• by Karlene Lukovitz  @KLmarketdaily, July 21, 2008

Even an increasingly scary economy and soaring coffee prices are not going to make most Americans consider cold-turkey withdrawal from their beloved coffeehouses or favorite fast-food brew purveyors.

Still, small behavior changes a major large impact on the coffee market, and current economic pressures are expected to drive consumers to brew more of their premium coffee at home and/or choose less extravagant out-of-home coffees. The result: While the food service sector will maintain its lion's share of coffee dollars, retail-purchased coffee's growth rate will slightly outpace food service's over the next five years.

That's one trend among many now percolating within the coffee market, according to the latest study on the sector from Packaged Foods (PF), "Coffee in the U.S.: Retail, Foodservice and Consumer Trends."

According to PF, total food service and retail coffee sales, driven in no small part by rising prices, rose 11% to $43.9 billion last year. During 2003-07, total sales experienced compound annual growth of 9.7%, outperforming PF's February '06 prediction of 6.9% for the 2005 to 2010 period.

Although three out of four cups of coffee are already made at home, according to the National Coffee Association, food service's starkly higher price to the consumer has long meant that out-of-home dollar sales dwarf retail's.

And until last year, food service was increasing its share. Food service-sold coffee sales grew at a compound annual rate of 10.4% between 2003 and 2007, to exceed $38 billion and account for 87% of the total market-up from 84.8% in 2003.

During the same period, retail coffee brands had a CAGR of just 5.3%. Last year, retail's nearly $5.7 billion represented 13% of the total market, down from 15.2% in 2003.

But while PF projects that food service will grow by about 36% to nearly $52 billion by 2012, that means it will retain its current 87% share of a projected total of $59.4 billion, rather than continue to grow share. That's because retail sales are expected to grow a bit faster--by nearly 37%--to reach $7.8 billion and hold onto their 13% share.

Sales of packaged coffee in supermarkets, drugstores and mass merchandisers (excluding Wal-Mart) as tracked by Information Resources, Inc. (IRI) increased 5% during the 52 weeks ending April 20 to $3.6 billion. This was a slight bump in performance from packaged coffee's 4.8% increase for full-year 2007 and its 4.9% CAGR for the 2003 to 2007 period, PF points out.

In addition to economic jitters, retail coffee sales are benefiting from the growing number of premium food service-branded varieties now available at supermarkets and other mass retail outlets. Packaged coffee marketers and retailers--in a "if you can't beat 'em, join 'em" move--are increasingly combining forces with the food service leaders.

Cross-branding food service coffee brands for retail distribution has been particularly successful for Starbucks' marketing partners, PF notes. Kraft has hit brown gold with ground/whole bean Starbucks and (Starbucks-owned) Seattle's Best retail versions, and PepsiCo is cleaning up on the bottled/canned ready-to-drink side (Frappuccino, DoubleShot and Starbucks iced coffee).

More recently, quick-service coffee leader Dunkin' Donuts and Procter & Gamble have been flooding U.S. grocery stores and warehouse clubs with packaged, premium DD coffees. Meanwhile, the nation's second-largest coffeehouse chain--Minneapolis, Minn.-based Caribou Coffee--is partnering to expand its packaged beans into supermarket chains in the Northeast and Southeast, and launching a line of branded premium RTD coffees with Coca-Cola.

In addition to pushing food service-label packaged varieties, a growing number of supermarket and other retailers are installing coffeehouse-branded kiosks and coffee bars, including Starbucks, Seattle's Best and Peet's Coffee & Tea, Inc.

The report also details the competitive coffee scenario and growth-driving trends such as specialty/upscale, organic/natural, single-serve, fair trade and functional (health/wellness/energy claims) and hybrid coffee/energy drink varieties.