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The Big Business of Coffee

From a somewhat accidental beginning, coffee has grown into one of the most popular drinks in the world, generating a massive ~$560 billion per year according to Euromonitor. The U.S. is the largest coffee market in the world where ~$84 billion or ~15% of the global market is located which has been growing at a robust ~5% p.a. for the last decade and a half.

By Amit Nath

Many of us are deeply ingrained in our individual coffee consumption rituals which often commence first thing in the morning and can extend deep into the night. What may come as a surprise however, are the origins of our favorite drink. While impossible to verify, to oldest “history” of coffee goes back to the 9th century and an Ethiopian goat herder named Kaldi. Kaldi is credited with discovering coffee after noticing his goats increased level of attention, happiness and responsiveness immediately after eating beans from a coffee plant (which is native to Ethiopia). From that somewhat accidental beginning, coffee has grown into one of the most popular drinks in the world, generating a massive ~$560 billion per year according to Euromonitor. The U.S. is the largest coffee market in the world where ~$84 billion or ~15% of the global market is located which has been growing at a robust ~5% p.a. for the last decade and a half.

U.S. Coffee Market Growth

Source: Euromonitor, Morgan Stanley

Focusing on the U.S. market and its whopping ~$84 billion in annual sales, the natural question is, how is that divided up? As many of us will attest, our coffee consumption habits are “at home” (~$14 billion), “away from home” (~$66 billion) which includes specialty coffee shops and other locations like the office and convenience stores. A bit of a grey area in the market is the “on-the-go” segment which largely consists of Ready-To-Drink (RTD) coffee ($4 billion) usually bought off the shelf at a supermarket and consumed “at home” or “Away from home”.

 

U.S. Coffee Market Breakdown

Source: Euromonitor

The “away from Home” segment of the market is by far the largest part generating $66 billion per year and is actually where a majority of the growth is coming from in the overall industry. As more people put cafes and coffee into their daily routines, mass market coffee shops like Starbucks and Dunkin’ Donuts have performed exceptionally well while the trend has spawned smaller, boutique coffee houses like Peets, Blue Bottle, etc. as more and more new entrants look to quench people’s thirst for caffeine.

 

U.S. “away from home” Coffee Market Growth

Source: Euromonitor, Morgan Stanley

“At home” coffee consumption represents the other piece of the pie, generating $14 billion per year with household brands such as Nescafe, Maxwell House and Lavazza, prominent fixtures in many pantries across the world. Perhaps the most significant development in “At home” coffee consumption over the last 5-10 years has been the emergence of the single-serve pod category, with Nespresso and Keurig the creators and continued leaders here. The category however has matured after exhibiting ~80% YoY growth in the early 2010s, it is now growing below overall coffee industry growth, tracking 3-4% p.a. range versus ~5% for the industry. Some of the key drivers of the deceleration include significant household penetration which is approaching saturation (victim of its own success), price deflation from greater competition including private label and the millennial generation’s experiential preferences, which favor going out and consuming “away from home” where the “coffee experience” can be photographed and shared on social media. 

 

U.S. Single-Serve Coffee Pod Category Growth

Source: Euromonitor, Morgan Stanley

From its supposed humble beginnings in the fields of Ethiopia, the business of coffee has exploded and continues to be among the fastest growing in the food & beverage industry. That said, the experience of coffee has not materially changed from what Kaldi the goat herder observed in his flock over 1,000 years ago, we certainly owe those ancient goats a great debt of gratitude! 

 

Amit Nath is a Senior Research Analyst with Montaka Global Investments. To learn more about Montaka, please call +612 7202 0100.