SPECIALPERKS

AMANDA CHATER

People are waking up to specialty coffee.

Formerly just a caffeine-laden pick-me-up, it's now the fastest-growing segment of the category, and there are no signs of it slowing down.

"It's got a very dedicated consumer group," said James Field, coffee category manager for Heinen's Fine Foods stores, Warrensville Heights, Ohio. "It's the people who A, buy wines and B, buy better wines. They tend to look for higher-end items across the store."

Starbucks introduced people to finer coffees, and they sought to replicate that at home, he said. "People want indulgence, and for not a lot more [money], you can have a great coffee experience."

Mark Inman, a board member of the Specialty Coffee Association of America (SCAA) in Long Beach, Calif., said people are turning to specialty coffee because of its superior taste. "People want things to taste good and clean and no longer want cheap coffee," he said. "Coffee has now joined the echelons of specialty cheeses and wines."

Specialty coffee encompasses high-end and organic coffees. Many of the latter are certified Fair Trade products, which are designed to ensure better working conditions and prices for farmers. Consumers are also showing more interest in shade-grown coffee (which is said to be better for biodiversity), the origin of the coffee beans and single-origin coffees, in the same way that oenophiles may look for a single-varietal wine.

It's no surprise, then, that to attract more people to this segment, many retailers are taking a page from their wine category managers by offering education and tastings.

Heinen's puts information about specialty coffee in its circular and monthly upscale magazine, Aisles. It also encourages consumers to buy Two Brothers, its upscale specialty private-label coffee, by constantly introducing new types of coffee, usually new or seasonal flavors.

Single-store West Point Market in Akron, Ohio, samples its coffee once or twice a month. A regular and a flavored coffee are usually sampled together, and the prices are reduced. "Once they taste it, they see the difference," said Rick Vernon, chief executive officer of the upscale store.

More customers are asking about the beans' country of origin and whether the coffees are a blend or single-origin, so Vernon samples blends and single-bean coffee side by side so they can taste the difference.

Wild Oats Natural Marketplace in Boulder, Colo., samples four or five coffees daily from its in-store Java Bars, where it also places shipper displays or more permanent displays. Employees are encouraged to taste them so they can describe them to shoppers.

In the coffee aisle, Wild Oats uses signage to draw attention to the products, as well as informative posters, illustrating, for example, the origin of coffee beans.

"We're trying to get people to look at coffee the way they look at wine and know coffee from Ethiopia tastes different than coffee from Guatemala," said Simon Cutts, category manager, Wild Oats.

Since specialty coffee costs more than regular, Wild Oats offers buy-one-get-one-free offers and per-package price reductions 40 weeks out of the year.

To introduce new customers to its specialty coffees, the natural/organics retailer also uses coffee gift packs, which are particularly popular around the winter holidays. For $19.99, a gift-wrapped cardboard box is filled with a packet of specialty coffee, a mug and a scoop. Or, for $39.99, customers receive a fancy mug, two packages of coffee and a scoop in a wooden crate.

Organic coffee, like all organic products, present a merchandising question: segregation or integration?

Retailers should try and put it in both places, but if they only have space for one display, it should go in the regular coffee aisle, said Suzanne Brown, international marketing consultant for Brown Marketing Communications in Atlanta. "If I'm looking for coffee, I'm going to go to the coffee aisle first. I also think there are more merchandising opportunities there."

Jay Jacobowitz, president of natural products consulting firm Retail Insights in Brattleboro, Vt., agreed. "Retailers should stop treating organic coffee like the red-headed stepchild. They should create a sense of pride about it and put it [in the regular coffee set] where it will get the more traffic."

According to the SCAA, 15% of American adults today drink a daily cup of specialty coffee, an increase of six percentage points over 2000.

Supermarket sales reflect this increase. Folgers, the market leader in non-specialty coffee, saw sales in food, drug and mass merchandiser stores decline 7% between 2001 and 2003. Sales of Millstone, Procter & Gamble's premium brand, rose 37.5%, and Starbucks sales rose almost 23% in the same period, according to Mintel International Group in Chicago.

