Taking the place of pods could be premium artisanal coffee – especially in specialty shops – that emphasizes the subtle notes of beans from specific regions, or how beans are roasted, ground or brewed with unique techniques, the market researchers added June 21 during a webinar on the state of the coffee market in North America.
They explained this shift can be attributed to the improving U.S. economy, consumers’ lower tolerance for the high cost of pods compared to traditional bagged coffee and Americans’ changing tastes based on increased health consciousness.
The rise and fall of the pod
Coffee pods took the U.S. by storm following the great recession in 2008 – growing from “merely a blip in the coffee market” 10 years ago to a $1 billion industry in 2011 and eventually crossing the $4 billion threshold in 2014, said Eric Penicka, a research analyst with Euromonitor.
Sales of coffee pods in the U.S. in last five years also single-handedly drove a 7% compound annual growth rate in retail coffee sales, helping to bring the total amount Americans spent on retail coffee to $17 billion in 2014, according to Euromonitor data.
Excluding sales of coffee pods during this time flatlines the CAGR at 0%, adds Penicka.
He explained Americans embraced coffee pods during the great recession as a less expensive alternative to coffee sold at food service. This drove off-trade retail sales of coffee up 5.2% in 2009 – its highest growth in 10 years. Comparatively, in 2009, the growth of coffee sold in food service hit a 10 year low at only 0.3%, Penicka said.
Pods also gained popularity because they are an “incredibly convenient … no fuss way to make coffee,” which many Americans wanted during the recession to help them power through long days and multiple jobs as they tried to make ends meet, Penicka said.
“Ultimately, the healthy balance of cost, convenience and quality made coffee pods a winner” during the recession, Penicka said. “However,” he added, “with the improved economy we are experiencing today we believe the window of opportunity for pods is closing and the growth will stall in the next five years.”
He explained that while the cost of a cup of coffee from a pod is less than that from a shop, it is seven times that of a cup of coffee brewed from bagged coffee. And as consumers have more discretionary money again, they are reverting to buying coffee from stores and augmenting with less expensive bagged coffee brewed at home.
The softer than expected sales of the Keurig 2.0 coffee pod machine that launched in 2014 reflect the closing window of potential for pods, Penicka added.
Premium coffee could replace pods at the top
“While pods are dominating the story of off-trade, specialty coffee shops are growing” and so is the demand for premium coffee, Penicka said.
“In 2014, specialty coffee shops experienced $19.1 billion in sales up from $16.6 billion in 2009, and just $8.5 billion in 2000,” Penicka said, adding, “Americans’ spending per capita in specialty coffee shops has doubled from just $3 in 2000 to $6 in 2014.”
The bulk of these stores are Starbucks outlets, but the number of the behemoth chain's stores is shrinking and the number of independent coffee shops is increasing, Penicka said. He noted Starbucks stores accounted for 63% of specialty coffee shops in 2014, which is down from 67% at its peak in 2008.
The dip in Starbucks stores shows that consumers are moving away from frothed and sweetened coffee that has been in a “fun and indulgence stage,” and into an artisanal stage of coffee innovation where specialty coffee shops tout subtle notes of coffee and unique brewing and roasting techniques.
“American coffee consumers are far savvier than ever before. Even though they are a minority group it is with these consumers where growth lies,” Penicka said. He explained: “They have forgotten the masking powers of milk and syrups to appreciate the delicate intricacies of coffee. In these artisanal coffee shops or third wave coffee shops new methods, or I should say forgotten methods, have come into the lime light. While expresso machines play a part in spec coffee shops, pour-over has come front and center giving Americans a new way to discover familiar products.”
As these new, but old, methods filter into households, they will give pods a run for their money.
This shift also will create a growth opportunity for small batch and local roasters to find a foothold in the competitive U.S. retail coffee market since trends in food service usually filter to CPG sales within a few years.