Coffee outlook: Demand strong despite faltering consumer confidence

There might have been a time when being in the coffee business did not require keeping on top of a multitude of fluctuating factors, be they economic, demographic, health and trend focused, but those days are long gone.

In 2023, coffee purveyors face a myriad of forces. Matthew Barry, food and beverage insights manager at Euromonitor International, a global researcher, offered an overview of the U.S. coffee outlook during a recent National Coffee Association webinar.

Matthew Barry

While the outlook contained many nuances, Barry began his presentation on a positive note, observing that U.S. retail coffee sales reached a record high at $18 billion in 2022, not including out-of-home sales.

While convenience services fall under the "out of home" portion of the coffee market as opposed to the retail segment, Barry said the overall trend remains positive since consumers continue to purchase coffee despite lower consumer confidence caused by macroeconomic factors.

"We expect to see growth continue to be pretty much low- to mid-single digits in non-inflationary terms in the coming next few years," he said.

A 'permissable' indulgence

"Coffee has been deemed a permissible indulgence product that I can spend a little bit of money on," he said. "There's a lot going on, and if I get my coffee the way I like in the morning, that makes my day so much better in a way that really, in terms of bang for buck, is disproportionate. So that's why we're seeing the coffee protected."

Coffee shops have recovered from the pandemic setback and continue to show 5% annual sales growth, which Barry considers good given a challenging macroeconomic environment, such as cost of living increases and rising inflation.

During Starbucks' Q3 earnings call last year, then CEO Howard Schultz said the company is not seeing any measurable reduction in spending or trading down, Barry noted.

On the inflation front, he cited some recent progress since the Federal Reserve has increased interest rates resulting in a slowing down of inflation.

"It's a very delicate dance they're doing trying to tamp inflation without causing the so-called hard landing, rising unemployment," he said. "They may yet pull it off. They may not; it remains to be seen."

Changing consumption habits: a double-edged sword

Changing habits in where consumers get their coffee impacts the out-of-home market — which includes convenience services — in both positive and negative ways, Barry said.

"Think about where we're consuming our coffee," he said. "We want to order it online, especially on our cell phones…And when we talk about both the ordering and the consuming, we're seeing really three adjectives keep coming up: fast, personalized, digital…We want it as fast as possible as efficiently as possible."

The need for "fast, personalized, digital" favors the rising self-service technology, Barry said.

Vending and foodservice merge

"You're seeing a merging where the coffee shop is going more like foodservice and more like vending," Barry said. "We're now seeing coffee vending becoming a really serious part of the market. At the same time, foodservice is trying to automate to deal with labor costs, as well as that consumer need for efficiency."

To illustrate his point, Barry showed a picture of a self-serve robotic coffee bar at the San Francisco Airport.

Sit-down experience continues

At the same time, there are consumers who want the traditional, sit-down coffee consumption experience.

"It's not just about the coffee, right? It's also about the experience," he said. Even among younger consumers, a "significant amount of people really want the in-person experience and are willing to sacrifice efficiency in order to get that now."

Barry referred to these opposing trends as a "spluttering" which has been going on for years: the growth of both the fast, efficient, digital segments and the human oriented slower segments.

"And I think they'll continue in 2023," he said.

Nearly all coffee category segments are showing growth.

Ready-to-drink continues to be the standout segment at retail with non-inflationary growth expected at about 5% per year going into 2037, Barry said.

The only segment not doing well is instant coffee, which Barry said is expected to decline.

Health and wellness products evolve

Health and wellness concerns continue to be important to coffee consumers, but the dominant categories within this segment are changing.

"It's interesting to see dairy-free, for example, falling," he said. "I think we're seeing new claims appear: plant-based animal-free, which better conveys what they (consumers) want to convey, rather than dairy-free weight loss.

"One thing to really keep an eye on in this year in 2023 is the emergence of animal free-dairy as a real part of the mainstream food beverage industry, because historically you have your animal-based dairy, you have your plant-based area, right? And now we have this kind of weird middle section, where it's made in precision fermentation technology, often from yeast.

"So it's not really plant-based. It's not really animal-based either. It's kind of its own thing."

"It's not that weight loss doesn't matter to people anymore," he said. "The term 'weight loss' is less important. They want to see terms like 'metabolism,' 'detox,' as the emphasis has shifted the wider culture from losing weight for weight's sake to losing weight as part of a wider healthy lifestyle."

Artificial flavors are also falling in importance as consumers are looking for ingredient claims like "organic."

Every major diet trend right now allows for black coffee, he said.

Coffee will also continue to play an important role as a function enabler due to its caffeine content. Stress continues to affect consumers, which raises the need for functional beverages.

About 43% of Gen Zers say stress anxiety has a severe impact on everyday life. There was a time when it would have been astounding to see 300 milligrams of caffeine in a coffee drink, and now there are multiple such SKUs in the market.

"There's one side of the market that just wants as much caffeine as possible," he said.

On the other hand, some people are concerned about caffeine intake, which explains the emergence of single-portion bags that when submerged in boiling water pull 80% of the caffeine out in four minutes.

Sustainability trend evolves

Sustainability also continues to be important to consumers, he said, but the types of products they are looking for to address this need are changing.

Fairtrade and organic will lose ground to "biodynamic," he said, even in a challenging inflationary environment.

All the big coffee companies and many small ones now have "net zero" strategies.

Going forward, consumers still want to spend money on coffee, but some product preferences are slowly changing and external macroeconomic factors are weighing on them.

"There's a real challenge in getting consumers to spend more, particularly at a time with very tight budgets," Barry said.

Photo: LinkedIn