Standard Industrial Classification (SIC) Code - 2095 Roasting Coffee/North American Industry

Classification (NAICS) Code - 311920 Coffee Roasting: The coffee roasting industry includes involvement in the following: roasting coffee and manufacturing coffee concentrates and extracts (including instant/powdered, liquid, frozen/freeze-dried, flavorings, and syrups). Tea products have been excluded from the description of the industry due to the lack of consensus among definitions and scope of the project.

Introduction

Coffee as an industry in the United States started as early as the seventeenth century. Small coffee shops opened up in the colonies after years of popularity in Europe. Due to high tea taxes from Britain, coffee soon monopolized the hot beverage industry in the United States (All Business, 2007). Conditions in the beginning were not ideal for coffee beans. The ships were damp, which caused bad tasting coffee (Hemler,

2009). During the American Civil War, grinders and beans were too heavy for soldiers, so companies started grinding beans and forming the grounds into block for quicker and easier coffee. This caused more coffee to be purchased, but the quality was lower (All Business, 2007). The shipping quality and focus on mass production of bulk coffee inevitably caused the coffee crash of 1881. This crash helped create regulations on coffee trading, roasting, and manufacturing that eventually helped create the vast coffee industry we experience today (Hemler, 2009). Coffee’s availability has expanded from the wealthy to middle class to the average American, and its production has gone from a time consuming scientific process to a press of a button.

This has caused coffee consumption in the past 50+ years to skyrocket.

Due to this large increase in possible consumers, coffee is now in grocery stores, specialty stores, gas station convenience stores, and coffee shops on every corner. There are approximately 350 different coffee roasting enterprises in the United States employing approximately 12,500 employees (IBISWorld, 2012).

Even though purchasing coffee has become easier with the times, growing coffee is a different story. Coffee grows in a highly elevated, tropical climate with rich soil. This climate is predominantly around the equator.

Popular countries for growing coffee are Mexico, Guatemala, Colombia, Brazil, Ethiopia, Kenya, and Yemen.

The only region in the United States that is able to grow coffee is Hawaii (NCA, 2013). More information on coffee roasting is available through multiple publications, such as Coffee Talk,

Fresh Cup, and Specialty Coffee Retailer. These publications are all monthly, industry-oriented publications ranging in a variety of industry trends and topics. Coffee organizations, such as National Coffee Association

(NCA), Specialty Coffee Association of America (SCAA), and International Coffee Organization (ICO), have events and trade shows annually and biannually for consumers, business owners, and experts alike to discuss trends in the industry and upcoming products. Another great source for information is the IBISWorld industry report, which gives information on the products, industry, and consumers.

Industry Composition and Competition

Coffee is enjoyed by millions worldwide and has been established as part of a morning ritual, essential to waking up and being alert, and coffee houses have become gathering places. The industry is strong; coffee is the second most valuable traded commodity in the world behind petroleum/oil and makes up the largest food import for the U.S. (Global Exchange, 2013). Coffee consumption is predicted to remain relatively stable despite price volatility (Kaczanowska, 2012). Although coffee has traditionally been regarded almost exclusively as an export, coffee consumption in coffee producing countries has been growing steadily and in the next several years the U.S. may be passed as the largest consuming market (SCAA, 2012).

Five major U.S. companies are responsible for holding 76.2% of the market share in the coffee production industry. The J.M. Smucker Company holds the lion’s share 24.0% of the market share with its brands Folgers, Millstone, Café Bustelo, Café Pilon, and Dunkin’ Donuts. The second largest owner of market share is Kraft Foods Inc. with 18.9%, and includes the brands Maxwell House, General Foods International

Coffees, and under license are Starbucks, Seattle’s Best, and Yuban. Starbucks ranks third, with 12.8% of the market share, selling coffee beans at its retail stores along with selling through other retailers. Green

Mountain Coffee Roasters Inc. is close behind Starbucks with 12.0% market share and includes the Keurig,

Diedrich Coffee, Timothy’s, Tully’s, and the Green Mountain brands. Nestle SA is the last of the five major companies at 8.5% market share with brands Nescafe, Taster’s Choice, and Coffee-Mate (Kaczanowska, 2012).

