Why it matters:
- The $88.9 billion U.S. coffee industry is in growth mode, fueled in part by a rising demand for specialty coffee and unique coffee-drinking experiences.
- Millennials and Gen Z are voting with their dollars for coffee businesses that tout sustainability and ethical sourcing, just as they seek out novel coffee options like creamy nitrogen-infused brews and on-the-go cold drinks such as salted caramel espresso.
- The U.S. coffee market follows a similar path to wine and craft beer, where there are inexpensive brands and products the public is willing to pay a premium for. Hence, boutique coffee brands and merchants are leaning into specialty coffees, high-end roasting and brewing systems, and experiential coffee-drinking environments to brew up growth, coffee business owners told CO—.
Coffee is a lifelong habit for many and has been for generations.
A combination of trends—including businesses’ heightened attention to how coffee beans are grown, higher quality ingredients, and the expectation that the drink offers more than taste but also an experience— is creating even more caffeinated consumers, boutique coffee businesses and industry analysts told CO—.
The trends have been percolating for some time, driving growth of the $88.9 billion U.S. coffee industry.
“Over the last couple of decades, consumers have increasingly consumed premium and specialty coffee beverages. This has occurred largely due to the influence of industry pioneer Starbucks, as well as the development of convenient, high-quality at-home brewing systems, and the emergence of specialty coffee brands across the country,” said John LeVert, a Managing Director at Solomon Partners, an investment bank based in New York City.
Solomon advises clients in over 15 industries but coffee is one his main specialties, enough that his colleagues call him “Mr. Coffee.”
The coffee category is uniquely profitable because the beverage is part of many consumers’ daily rituals, “whether that be at home, away from home, or both,” Solomon told CO—.
The sustainable factor: ‘In the coffee world, and this extends to other beverages like craft beers, the story being told has become very important to consumers’
Consumers are becoming increasingly conscious of the environmental and social impact of coffee production, according to Statista Market Insights. “They seek out brands that prioritize fair trade practices, promote sustainable farming methods, and support the livelihoods of coffee farmers. “
Indeed, sustainable practices are “a point of emphasis for consumers, especially younger consumers, and with a lot of other industries, and not just coffee,” said Ross Steinman, Ph.D., Professor at Widener University. “Consumers have a lot of options, particularly with coffee, and when we’re faced with a lot of options, we start looking at a product’s characteristics, such as their business practices, and that includes the environmental and societal impact.”
Mike Caswell, a former Starbucks executive and the CEO of Roasting Plant Coffee, which has 14 locations in the United States and London, agrees. “The younger the coffee drinker, the more important the environment is to them,” he told CO—.
“We are highly dependent on the producers to produce the highest quality coffee bean,” Caswell said, “and that alliance is directly impacted by [its sustainable business model].”
As a startup, Caswell said that Roasting Plant can’t yet invest tens of thousands of dollars into each coffee farm they work with. But its Director of Coffee Genevieve Kappler visits farms around the world in countries like Ethiopia and Guatemala, working closely with producers to deliver coffee that meets its quality standards, while also ensuring its sourcing deals benefit the local farmers.
The idea is to negotiate prices that “cover more than just survival” but support decent living standards, which incentivizes farmers to produce superior coffee, Roasting Plant’s Caswell said.
Companies like Roasting Plant are increasingly sharing with consumers what they’re doing behind the scenes to get the best coffee possible as part of their business strategy, Steinman told CO—.
“In the coffee world, and this extends to other beverages like craft beers, the story being told has become very important to consumers. We’re making our buying decisions, and we have a lot of choices. So consumers want to know the field where the coffee was produced and something about the families that grew the coffee. Those narratives guide a lot of those purchasing decisions and [often prompt] the consumer to spend more money than they intended to,” he said.
“What we’re seeing in coffee is quite similar to what we’ve seen in other categories like wine and chocolate — the democratization of interest in origin and ingredients,” said Samantha Siegal, Chief Marketing Officer of coffee brand Death Wish Coffee Co. “Part of this is inevitably about the signal of quality, but part of it likely also comes down to the way social media and return to travel have made these things far more accessible and approachable than they may previously have been.”
[Read: 3 Startups Reveal Their Roadmap for Developing and Launching a Successful Sustainable Product]
In the coffee world, and this extends to other beverages like craft beers, the story being told has become very important to consumers. We’re making our buying decisions, and we have a lot of choices.
Ross Steinman, Ph.D., Professor at Widener University
Specialty-grade coffee, like ‘This Coffee Dated Pete Davidson,’ gains ground
Specialty-grade coffee, a phrase that emerged in the 1970s, refers to coffee beans grown under optimal conditions, in which various elements of the coffee drink are graded, from appearance to aroma and acidity. A business that serves specialty-grade is offering beans that have scored 80 points or above on a 100-point scale devised by the Specialty Coffee Association.
