The United Kingdom Coffee Industry - Case Study Example

UK Coffee Industry In 2005, the UK coffee market was valued at 680 million worth of sales with a 5-7% annual growth rate since 2000, indicating recovery from the recent price decline during the 1990s. Coffee products are differentiated primarily between instant coffee and ground or roast coffee, with instant coffee sales dominating with an 85% (580 million) market share in 2005, compared to only 15% (100 million) for ground and roast coffee during the same year, illustrating a contradictory case within the European market, where consumers favour ground and roast. As the 2005 sales of instant coffee1 indicate, the sub-sector is further divided between regular, premium freeze-dried, decaffeinated, speciality, super premium, powder and economy or flavoured coffee. Among these sub-categories, speciality coffee exhibited the highest growth rates overall. Dominance of instant coffee is attributed to a combination of aggressive marketing and branding campaigns by brand manufacturers, as well as the price consciousness and brand loyalty characteristic of coffee drinkers. However, instant coffee growth rates lag behind ground and roast, increasing only by 11.1% from 2003-2005, compared to 13.6% for the latter, which can be attributed to the development of new pod technologies and the decreasing prices of coffee machines, which allows consumers greater convenience in home brewing; and the prevalence of repertoire drinkers2, indicating an increase in consumers drinking both instant and ground coffee. table 1: UK retail sales of coffee, by sector, by value, 2003, 2004 and 2005 2003 2004 2005(est) %change 2003-05 m % m % m % Instant 522 86 544 85 580 85 +11.1 Roast/ground 88 14 94 15 100 15 +13.6 Total 610 100 638 100 680 100 +11.5 (Source: Mintel, 2006) The market is also highly segmented with distinct divisions in terms of age groups, geography, and consumer behaviour. Demographically, consumption increases with age as majority of heavy coffee drinkers in both sectors found among the 35-64 groups, with 76% drinking instant coffee and about 43% drinking instant exclusively. With respect to ground coffee, consumption is concentrated in more affluent regions of the country, indicating price consciousness among drinkers. table 2: Usage of instant coffee, by demographic sub-groups, 2005 Base: adults aged 15+ All users % Heavy users % Medium users % Light users % Non-users % All 76.1 37.1 25.1 13.2 23.9 Men 75.6 38.0 24.4 12.6 24.4 Women 76.6 36.3 25.8 13.7 23.4 15-24 52.2 20.2 20.0 11.5 47.8 25-34 73.1 35.1 22.7 14.8 26.9 35-44 78.3 42.8 21.1 14.0 21.7 45-54 81.7 43.9 23.7 13.4 18.3 55-64 85.1 44.9 25.7 13.7 14.9 65+ 84.4 35.8 35.8 11.9 15.6 Taken from the TGI survey of around 25,000 adults (Source: Mintel 2006) table 3: Usage of fresh ground coffee, by demographic sub-group, 2005 Base: adults aged 15+ All users % Heavy users % Medium users % Light users % Non-users % All 36.4 8.2 11.2 16.1 63.6 Men 36.5 9.5 10.9 15.3 63.5 Women 36.3 7.0 11.6 16.9 63.7 15-24 23.8 3.6 7.6 11.1 76.2 25-34 34.5 7.2 10.8 16.0 65.5 35-44 40.0 8.9 12.4 18.0 60.0 45-54 42.7 10.1 13.1 19.2 57.3 55-64 41.5 10.6 13.0 17.4 58.5 65+ 35.6 8.8 10.5 15.1 64.4 Taken from the TGI survey of around 25,000 adults (Source: Mintel 2006) Only a few manufacturers dominate the coffee market. For instant coffee, the market is dominated by Nestl (56%) through its Nescaf Original Blend (33%) and Gold Blend (15%) - the two highest-selling brands - followed by Kraft (22%), and Own-label products (11%), while other manufacturers made up the remaining 11% in 2005. There are no dominant suppliers for ground and roast. However one company, Douwe Egberts, had the highest market share at 12%, followed by Cafdirect, Taylors, and Lavazza, with 8% market shares each. Own-label manufacturers for ground and roast coffee, however, possess 40% of the total market. table 4: Market share of instant coffee, by producer, by value, 2003 and 2005 2003 2005 (est) % change 2003-05 m % m % Nestl 294 56 325 56 +10.5 Kraft 124 24 125 22 +0.8 Own-label 52 10 64 11 +23.1 Others 52 10 66 11 +26.9 Total 522 100 580 100 +11.1 (Source: Mintel, 2006) Figure 4: Market share for ground/fresh coffee, by producer, by value, 2003 and 2005 2003 2005 (est) % change 