Economics

Ready-to-drink coffee poised to take off

The global ready-to-drink (RTD) coffee market has grown considerably over the past five years, now making it a US$18 billion retail market, according to Euromonitor International’s research. While it has grown by just 2 per cent since 2014, this represents the weakest performance of the past five years, as leader Japan’s 3 per cent value decline hurt the industry. However, RTD coffee is booming in the US and China, the second and third most valuable RTD coffee markets, with value sales growth of 13 per cent and 23 per cent in 2015 respectively. Double-digit value growth was also achieved in a number of other countries including Switzerland, the UK, Canada, Malaysia, and Indonesia. Why are sales of RTD coffee growing in these markets while declining in Japan? Japanese workers had been drinking canned RTD coffee for a cheap energy boost but are now trading out of the category to freshly brewed coffee from convenience stores for a better taste experience. There is also competition from other functional options such as energy drinks. In contrast, RTD coffee makers in the US and China are benefiting from the growth in specialist coffee shops by launching premium products such as using cold-brew formulas and frozen whole milk and innovative packaging to offer a café-style experience. Japan retains top spot but is losing share of global RTD coffee market
Japan retained its position as the biggest market for RTD coffee with retail value sales of US$11.3 billion in 2015. But its share of global RTD coffee has been declining, as other markets, including the US and China, show strong growth. Japan’s value share of the global RTD coffee market has declined from 74 per cent in 2010 to 63 per cent in 2015 and is projected to reach 52 per cent in 2020. Japanese are avid RTD coffee drinkers, with per capita consumption at 24.8 litres in 2015, compared to the global average of 0.7 litres. The majority of these RTD coffee drinkers are male Japanese office workers who want a beverage to help them stay alert during long hours at the office and the commute. Canned RTD coffee gained popularity there due to its convenience and wide availability in Japan’s ubiquitous vending machines. Retail volume sales of RTD coffee through vending machines have also declined in Japan, from a 26 per cent share in 2010 to 24.5 per cent. But canned RTD coffee is now losing favour with Japanese men. Over the 2010-2015 period, convenience stores started to serve freshly brewed coffee to compete against specialist coffee shops and fast food outlets. This initiative resulted in many Japanese men switching to freshly brewed coffee offered at convenience stores due to its perceived superior taste and reasonable price. The migration from RTD coffee to freshly brewed coffee in convenience stores is expected to further accelerate over the 2015-2020 forecast period as convenience stores, with an increasing number of outlets offering freshly brewed coffee, are now also widening the choice of coffee variants available, such as iced café latte and frappe. As a result, Japan’s RTD coffee retail value sales are expected to show a slight decline between 2015 and 2020. China moves from sixth place to third place in global RTD coffee rankings
Between 2010 and 2015, China’s RTD coffee retail sales value nearly quadrupled from US$281 million in 2010 to US$1.1 billion in 2015. In doing so, China moved past South Korea, Australia, and Taiwan to become the third largest market for RTD coffee. Key drivers of growth in RTD coffee in China are greater interest in café-style coffee, busier lifestyles, and the launch of premium varieties. The expansion of specialist coffee shops such as US-based Starbucks and UK’s Costa Coffee has helped to create a café culture in China, a nation of tea drinkers. Busier lifestyles are fueling the growth of RTD coffee in China. RTD coffee is perceived as an instant energy source, with caffeine thought to heighten concentration, especially among students and office workers. By comparison to instant coffee and freshly brewed coffee, RTD coffee is more convenient and a time-saver. In China, consumers are viewing RTD coffee as a step up from instant coffee as RTD coffee makers add more premium varieties. Many RTD coffee producers in Asia Pacific use milk powder due to a less developed dairy industry in the region. To distinguish itself from other players in China and provide a premium taste, Taiwan’s Uni-President Enterprises Corp decided to use a frozen whole milk concentrate from Australia for its September 2015 launch of Lento RTD coffee in latte and macchiato variants in major cities in China. With RTD coffee per capita consumption at only 0.3 litres in 2015, China offers a lot of room for future growth. Retail value sales of RTD coffee in China are projected to reach US$2.6 billion in 2020. US RTD coffee makers use café brands to leverage natural and impulse trends
