Coffee Perks Up

Even before his days as chief marketing officer at Starbucks, Scott Bedbury recalls sitting on a plane in the early 1990s next to an executive for one of the major branded players in supermarket coffee. They got to talking about the industry, and the executive revealed the reason its growth had come to a screeching halt: Major marketers had been nickel and diming quality out of their blends quarter after quarter in the endless quest to turn in acceptable levels of profit growth.

Fast forward a decade, and the story couldn't be more different. The major supermarket coffee brands still may be seeing sluggish growth. And coffee consumption, as measured by cups drunk or bags imported to the U.S., has been largely stagnant for more than a decade. But the value of the brews keeps rising at double-digit rates as Starbucks continues to lead the charge toward global expansion, and players throughout the industry turn to new packaging, new products and new concepts to add value at ever-growing rates.

Procter & Gamble Co.'s Folgers brand last summer debuted an improved plastic "AromaSeal" container to replace its age-old can in its most popular size. The brand more recently launched a new customized foodservice machine, Folgers Custom Cafe, in which consumers can select their own blends and flavors, in an effort to jump-start the lagging institutional and low-end foodservice segment of the market.

AromaSeal, now available only in the 39-oz. can but likely to expand to other sizes, is "exceeding our expectations," says Tonia Hyatt, spokeswoman for Folgers.

Meanwhile, Altria Group's Kraft Foods, marketer of Maxwell House, continues to see its growth coming from a distribution deal with Starbucks to distribute that brand at retail.

As part of an alliance announced in October with appliance maker Applica, Folgers is preparing to launch a coffee pod system, co-branded with Black & Decker, that aims to bring a new high-margin segment to the mass retail and supermarket end of the business, according to people familiar with the launch. P&G declined to comment on the initiative.

Folgers won't be alone in the emerging mass market for coffee pods,primarily single-serve systems that use pre-portioned coffee already packed in filters. Salton, marketer of the George Foreman grill, is hoping to have a similar heavyweight on its hands through its own partnership, with the recently launched Melitta One: One Javapod Coffee Maker. Should the category take off in the U.S., Kraft and Sara Lee (marketer of Chock Full 'O Nuts), which already have been selling pods in Europe, likely will be close behind.

For all the growing activity in the coffee market, one thing that hasn't changed is how much coffee is consumed.

"The number of bags of green coffee imported to the U.S. has been right around 18 to 19 million for more than 10 years," says Dan Cox, president of Coffee Enterprises, a Burlington, Vt., consulting firm. "What that doesn't measure is the breakup of those bags. You have commercial grade, specialty grade and low quality grade.

"Low quality grade for the past five years has been taking a bigger share. Specialty grade also has been taking a bigger share. I wouldn't want to be in the commercial coffee business, because they're going to continue to lose market share. Starbucks on the other hand--these guys are having a hard time finding the quality coffee they need."

The commodity market reflects the rapid flight to quality by consumers at all levels of the coffee category, Cox says.

"Consumers' consumption habits have changed dramatically," he continues. "Twenty-five years ago, you saw hardly any whole beans. You hardly saw any flavored coffees. Now you've got half the fixtures [at supermarkets] with flavored coffees. You've seen a huge transformation from the can to the valve pack. When Folgers gets out of the can, that tells you something. That means it's mainstream.

"Now you're going to single-cup servings. They've been around for a long time, but they were never very successful, mainly because the coffee inside didn't taste very good. But with the new technology out there, especially for smaller families or single people, they give you a wide choice of varieties," Cox concludes.

Starbucks gets much of the credit for transforming the industry, both in foodservice and retail. When Bedbury joined Starbucks in 1995 as chief marketing officer, he concluded that of the roughly 2.3 billion cups of coffee consumed every day around the world, about 1.8 billion were of very low quality. Today, the total number remains similar, but "the bad coffee has been reduced to 1.3 billion cups," he says.

"That [still] leaves a lot of opportunity, or I should say grounds, for growth," he says, even with Starbucks' sales having nearly doubled to $4.1 billion globally in the past three years. That growth has pushed sales of Starbucks alone past the entire $2.8 billion U.S. instant, ground and whole bean coffee business at supermarkets and mass merchandisers, as measured by Information Resources Inc.

But neither Cox nor Bedbury credits Starbucks' success to the coffee quality as much as the atmosphere, service and branding power of its retail stores. "As a company, they have raised the sea level across the nation for good coffee," Cox says. "One of their key strategies is that they're not franchised. So [Chairman] Howard [Schultz] or [CEO] Orin Smith can on any day walk into a store and say, ,'This is a pit. Here's the key chain. Shut it down.'"