2003-05 m % m % Douwe Egberts 11 12 12 12 +9.1 Cafdirect 7 7 8 8 +14.3 Taylors 8 9 8 8 - Lavazza 8 8 8 8 - Gala - Lyons 6 6 5 5 -16.7 Percol 5 5 5 5 - Kenco 2 2 3 3 +50.0 Others 11 12 11 11 - Own-label 36 39 40 40 +11.1 Total 94 100 100 100 +6.4 (Source: Mintel, 2006) Several new developments also affect the market, including growing health concerns, increasing investments on own-label brands, prevalence of repertoire coffee drinkers, and growing consumer demands for quality. One issue that commands attention however is ethical coffee, which accounted for 3.2% of total sales in 2005, with players like Nestl introducing its Partner's Blend and ground coffee suppliers Cafdirect and Percol. However, despite growth of fair-trade brands, reports indicate that UK coffee drinkers are still price conscious such that regardless of strong support for fair-trade goals, only a few are willing to pay the higher price associated with fair-trade products, illustrating the main challenge of fair-trade advocates (Skapinker 2002). Figure 5: UK retail sales of Fairtrade coffee, by value, 2003-05 m Index m Index % of coffee market 2003 17 100 25 100 2.9 2004 19 112 28 113 3.0 2005 (est) 22 126 33 133 3.2 (Source: Mintel, 2006) Nestl's Nescaf Brand With its broad portfolio of instant coffee products ranging from standard to specialty coffee, Nescaf continues to be a major player within the coffee industry, owning 56% of the instant coffee market. Much of Nestl's success with its Nescaf portfolio lies with its aggressive branding and positioning strategies, which allows the company to cater to almost every segment within the market by carrying a broad range of coffee products oriented towards demographics and consumers' drinking habits, while emphasising and leveraging on the strength of its core brand - Nescaf. Nestl's flagship coffee, Nescaf Original Blend, is oriented towards heavy coffee drinkers in the instant coffee market within the 35-64 age range. With its full flavour and bold taste, it appeals to majority of the heavy coffee drinkers within the age group, who prefer the benefits that go with caffeine. By targeting this group, which is also the largest consumer of coffee products in the market, Nestl captured one-third of the instant coffee market, earning a 33% share in 2005 (190million) and establishing a stable customer-base, through the Original Blend alone. To build upon the success of its core brand and maintain its market share, Nestl extends the Nescaf brand to other coffee products through cross-promotions and simultaneous campaigns that appeals to light and moderate coffee drinkers, repertoire coffee drinkers, as well as heavy coffee drinkers limiting their intake, to increase reception among its less popular brands by associating them with the more popular coffee products. Figure 6: Market share for instant coffee, by leading brand, by value, 2003 and 2005 2003 2005 (est) % change 2003-05 m % m % Nescaf Original 185 35 190 33 +2.7 Nescaf Gold Blend 81 16 87 15 +7.4 Kenco Really Smooth 25 5 24 4 -4.0 Kenco Really Rich 19 4 19 3 - Douwe Egberts 16 3 19 3 +18.8 Kenco Decaffeinated 18 3 20 4 +11.1 Carte Noire 16 3 16 3 - Maxwell House Granules 19 3 18 3 -5.3 Kenco Rappor 20 4 19 3 -5.0 Nescaf Decaffeinated 10 2 11 2 +10.0 Other Nescaf 18 3 37 6 +105.6 Other Kenco 7 1 9 2 +28.6 Own-label 52 10 64 11 +23.1 Others 36 7 47 8 +30.6 Total 522 100 580 100 11.1% (Source: Mintel, 2006) To increase market shares, Nestl also offers products oriented towards youth (Beck 2000) and women. Known for their brand consciousness and distinctive lifestyles, Nestl's offering for these consumers consist of its Nescaf Gold Blend, the second highest-selling instant coffee with a 15% share (87million) in 2005. Since these segments are highly brand-conscious, especially with their drinks, the Gold Blend was re-launched in 2004 with a modernised design of its coffee jar, exhibiting the image of a golden scoop to evoke the look and feel of fine jewellery, and consequently, fine-branded coffee (Konopelski 2004). Consequently, this segmentation proves highly effective as evinced by the Gold Blend's 7.4% sales increase from 2003-2005. Furthermore, Nescaf also launched a specialty line of caf-style coffees to counteract the growing popularity of