Coffee Perks Up

But the coffee itself is an increasingly important part, too. Starbucks or not, 82 percent of the coffee consumed in the U.S., as measured by volume, still sells at retail, Cox says. Starbucks now has a $90 million mail-order business, and another $90 million in annual sales at supermarkets, as measured by Information Resources, for the 52 weeks ended Nov. 2. That puts it well ahead of P&G's upscale Millstone, not counting Wal-Mart supercenters and club stores, where both also are sold.

Starbucks also is becoming a key influence to bring youths into the coffee category, Cox says, noting a rising number of youths whose introduction to coffee comes from Frappuchinos or other cold coffee beverages. "Young people are embracing the coffee flavor , but it's cold and creamy and sweet," he says. "So what? It's growing the category. I think there are incredible opportunities."

Ironically enough, a bigger opportunity, according to Bedbury, could be lowly instant coffee, long a declining business in the U.S. but still a dominant form overseas. "The real wild card," he says, "will be if and when Starbucks decides to reinvent instant coffee. We did some amazing exploratory work on this. It can be done. The bulk of the coffee consumed in Asia is what we would refer to as instant. It doesn't have to be so bad."

In pod we trust?

Bedbury and Cox are more cautious about prospects for the new generation of pods and pod makers, which already are growing as part of a small, high-end espresso maker business. Espresso pods today often are four-figure machines that use pods priced at $1 and up. The Salton-Melitta and Black & Decker-Folgers systems are priced around $50, with pods expected to cost 50 cents or less.

Both Salton and retailers are excited about the pod system, says Salton Chairman-CEO Leonard Dreimann, because of success in Europe seen by Sara Lee Corp. and electronics maker Philips. More than 3 million pod coffee makers have been sold in Europe, he said, and they generate annual sales of about $200 per machine in pods.

The original high-end espresso pod machines cost $5,000 to $7,000 and originally aimed to circumvent a growing shortage of highly skilled baristas by providing a uniform grind and brewing process, Cox says. Whether mass market machines using lighter roasts can be equally successful remains to be seen, he says.

A big marketing investment by P&G will be key to making the move work, Cox says. Applica executives indicated in October that they and P&G plan to spend about $20 million minimum between them on the launch , a big outlay in terms of most mass appliance launches, but relatively modest for a new packaged food launch. As P&G has done in recent years with launches in non-food categories, such as whitening kits and power floor mops, it's starting the process with consumer-direct sales via infomercials and sales on home shopping networks in early 2004, to be followed by conventional retail distribution and media ads in the second quarter of 2004.

Pod marketers definitely will have retailers, who like the opportunity to grow sales and margins in the category, on their side, Cox says. "It's a razor and blade business [at mass retail]," he says. "You make much more money on the blades than the razor."