The US RTD coffee market has grown from US$1.3 billion in 2010 to US$2.3 billion in 2015 through the strong brand equity that leading coffee specialists and coffee roasters have brought to the category coupled with a commitment to high value innovation in formula and in packaging.  Consumer familiarity with the Starbucks brand has helped the company add US$677 million in sales over the 2010-2015 period. The major consumers of RTD coffee in the US are young adults who grew up drinking Starbucks Frappuccinos (some of which do not contain any coffee) in the Starbucks coffee shops and now drink the bottled Frappuccino RTD coffees as an afternoon treat or a ‘pick-me-up’.  On a smaller scale, Illycaffè’s Illy Issimo RTD coffee has benefited from being associated with an Italian espresso brand from a well-known coffee roaster with retail value growth of 30 per cent in 2015. Beyond indulgence, RTD coffee sales continue to benefit from the natural and impulse trends as many consumers see RTD coffee as a natural provider of energy through caffeine with advantages over competitors’ energy drinks and hot coffee, resulting from its simpler, comprehensible ingredients list and on-the-go availability.  To leverage the natural and “clean label” trends, RTD coffee makers have also been introducing products that contain less or no sugar. In 2014, Starbucks introduced Starbucks Iced Coffee Brewed to Personalize in Unsweetened, Lightly Sweetened, and Caramel varieties that allow consumers to customise their iced coffee at home. Cold-brew moves from specialist coffee shops into a packaged format
In the US companies are taking advantage of the growing cold-brew coffee trend to launch RTD coffees. Cold-brew coffee has gained in popularity through Third Wave coffee shops including Stumptown Coffee Roasters and Blue Bottle Coffee. The cold-brew process involves steeping coffee grounds in water for several hours and produces a coffee that is naturally sweeter, more caffeinated, and less acidic. In 2011, Stumptown Coffee Roasters successfully launched a cold-brew coffee in a glass bottle. Cold-brew became better known in the US in 2014 when a number of companies including Blue Bottle, Chameleon Cold-Brew, and High Brew Coffee entered the space. Using innovative packaging to offer a premium experience
In addition to introducing innovation in formulas, RTD coffee companies are looking beyond the traditional metal can to provide a taste and texture that is closer to café-style coffee. Nestlé developed the Nescafé Shakissimo chilled coffee-cup that creates a creamy froth after being shaken for Western Europe in 2014 and introduced it in China in 2016. In the US, Third Wave specialist coffee shops are aiming to replicate the experience of visiting their stores including the cold-brew on taps through new canned coffees. Stumptown’s April 2015 launch of Stumptown Nitro Cold Brew Coffee replicates its nitro cold brew on tap by using a nitro widget inside the can that produces creamy foam like Guinness stout. In March 2016, La Colombe Coffee Roasters packaged its La Colombe Draft Latte from the tap into a pressurised can (Innovalve) that froths the ingredients when opened. Future of RTD coffee
While Japan is projected to see its retail RTD coffee market decline by US$155 million in constant value terms over the 2015-2020 period, China and the US are expected to grow by US$1.6 billion and US$1.3 billion, respectively, over the same time period. The expansion of specialist coffee shops is creating a café culture in China and familiarising consumers with cold-brew coffee in the US. This helps create awareness of premium coffee but at the same time offers a threat to RTD coffee producers, as the taste of freshly-prepared coffee is difficult to replicate. That said, the key to strong value growth in China and in the US has been the equity that leading coffee specialists (Starbucks, Blue Bottle, Stumptown) have brought to the category, accompanied by innovation in formula and in packaging. The movement towards premium offerings in RTD coffee is also expected to lead to shifts in company shares. The Coca-Cola Co is currently the number one player in global RTD coffee with an 18 per cent retail value share in 2015 but this is down from a 23 per cent share in 2010. The Coca-Cola Co’s global performance is being dragged down because it is number one in Japan but with a very small share in both China and the US. In contrast, Nestlé grew its value share from 5 per cent in 2010 to 7 per cent in 2015 through the success of its RTD coffee packaged in 268-millilitre PET bottles, its sophisticated distribution network, and the use of Chinese actress Angelababy in Nescafé’s television advertisements. Nestlé may be able to leverage its leadership in China to become a bigger player at the global level. Starbucks has grown from a 7 per cent share in 2010 to a 12 per cent share in 2015 and is expected to continue growing further. Partnering with leading soft drinks company, Ting Hsin International Group, in 2015 to manufacture and distribute premium Starbucks RTD coffee across mainland China has allowed Starbucks to expand from being a regional player to a national player in the country. The launch of bottled Starbucks Cold Brew coffee in grocery and convenience stores in select Starbucks US retail stores and grocery stores in Seattle and Portland, Oregon in July 2016 should further aid Starbucks. For further insights and questions, please contact Virginia Lee, Senior Beverages Analyst at Euromonitor International, at virginia.lee@euromonitor.com or follow her on Twitter at @VirginiaALee. GCR

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