out-of-home coffee drinking (Sixsmith 2006) and re-create the growing caf lifestyle popular within this segment. Accompanied by the tagline "Remember, you're at home now", it reminds consumers that they can still enjoy their favourite specialty coffee drinks and live up to their lifestyles, even at home. With overall speciality coffee sales increasing by 80% since 2003, Nescaf benefits from establishing a mark within this fast-growing segment early on. Tesco (own label) One recent development making waves in the coffee retail market is the penetration of own-label coffee products by leading supermarket distributors such as Tesco. Whereas Nescaf is differentiated across the instant coffee market, Tesco's segmentation strategy, despite carrying similar coffee products as manufacturer brands like Nescaf through its Tesco Finest and Tesco Value lines, focuses more on consumers' socioeconomic status, such that its marketing strategies are concentrated more on capturing consumers within the ground and roast coffee markets who are less likely to be swayed by brand images. Figure 7: Penetration of own-label into packaged grocery sales, by leading grocery retailers, 1996-2000 1996 % 1998 % 2000 % % point change 1996-2000 Tesco 45 45 45 - Sainsbury 52 47 45 -7 Iceland 50 48 45 -5 Asda 43 46 43 - Safeway 41 42 38 -3 Morrisons 34 36 36 +2 Somerfield 37 37 35 -2 Waitrose 38 36 34 -4 All Co-ops 21 23 25 +4 Kwik Save 13 19 12 -1 All grocers 39 39 39 - (Source: Mintel, 2006) Much of Tesco's success in the coffee market is within the ground and roast categories where consumers, although considerably smaller in size are less brand-conscious, unlike instant coffee drinkers, hence making it easier for own-label products to dominate. Furthermore, as consumer surveys suggest, within the ground and roast coffee markets, consumers, who tend to come from more affluent socio economic backgrounds, are more prepared to pay the premium that goes with ground and roast coffee, compared to instant. To capture this market, Tesco released five gourmet ground and roast coffee products under its Tesco Finest Brand - Mocha Sidamo Ground, Tesco Finest Kenyan AA Ground, Tesco Finest Costa Rica Tarrazu, Tesco Finest Java Sumatra Ground, and Tesco Finest Colombian Supremo - packaged in a silver foil pouch to reflect its upscale character, the pack also comes with complete information regarding the type of beans used and its origin, among others - information real coffee connoisseurs appreciate. This strategy works two-fold (Simms 2005). On one hand, it appeals to the refined and sophisticated palates of discriminating connoisseurs who care more about the quality of gourmet coffee as opposed to often-hyped brands. On the other hand, for the lot of consumers new to ground and roast coffee, Tesco, as an already trusted distributor, presents its own-label products as the clear choice in their foray into ground and roast coffees. This is due to the fact that given the number of gourmet brands in the market without a clear market leader, 44.7% of consumers are more likely to buy products from manufacturers that they trust. In this case, the trusted manufacturers are likely to be the grocers and their own-label coffee products. The same strategy is implemented into Tesco's Value line, which are presented as significantly cheaper alternatives to well-known coffee brands. Focusing on the greater "value" that comes with its coffee products, Tesco accompanies its promotions with specials for the price-conscious consumers making their offers fairly attractive. However, since most of its Tesco Value coffee line consist of instant coffee products, own-label penetration is much lower due to the strong brand presence in the instant coffee market. References Beck, E. 2000, 'About Advertising: Joe on the Go: Nescafe Ads Target Young Coffee Drinkers', Wall Street Journal (Europe), 4 September, p.33. Available from: Proquest. [24 November 2006]. Datamonitor (2006). Nestle, SA. Company Profile: UK. August 2006. Datamonitor (2006). Tesco, PLC. Company Profile: UK. May 2006. Konopelski, A. 2004, 'CPB and Design Bridge flavour for Nescaf brand', Design Week, 23 September, p.6. Available from: Business Source Premiere. [24 November 2006]. Mintel (2006). Coffee. Market Intelligence Food and