The ratings are similar to the points system that the wine industry uses, said Ashley Vasquez, Co-founder of TBD Coffee, a Los Angeles-based online coffee company offering sustainably grown and ethically sourced beans with flavors such as Therapy in a Bag Mocha Coffee and This Coffee Dated Pete Davidson.
Vasquez started the business in 2020, right as the pandemic was going strong, with her boyfriend, Zachary Dripps, and their 10-pound dog, Marlee, who is a big part of their marketing.
“Essentially you can break [the coffee market] out into two buckets — commercial-grade and specialty-grade coffee. Specialty-grade scores highly on the points system and is top quality,” Vasquez said. She added that TBD Coffee roasts their customers’ orders after they’re placed online.
“So, you're getting coffee delivered to your mailbox that's probably about six months fresher than grabbing a bag at the grocery store,” Vasquez told CO—..
Commercial coffee is generally described by the specialty-grade coffee industry as the mass-produced coffee you’ll find in grocery stores that’s sold by the biggest brands.
“Oftentimes, flavored coffee is an intense, sugary flavor that covers up low quality commercial-grade beans,” Vasquez said. “What's starting to happen, and certainly something we're doing more and more of, is taking a specialty-grade coffee, and adding a subtle, natural flavor with no sugar or other [stuff] mixed in.”
“We're fully on the train for the new movement of flavored specialty-grade coffee,” she said.
[Read: Remote Work Presents Opportunities (and Challenges) for Suburban Restaurant Growth]
The rise of experiential coffeehouses, where customers can watch how the sausage gets made
Experiential coffeehouses gained appeal during the pandemic. Tired of being cooped up inside, people were excited to get into a coffeehouse where they could see coffee beans roasted, according to New Ground.
An experience is part of what Caswell has been after ever since launching Roasting Plant Coffee in 2007. When you order at one of its locations, you pick out your beans and get to see them shoot through a pneumatic tube via its proprietary Javabot roasting system, and within a minute they’re brewed.
Charles Bibilos, who owns family business Cherry Bean Coffee in Denver, Colorado, is also trying to give his customers an experience.
“Coffeehouses have generally moved toward a sleek, ultra-modern look in the last decade or so, but we're starting to see more places incorporate a homier, throwback coffeehouse vibe. We're part of that trend. We want to feel more like the neighborhood's living room than a pristine, shiny shop that's built for Instagram,” said Bibilos.
Millennials and Gen Z are gravitating to novel coffee-drinking taste experiences, said Solomon Partners’ LeVert, like nitro coffee, which is infused with nitrogen gas to give the drink a smooth, creamy texture.
“Younger generations are drinking more coffee than their parents, and they tend to consume coffee through extract-based drinks, such as cold brew and iced coffee,” he said. “These cold coffee options are increasingly available on menus at coffee chains, or on the shelf at stores in a ready-to-drink (RTD) format for convenient on-the-go consumption, such as Black Rifle Coffee’s RTD espresso or Super Coffee’s latté offering.”
Indeed, millennials and Gen Z inspire most coffee innovations, said Death Wish Coffee Co.’s Siegal.
Therefore, “As an industry, we need to be thinking about these consumers’ underlying needs, life situations, and expectations of products and brands to determine how we can best earn a place in their daily routines,” Siegal told CO—.
Coffee industry opportunities meet challenges from rising costs to post-pandemic traffic patterns
Just as younger generations become more discriminating over the quality of the coffee they’re consuming and keep raising the industry bar, rising costs and remote-work culture have created new challenges for coffee businesses.
“Costs just keep rising. Certain types of alternative milk, for example, cost twice as much as they did a few years ago,” Cherry Bean’s Bibilos said. Labor costs have surged, too, he said. “We're more than happy to raise our baristas' pay, but it's hard to keep our menu prices under control.”
Bibilos also said traffic patterns since the pandemic have changed how people consume his product. “Back in the day, people had the same routines, and they would stop by for coffee at the same time every day, especially in a downtown location like ours. With hybrid work, customers have different schedules from day to day, and we find that our business is less predictable. Our rushes often come at unusual times, and we're sometimes quiet at a particular time of day that was slammed before,” he said. “I think that's the new normal, for better or worse.”
Vasquez, for her part, said her company is ready for whatever the new normal looks like. “I just ran the math, and there are exactly 1 gazillion competitors in this space, something family and friends raised as a concern from the beginning,” Vasquez said. “But we're not trying to compete with every coffee company ever. We have our own niche, and that’s the audience we focus on.”
-Barbara Thau contributed to this story.
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