Coffee is a buzzing category. In the US, 67% of American adults drink coffee daily. And it’s a category that’s evolving fast with the next generation: with younger consumers driving increased interest in RTDs and new formats. The demand is clearly there: and coffee brands are responding with innovative options.
But the base of all these innovations is… coffee. And coffee prices have reached an all-time high and show no signs of abating. That creates a challenge for brands: creating and producing brands that resonate with consumers – but against an uncertain background when it comes to raw material pricing.
Keurig Dr Pepper: Looking to premiumization and innovation
Coffee makes up around a third of Keurig Dr Pepper’s sales. That’s centered around its Keurig coffee system: which gives the company a platform for innovation.
Knowing the industry faces headwinds of inflation and high coffee prices, the company has been shoring up its coffee business in the US.
It’s first step – like its competitors – has been to address pricing. But its second strategy is to expand its presence in formats and channels where it’s historically been underrepresented.
That includes an RTD coffee partnership with La Colombe, a partnership which saw retail sales growth accelerate over the last quarter. And it is also pushing further into hospitality, food service and office channel.
“We are managing the [coffee] business with two primary objectives,” said Tim Cofer, CEO, KDP, in last month’s FY2024 earnings call. “First, to preserve profit dollars and our ability to reinvest despite escalating green coffee costs. In response to this inflation, we announced pricing in Q4 that began to take effect in January and saw many competitors take similar steps.
“However, the commodity price has continued to move even higher since then, and we are evaluating all available options to offset the incremental pressure.
“These levers include driving greater productivity, optimizing mix, and may also require further pricing actions with some elasticity offset.”
The second objective is around innovation.
“We will continue to steward the single-served category through marketing, innovation, and activation in brewers and pods, while expanding our presence across total coffee occasions and solutions,” said Cofer.
“We are planning to introduce compelling new products in various formats this year, and behind the scenes, we are advancing work on more disruptive launches like Keurig Alta and K-Rounds plastic and aluminum free pods for the years to come.”
Nestle deals with commodity costs on two fronts
Coffee is an exciting category for Nestle: which boast big global bets Nescafé, Nespresso and Starbucks. In fact, coffee was one of the key drivers of growth for the company in FY2024.
Nescafe and Starbucks are performing well, and the company is seeking particular success with innovations such as cold coffee and coffee creamers.
But Nestlé must also deal with a high inflationary environment on two fronts: firstly for coffee, but also for cocoa.
In FY2024, the company saw gross profit margin decline sequentially in the second half as it saw higher commodity costs across the two categories.
And it expects to see that continue in 2025, noted Anna Manz, chief financial officer, in last month’s earnings call.
The company does have strategies in place to address that: but warns the environment is not expected to improve dramatically.
“Pricing, efficiencies and strategic revenue management actions will allow us to offset most of the absolute increase in cost of goods sold,” said Manz. “Nevertheless, we expect gross profit margin in percentage terms to be lower for 2025.”
Like KDP, the company sees innovation as key to keeping coffee thriving with innovations such as cold coffee (Nescafé Ice Roast Coffee, Nescafé cold-concentrate) and the popular North American Vertuo coffee system.
Focus on the long term potential of the coffee category
Despite the challenges, its important to remain focused on the long-term potential of the coffee category and the positive consumer dynamics.
“Coffee remains an attractive category long-term,” said Cofer of KDP. “We remain committed and bullish on long-term coffee prospects…it is a ubiquitous category. It maintains wide and passionate consumer appeal, it’s the most consumed beverage outside of water.
“We believe - even in an inflationary environment - there’s ongoing opportunity for premiumization. We think there’s an opportunity for us to have an even wider diversity of formats and channel penetration to distinct different, to attract and capitalize on different needs states.”
Cofer highlights that 2025 will be more difficult, however, when it comes to challenges such as inflation and record green coffee prices.
“We must protect our ability to invest for the long-term. We understand that with the pricing moves that we and others have made, there will be some volume elasticity trade-off. We’re willing to accept that because overall, we think we need to play the long game here.”