The remaining 23.8% market share belongs to other companies, those that typically own less than 5% of the market share (Kaczanowska, 2012). Although five major companies hold over 75% of market share, competition within the industry is increasing as the marketplace is fragmented and small to medium companies offer specialty and gourmet products that cater to niche markets. Perceived quality of coffee products and brand loyalty weighs heavily in consumers’ minds which helps protect against price changes, but establishing and keeping a significant number of brand loyal customers is a challenge and efforts are constantly made to differentiate between competitors (Kaczanowska, 2012).

The coffee industry in the U.S. boasts a revenue of $9.6 billion and profits of $230.1 million and is the largest importer of coffee, although burgeoning middle classes in emerging markets in Brazil, India, and China are beginning to demand more coffee (SCCA, 2012). The U.S. imports coffee from Brazil, Mexico, Colombia,

Vietnam, Guatemala, Indonesia, Costa Rica, Peru, Ecuador, Venezuela, El Salvador, Uganda, Honduras,

Thailand, Nicaragua, Papua New Guinea, and India, where coffee plants thrive (Global Exchange, 2013). The coffee manufacturing industry is segmented into three major categories: ground roasted coffee comprising

73.6%, whole bean roasted coffee at 13.4%, and other products making up the remaining 13% (Kaczanowska,

2012). Whole bean roasted coffee is expected to grow in future years, although the majority of the share will still remain with popular ground roasted coffee. Historically profitability for coffee farmers has been low; most have been living in poverty or barely above poverty due to the supply chain and middlemen who do not give farmers a fair price for their beans (LaPorte, 2012). Revenue is expected to grow as consumption and demand for specialty products grows (Kaczanowska, 2012). The last few years have seen an increase in the trend of the ethical consumer, who looks for organic and fair-trade products and is concerned about the plight of the coffee farmer. Larger corporations have noticed the trend and have begun marketing to ethical consumers. Small and medium sized companies have seized niche markets, touting fair trade products and organically grown and produced coffee. Industry revenue is projected to grow over the next five years; a decline in coffee bean prices and increased manufacturing automation should result in decreased operating costs and higher profits (Kaczanowska, 2012).

PRODUCTS AND SERVICES OF THE COFFEE ROASTING INDUSTRY Overview of products offered by the industry:

The roasted coffee industry supplies establishments such as small businesses, who roast green coffee beans to produce beans suitable for grinding to make coffee, and to companies who produce coffee concentrates and extracts in powdered, liquid, or frozen form, including freeze-dried. The U. S. is the world’s largest importer of coffee beans, employing traders to purchase the product. The National Coffee Association represents the roasters in the industry. Processing of coffee beans is performed by manufacturers that roast the beans for packaging. For many years, the market was dominated by multinational corporations mostly interested in quantity and profit, the result being that for decades, coffee bought and sold in the U. S. was regarded as inferior to other parts of the world (Highbeam Business, 2013).

Publications or websites—regular reviews on the products:

Following are several websites hosted by publications or organizations, all of which report on current trends in the coffee roasting industry, news related to the production, trade and processing of coffee beans, and on marketing coffee. All of these entities deal primarily with the coffee roasting market in the U. S.

Specialty Coffee Association of America: http://www.scaa.org/

Specialty Coffee Retailer: http://www.specialty-coffee.com

Roast Magazine: http://www.roastmagazine.com/

The National Coffee Association: http://www.ncausa.org

Fair Trade USA: http://www.fairtradeusa.org

Coffee Talk: http://coffeetalk.com

Description of the market:

The market for green coffee beans, in terms of types and quantity of beans available as well as price per pound, fluctuates, sometimes wildly, because of conditions on coffee farms (weather, pests, diseases, etc.), labor and political issues, and other factors inherent in the growing, trading, import and sale of coffee beans.

Specialty coffee roasters include owners of small business (coffee shops) and mega-corporations like

Nestle, J. M. Smucker (Folgers, Dunkin’ Donuts), Starbucks, Caribou Coffee, and McDonald’s. The large corporations, in the territorial battle for market share, often create and market new versions of their roasts, varying from very dark (e. g. “Charbucks”) to very light. Consumer tastes have changed over the past two years from a preference for very dark roasts with a bitter edge to lighter, less bitter roasts. Some of the current changes in coffee roasting methods are being driven by a younger generation of baristas and consumers, who prefer to taste not only the type of roast, but the “nuances of the bean.” Coffee roasters must be versatile in order to meet the changing consumer preferences for type of roast and variety of coffee bean

(Demetrakakes, 2013).

