling, with the average number of occupants per household decreasing
on a year-by-year basis. The average household size is on the decline due to a
number of factors, including a trend for couples to delay marriage and have
fewer children, a tendency for women to have children later in life, and the
emerging trend of children leaving the family home at a younger age. Denmark’s
aging population is a contributing factor, as a rising number of elderly people
live alone or in two-person households.
The number of single households in
Denmark reached 1.014 million in 2010, an increase of some 7% from 2005. This
trend towards smaller household size has important implications for consumer
spending habits and players in hot drinks in Denmark.
Current Impact
Due to the changes seen in household
size and composition, a greater proportion of total household spending is
accounted for by single-person households, which has important implications for
companies targeting young people. These consumers often have higher levels of
disposable income compared to older households, who allocate greater financial
resources to their children or furnishing their homes. Additionally, the
growing number of single-person households in Denmark is resulting in
increasing consumer demand for single-portion products and a decrease in demand
for family sized packaging.
This trend is driving demand for
single-portion instant coffee and other hot drinks products. Allied to consumer
demand for convenience, consumers are demonstrating increased demand for
single-portion hot drinks, which are not necessarily consumed on a daily basis,
so that product freshness can be retained. This is resulting in strong demand
for products that are suited to single-person households, such as tea bags and
coffee pods. For instance, Merrild Kaffe has stated that its coffee pods brand,
Merrild Senseo is now enjoying strong growth after initially struggling to
establish itself in Denmark.
Outlook
The number of single-person
households in Denmark is expected to reach 1.063 million in 2015, an increase
of 5% from 2010.
This growth will be driven by the
same factors as over the review period, such as a higher number of women in
work or further education, increasing wealth, lower birth rates, ongoing ageing
of the population, and higher divorce and separation rates.
Despite their relatively high levels
of discretionary income, many single-person households are likely to feel the
effects of economic pressures, such as rising fuel and food prices, and reduced
access to credit, more than other types of household over the forecast period.
Future Impact
With the number of single-person
households expected to increase further over the forecast period, consumer
demand for smaller and single-portion drinks is also likely to increase. As a
result, hot drinks sales are likely to be driven by smaller packaging sizes, as
manufacturers cater to changing demographics.
The share of total tea sales
accounted for by tea bags is likewise expected to increase over the forecast
period. Additionally, tea bag product offerings are expected to further evolve
to better meet the demands of single-person households. For example, it is
expected that products offering consumers a selection of different tea
flavours, as opposed to one, will become increasingly popular over the forecast
period. Products, such as Twinings Green Tea Selection, retail at a similar
price and in similarly sized packaging to regular tea bag products, but differ
from these products by offering consumers a selection of different flavours.
Such products appeal to single-person households, as they limit the expense of
purchasing a variety of flavour types to find a preferred flavour, or the
expense of purchasing numerous flavours for consumers who have a preference for
more than one flavour. Over the forecast period, the growing number of single-person
households in Denmark is expected to lead to the introduction of an increased
number of product innovations that cater to this growing demographic.
Meanwhile, the expected increase in
the number of single-person households is likely to result in reduced demand
for larger pack sizes. It therefore can be expected that value sizes will
increase at a greater rate than volume sizes in the forecast period as consumer
can be expected to purchase more of smaller and single-portion drinks that
usually carry higher unit price.
The growing importance of
discounters
As the Danish economy continues to
tackle the far ranging impact of the global economic downturn, discounters are
becoming an increasingly attractive channel for the expansion of hot drinks
sales.
While supermarkets/hypermarkets
remained the leading channel for hot drinks in Denmark in 2010, discounters
continue to grow in importance. Discounters accounted for a 25% share of hot
drinks retail volume sales in 2010 up from 21% in 2005. Over the same period,
supermarkets/hypermarkets saw a five percentage point decline in its share of
hot drinks retail volume sales from 64% in 2005 to 59% in 2010.
Current Impact
As coffee and tea are consumed on a
daily basis in Denmark, consumers consistently look for greater value when
buying these products. Discounters provide a convenient channel where both
private label and marked-down branded products can be found.