Drink, Market Intelligence: UK, Market Intelligence Standard. January 2006. Simms, J. 2005, 'The rise and rise of own label', Marketing, 9 February, pp.36-38. Available from: Business Source Premiere. [24 November 2006]. Sixsmith, R. 2006, 'Caf culture key to retail growth', Horticulture Week, 19 October, p.6. Available from: Proquest. [24 November 2006]. Skapinker, M. 2002, 'The problem with ethical shoppers', Financial Times.London (UK), 30 November, p.10. Available from: Proquest. [24 November 2006]. APPENDICES appendix 1: UK retail sales of instant coffee, by sector, by value, 2003, 2004 and 2005 2003 2004 2005 % change 2003-05 % change 2004-05 m % m % m % Regular 224 43 228 42 232 40 +3.6 +1.8 Premium freeze-dried 136 26 136 25 139 24 +2.2 +2.2 Decaffeinated 62 12 65 12 70 12 +12.9 +7.7 Speciality 39 7 50 9 70 12 +79.5 +40.0 Super-premium 52 10 57 11 61 11 +17.3 +7.0 Powder 5 1 5 1 5 1 - - Economy/flavoured 3 1 3 1 3 1 - - Total 522 100 544 100 580 100 +11.1 +6.6 (Source: Mintel 2006) appendix 2a: Coffee-drinking habits, August 2005 Base: 969 main shoppers aged 16+ I tend to only drink instant coffee I tend to drink several types of hot drinks including coffee I drink both instant and ground coffee I never buy/ drink coffee % % % % All 43 25 24 21 Men 46 23 22 21 Women 42 25 25 22 16-24* 29 22 8 44 25-34 43 24 16 25 35-44 46 24 24 22 45-54 41 23 30 19 55-64 38 31 33 15 65+ 50 24 25 17 (Source: Mintel 2006) appendix 2b: Coffee-drinking habits, August 2005 Base: 969 main shoppers aged 16+ I only drink specialist coffee % I like to drink different types of coffee % I tend to only drink fresh ground/caftire/ filter coffee % I like to make instant latte/ cappuccino-style drinks at home* % All 11 11 10 9 Men 7 10 9 6 Women 12 12 11 10 16-24* 2 8 2 8 25-34 12 10 12 6 35-44 10 9 8 8 45-54 13 13 14 12 55-64 14 16 14 11 65+ 10 11 8 9 * low sub-sample (Source: Mintel 2006) appendix 3: Selected lifestyle statements by usage of instant coffee, 2005 Base: adults aged 15+ All adults % All users % Heavy users % Medium users % Light users % Non-users % Agree: When I see a new brand I often buy it to see what it's like 34.6 35.2 35.4 36.0 32.7 32.9 I look for the lowest possible prices when I go shopping 37.7 37.2 38.0 36.2 36.6 39.3 On the whole I think well known brands are better than a shop's own brand 31.1 31.1 30.0 31.6 32.7 31.2 Once I find a brand I like I tend to stick to it 69.0 70.1 71.1 69.3 69.0 65.6 It's worth paying more for organic food 31.1 31.0 27.3 33.5 35.9 31.2 I always look out for special offers 57.9 58.4 59.1 58.5 56.4 56.2 I'm tempted to buy products I've seen advertised 25.4 25.4 25.5 25.5 25.0 25.3 Supermarkets' own brands are made by the big manufacturers anyway 55.3 57.2 58.1 57.9 53.6 49.1 I buy Fair Trade products when available 31.2 32.1 30.0 35.2 32.1 28.4 I usually choose the cheapest products 23.3 22.7 23.8 20.3 24.2 25.3 I like changing brands 34.9 35.0 35.6 34.1 35.1 34.4 I only buy trusted products, ones I know 44.5 44.7 43.6 45.8 45.5 43.9 Taken from the TGI survey of around 25,000 adults (Source: Mintel 2006) appendix 4: Selected lifestyle statements by usage of fresh ground coffee, 2005 Base: adults aged 15+ All adults % All users % Heavy users % Medium users % Light users % Non-users % Agree: When I see a new brand I often buy it to see what it's like 34.6 33.6 30.6 35.3 34.0 35.2 I look for the lowest possible prices when I go shopping 37.7 34.2 32.4 34.2 35.0 39.7 On the whole I think well known brands are better than a shop's own brand 31.1 29.9 27.7 26.8 32.8 31.8 Once I find a brand I like I tend to stick to it 69.0 69.9 66.9 70.1 71.4 68.5 It's worth paying more for organic food 31.1 38.3 48.2 38.6 33.3 27.0 I always look out for special offers 57.9 57.6 53.5 58.9 59.2 58.1 I'm tempted to buy products I've seen advertised 25.4 24.0 21.2 24.8 25.1 26.2 Supermarkets' own brands are made by the big manufacturers anyway 55.3 58.9 61.4 58.9 57.3 53.2 I buy Fair Trade products when available 31.2 37.6 44.3 40.5 32.3 27.6 I usually choose the cheapest products 23.3 19.3 20.5 19.7 18.1 25.7 I like changing brands 34.9 34.2 31.1 36.8 33.9 35.2 I only buy trusted products, ones I know 44.5 41.6 42.5 41.1 41.0 46.2 Taken from the TGI survey of around 25,000 adults (Source: Mintel 2006) Read More