The National Coffee Association (NCA) notes that “the perfect roast is a subjective choice that is sometimes determined by national preference or geographic location.”

Convenience store chains have also entered the specialty coffee market, providing both self-serve and barista options for specialty coffee drinks.

Daily Coffee News (by Roast Magazine) reports that J. M. Smucker (Folger’s, Dunkin’ Donuts) will shift the focus of its coffee production from bulk to K-cups in 2014, an indication that the market for coffee is showing a significant increase in the purchases of the K-cup model for at-home coffee brewing. For FY2013, the Folger’s K-cup product sold $290 million, compared to $25 million in bulk coffee sales (Brown, 2013).

Consumer information for roasted coffee:

Consumers of roasted coffee include businesses and individuals who buy green coffee beans for the purpose of roasting and selling to coffee vendors or through their own commercial outlets by roasting, grinding and making coffee beverages, as well as, on another level, the people who buy coffee beverages either to prepare at home or from coffee houses, convenience stores, and other businesses.

Most coffee roasters are importing green beans from the relatively few regions globally that grow the beans, where the climate is suitable. Some roasters purposefully buy from countries with low GDPs in order to assist the people living there and ensure they are paid a fair wage (e.g. Haiti, Thailand, Vietnam, Indonesia), reflecting the socially conscious attitudes of many importers and buyers. Many commercial coffee roasters prefer to roast their own beans because they have complete control over the “sourcing” of the coffee beans. If a coffee beverage vendor buys beans roasted by another entity, the provenance and quality cannot be guaranteed (Groot, 2013).

Consumers of coffee are often “foodies,” who regard coffee brewed from premium roasted coffee beans as an affordable luxury. They also see health benefits in drinking coffee because it contains anti- oxidants. Studies suggest that drinking coffee can prolong life and lower the risk of developing Parkinson’s and Alzheimer’s disease.

One spokesman describes coffee roasting, brewing and drinking as part of current pop culture.

Coffee drinkers in 2013 are more educated about what they are drinking; “they know where it’s grown and how it’s roasted.” Coffee consumers appreciate the “town square” nature of specialty coffee shops and often use the spaces for meetings with friends and for business, as well as personal spaces for reading or doing work via a digital device. Outside of coffee houses, individual coffee drinkers have become their own baristas, buying increasingly sophisticated grinding and brewing mechanisms for their homes. Recent statistics from the National Coffee Association show that the percentage of Hispanic American coffee drinkers has increased, while the younger generation of Americans is drinking less coffee, an example of how the demographics of coffee drinkers change over time. (USA Today, 2013.)

The Convenience Store Decisions issue from March 1, 2013 details a “profile of today’s coffee customer,” based on the 2012 National Coffee Drinking Study from the National Coffee Association (NCA).

The study notes that 40% of 18-24 year olds are drinking coffee each day, which is an increase of 9%, from

31% for this age group in 2009. The study also shows that 54% of adults age 25-39 drink coffee each day, an increase from 44% in 2011. The study also tracked reasons why respondents bought coffee, and according to answers received, 29% of the 18-39 age group “felt better about their financial situation,” but this reason was not consistent through the other age groups surveyed. The study found that overall, 75% of U. S. adults drink coffee, and 58% reported drinking coffee daily. Coffee drinkers outnumber tea drinkers 183 million to 173.5 million. The 2012 study reported strong increases in demand for specialty coffee drinks, such as Macchiatos, which increased in popularity by 50% since 2007. Coffee consumers expect to be able to personalize their coffee drinks, becoming “very particular” about how they want their coffee (Convenience Store Decisions,

2013).