Over the review period, private
label defended its share of hot drinks retail value sales through increasing
product quality. Fair trade and organic private label tea and coffee began to
appear, as private label manufacturers invested in improving the design and
positioning of their products, in an attempt to gain further ground on the
leading brands. As a result, manufacturers of branded products were
increasingly forced to market products offering real added-value, in order to
justify their higher prices, as well as invest in additional advertising and
promotion to communicate the superior quality of their products and build brand
loyalty.
Outlook
In addition to the low prices and
steadily improving quality of products offered through discounters, it is one
of the fastest expanding retail channels and can generate new sales through
virtue of being less saturated than supermarkets/hypermarkets and other grocery
retail channels. Leading discounter chains, such as Netto, Fakta and Rema 1000,
continued to expand at a rapid pace in Denmark over the review period, with no
immediate signs of a slowdown. The continued network expansion of Denmark’s
various discounter chains suggests than even when the Danish economy begins to
recover, the widespread availability and price competitiveness of discounters
will see the channel continue to appeal to Danish consumers.
Future Impact
Discounters are expected to see
retail volume sales share gains in hot drinks over the forecast period, while
supermarkets/hypermarkets is expected to see ongoing sales share losses.
Independent small grocers and other grocery retailers are expected to the worst
affected by the growing importance of discounters, mainly due to their
financial inability to invest in outlet expansion and compete based on price.
However, there is an opportunity for
other distribution channels to gain sales share through catering to the demands
and needs of modern consumers. In recent years, convenience store outlets have
increasingly appeared in large railway stations and city centre locations;
which are not suited to discounters due to space restrictions. Leading
supermarkets are likely to expand into the convenience store channel in coming
years, as a means of offering new price and product mixes without diluting the
profitability of their primary stores. Internet retailing will see continued
growth to become an established part of the multi-channel approach adopted by
retailers and manufacturers alike. Furthermore, non-grocery retailers, such as
large drugstore chains and DIY centres, also sell coffee, tea and other hot
drinks.
Changing consumption patterns
Denmark is a nation of
coffee-lovers. More than six out of ten people drink four cups of coffee a day.
However, fresh ground coffee is declining in popularity as younger generations
migrate to other types of coffee.
According to research undertaken by
Analyse Danmark, 95% of older consumers drink coffee on a daily basis, whilst
only two-thirds of younger consumers do so. Additionally, there is a clear
deviation between the types of coffee that these two demographic groups
consume. Older generations have a strong preference for traditional ground,
filter coffee, while younger generations prefer espresso, cappuccino and café
latte.
In contrast to the older generation,
which has typically need-oriented consumption patterns, younger generations
have taken a coffee-on-the-go oriented consumption pattern to heart. Younger
generations are also less likely to buy coffee based on price, as they put
increased importance on quality. Consequently, younger consumers are the most
frequent users of specialist stores and café bars, as they are more willing to
pay a price premium for quality coffee.
Current Impact
The range and depth of premium
brands appearing on Danish supermarket shelves has dominated recent
developments. Modern, urban consumer’s demand for both convenience and quality,
resulted in positive retail value sales growth for coffee pods and the
introduction of premium instant coffee products, over the review period.
In 2010, instant coffee once again
recorded strong retail volume sales growth of 3%. Instant coffee is expected to
see continued strong performance over the forecast period, as premium, gourmet
instant coffee products are increasingly introduced. By the end of the review
period, ethical and organic instant coffee products were readily available in
Denmark.
While producers relate the increase
seen in retail unit prices in 2010 to higher raw material costs, it was also
influenced by the strong performance seen by premium brands and products, such
as Merrild Café Noir, and the increasing popularity of instant coffee.
Outlook
While it is expected that per capita
coffee consumption will increase slightly over the forecast period, it is not
expected to reach the heights recorded in the early years of the review period,
when per capita consumption stood at some approximately 5kg. This is largely
due to younger Danes not demonstrating the same appetite for coffee as
preceding generations. Younger consumers in Denmark are lowering their intake
of coffee, as well as starting to drink it at a later stage in life. Both of
these trends are expected to continue over the forecast period.