The National Coffee Association reported further details about who purchases coffee and what types of coffee they seem to prefer. Their 2012 report shows that 46% of all cups of coffee consumed in the U. S. in

2012 were either “traditional coffee-gourmet” (NCA’s description for premium coffee) or espresso-based beverages (including cappuccinos, lattes, macchiatos, and café mochas), up from 37% in 2011. They identified that consumers of premium brews and espresso-based coffees tend to “skew younger”, mainly in the 25-30 year-old age group. From 2002 to 2012, the number of 18-24 year-olds who reported drinking coffee sometime within a two-week period rose from 25% to 39%. The mean age at which consumers start drinking coffee is 19; consumers between the ages of 18-24 who drink coffee tend to drink 2.4 cups per day on average. Younger consumers are much more likely than older ones to buy coffee prepared outside the home, and while traveling or commuting. The NCA also found that 74% of Hispanic-Americans drink coffee daily, 12% more than other Americans; this generalizes across all the age groups of Hispanic-Americans. NCA also reports that 46% of Hispanic-Americans drink gourmet coffee daily versus 29% for non-Hispanic. The

NCA 2013 consumer trends report also showed that the numbers of American adults owning single-cup brewing systems is 12 percent, while 81% are aware of them. This trend is having a huge effect on how coffee is being packaged and marketed (Odesser-Torpey, 2013).

References:

All Business (2007). Roasted coffee: Background and development. Retrieved from http://web.archive.org/web/20071106053159/http://www.allbusiness.com/food-kindred- products/miscellaneous-food-preparations/3779280-4.html Brown, N. (2013). J.M. Smucker ditching bulk coffee in favor of k-cups and new brands. Roast Magazine. Retrieved from http://dailycoffeenews.com/2013/06/07/j-m-smucker-ditching-bulk-coffee-in- favor-of-k-cups-and-new-brands/ Convenience Store Decisions (2013). Demand for coffee soars. Convenience Store Decisions. Retrieved from http://web.ebscohost.com.proxy.lib.utk.edu:90/ehost/pdfviewer/pdfviewer?sid=e43d779b-04fc- 4152-be9d-84f3727c1118%40sessionmgr12&vid=20&hid=28 Demetrakakes, P. (2012). Roasting palettes for all palates: darkness profiles, prices and supply concerns are some of the issues facing roasters. Specialty Coffee Retailer. Retrieved from http://web.ebscohost.com.proxy.lib.utk.edu:90/ehost/pdfviewer/pdfviewer?sid=e43d779b-04fc- 4152-be9d-84f3727c1118%40sessionmgr12&vid=12&hid=28 Global Exchange Organization (2011). Coffee in the global economy. Retrieved from www.globalexchange.org/fairtrade/coffee/faq. Groot, J. (2013). Finding and roasting the best coffee. Specialty Coffee Retailer. Retrieved from http://web.ebscohost.com.proxy.lib.utk.edu:90/ehost/pdfviewer/pdfviewer?sid=1cc44cd6-b718- 4ca5-8791-048350613784%40sessionmgr10&vid=5&hid=26 Hemler, A. (2009). Coffee chronicles: Coffee's history in America, a short primer. Serious Eats. Retrieved from http://newyork.seriouseats.com/2009/11/coffee-chronicles-coffee-in-america-new-amsterdam- market-starbucks.html Highbeam Business (2013). Roasted coffee. Retrieved from http://business.highbeam.com/industry- reports/food/roasted-coffee Kaczanowska, A. (2012). Coffee Production in the U.S. Retrieved from http://clients1.ibisworld.com.proxy.lib.utk.edu:90/reports/us/industry/default.aspx?entid=272 LaPorte, N. (2013). Coffee’s economics, rewritten by farmers. The New York Times. Retrieved from http://www.nytimes.com/2013/03/17/business/coffees-economics-rewritten-by- farmers.html?pagewanted=all&_r=1& National Coffee Association (2013). All About Coffee. Retrieved from http://www.ncausa.org/i4a/pages/index.cfm?pageid=30 Odesser-Torpey, M. (2013). Brewing an upscale coffee strategy. Convenience Store Decisions. Retrieved from http://web.ebscohost.com.proxy.lib.utk.edu:90/ehost/pdfviewer/pdfviewer?sid=e43d779b-04fc- 4152-be9d-84f3727c1118%40sessionmgr12&vid=22&hid=28 Specialty Coffee Association of America (2012). Specialty coffee facts & figures. Retrieved from http://www.scaa.org/PDF/resources/facts-and-figures.pdf USA Today (2013). Coffee grinds fuel for the nation: gourmet brews, new gadgets jolt sales for the $30 billion industry. USA Today. Retrieved from http://www.usatoday.com/story/money/business/2013/04/09/coffee-mania/2069335/