While younger consumers are not
heavy coffee drinkers, they demonstrate a strong willingness to try different
types of coffee. Younger generations have shown a strong preference for Italian-inspired
coffee, a trend that is expected to gather further pace over the forecast
period.
Future Impact
There is strong evidence to suggest
that coffee consumption patterns in Denmark will change radically over the
coming 10-20 years, if the consumption patterns of current younger generations
continue into the future. Unit prices will increase beyond the rate of
inflation, instant coffee will account for a much larger share of coffee retail
volume sales and specialised espresso coffee machines will increasingly replace
traditional filter coffee machines in Danish homes.
Trade sources are of the opinion
that clear and pronounced consumption differences will develop between rural
and urban consumers in coming years. It is envisaged that rural consumers will
largely remain loyal to traditional filter coffee, while urban consumers will
embrace more non-traditional coffee types.
Another train of thought is that
coffee sales are likely to develop similarly to those of beer. Premium beer
brands and products are expected to see strong retail volume sales growth, at
the expense of both standard and economy product offerings, over the forecast
period. This reflects the fact that Danish consumers are prepared to pay a
premium for quality products, a trend that is likely to become increasingly
evident in coffee in coming years.
Economic woes shape sales
performance
In 2010, the performance of hot
drinks was shaped by the ongoing impact of the global economic downturn. The
impact, which the economic downturn has had on Denmark, is highlighted by the
country’s real GNP growth, which saw a decline of 5% in 2009.
Furthermore, over the later years of
the review period, unemployment levels in Denmark increased. In 2008,
unemployment in Denmark stood at 3%, while in 2009 and 2010 corresponding
figures of 6% and 7% were seen.
These figures suggest that consumer
disposable income levels were lower in 2009 and 2010 compared to earlier years
of the review period. Consequently, consumer price-sensitivity increased and
consumer appetite for non-essential products weakened.
Current Impact
Indications of a major shift towards
private label were seen in hot drinks in Denmark, over the review period. With
over half of the branded hot drinks sold on promotion, the price incentive for
shoppers to trade down to private label is often relatively small. Following an
initial period of strong gains over the early years of the review period,
private label’s retail value sales share stabilised, while a slight decline was
seen in 2010.
Across most hot drink subcategories,
brands make a real difference to consumer perception and, as a result, they are
quite willing to spend more on a trusted name. Added to this is the fact that
Danish consumers are particularly loyal to their favourite coffee brands. Clear
regional and geographic coffee brand loyalty is visible in Denmark. For
instance, Merrild is traditionally the brand of choice on the Jylland
peninsula, whilst Gevalia is the leading brand in the greater Copenhagen area.
Therefore, leading hot drink brands, such as Merrild, Pickwick and Gevalia, did
not experience a marked decline in performance in 2009 or 2010.
Outlook
The outlook for the Danish economy
over the forecast period is bright compared to the later years of the review
period. Real GNP growth is expected to be positive in each year of the forecast
period, with real GNP growth of 1% forecast for 2010.
However, the initial outlook for
unemployment is not so bright, with unemployment levels expected to remain
relatively high compared to prior to the economic downturn. While Denmark’s
unemployment rate is expected to decline marginally on an annual basis, it is
expected remain close to 6% throughout the forecast period. This suggests that
the Danish economy will remain in a relatively weak state over the short to
medium term.
Future Impact
The economic downturn did not
significantly influence consumers to migrate from branded to private label
products over the review period. This is unlikely to change over the forecast
period. While private label has its place and stronger appeal in more generic
categories, such as milk or cheese, hot drinks is an area where consumers are
reluctant to settle for less than a trusted brand. Although private label will
continue to challenge branded food and drink products, consumers may not be
willing to forgo the trust and reputation linked to a brand for negligible
monetary gain.
As hot drinks in Denmark is
dominated by a number of strong brand names, private label manufacturers will
need to address and change their product offerings, in order to generate
greater demand over the forecast period. As hot drink brands retail at relatively
low price points, private label will need to evolve from a low-price strategy
to gain sales share. This demands that private label product offerings become
more advanced, through more active development of premium positioned
alternatives, such as organic, ethical and luxury hot drinks.