According to ACNielsen, sales of organic coffee increased 54% this year through Nov. 6 compared to the same period last year, while non-organic coffee sales increased just 8.5%.

The organic segment will grow as mass merchandisers start to carry more products, said Inman of the SCAA. "Wal-Mart is now the biggest seller of organic coffee in the world. If other retailers follow suit, you'll see explosive growth."

Once only drunk by health-conscious consumers, organic coffee is now popular with a wider variety of shoppers, said Steve French, managing partner at The Natural Marketing Institute in Harleysville, Pa. Perhaps there's no better evidence of this than McDonald's, which has introduced Green Mountain organic Fair Trade coffee in over 650 northeastern United States outlets.

"Grocers should be taking a lot of notice, because if McDonald's beat them to it, they're really behind on the punch," Inman said.

Vernon expects sales of organic coffee at West Point Market to remain strong, helped by the government standards for organics that have lent credibility to organic products in general.

Sales of Fair Trade/organic coffee at Wild Oats, which are merchandised in a 12-foot section that's next to or across from the regular coffee set, have been growing at a rate of 15% to 20% annually for the past three years, Cutts said. The regular coffee set, which contains only specialty coffees, is growing at a rate of 5% to 10%.

Customers at Bashas', a 153-store chain based in Chandler, Ariz., are more interested in shade-grown specialty coffee and preserving the rainforest than in Fair Trade coffee, said Paul Howland, natural choice buyer/merchandiser. This is perhaps because of skepticism that the guaranteed prices don't reach the farmer, he said. But organic coffee sales are growing rapidly, and he did not expect the trend to reverse.

As specialty coffee's popularity grows, consultants see products getting more specialized.

Brown expects that manufacturers will soon start making health claims on packages. They'll also add nutrients to coffee and seals of approval on packages, from the Specialty Coffee Association, for example, or the country of origin. "There will have to be more transparency as people will be learning more," she said.

Chasing the Out-of-Home Coffee Buyer

Single-cup brewing systems, one of the newest trends in specialty coffee, have so far failed to stimulate shoppers, retailers told SN.

They include Sara Lee's Senseo and Keurig's four systems that include the Elite B40 and the Special Edition B60. Others are manufactured by appliance makers like Black & Decker and Krups. Some of these companies also make the pods - single-serve coffee packets - which these systems require.

Manufacturers said their new products are driven by consumers' growing demand for specialty coffee and its varieties. With single-serve pods, each member of a household can drink just what he or she prefers.

Buyers tend to be people who live alone and don't want to brew an entire pot, or families whose members have varied coffee preferences, said Matt Saurage, president of Community Coffee in Baton Rouge, La., which introduced coffee pods to supermarkets this past month. Young professionals and college students are the first adapters because they highly value convenience, he said.

Retailers, however, expressed less optimism about pod-based systems. "I worry about a product that's so specific," said James Field, coffee category manager for Heinen's Fine Foods, Warrensville Heights, Ohio, referring to the fact that each machine requires a specific brand of pod.

The pods haven't been big business so far at Heinen's, he said. Wild Oats Natural Marketplace in Boulder, Colo., meanwhile, has never had a customer ask about the pods, said Simon Cutts, coffee category manager.

Upscale West Point Market in Akron, Ohio, has been selling some machines by demonstrating them when it samples coffee, said Rick Vernon, chief executive officer.

Pod systems may offer convenience, but consultants said that regardless of the price, most younger people still want to buy their coffee from Starbucks because of the social interaction it affords.

Keurig, a Wakefield, Mass.-based coffee company, introduced its pods to retail stores last year. They're sold mostly in high-end stores like Bloomingdale's and Williams-Sonoma, but Keurig hopes to introduce them to grocery stores next year.

Dave Manly, vice president of marketing at Keurig, said he expects 25% of all coffee makers sold will be single-serve within the next four years. Pods tend to be bought by higher-income consumers, and reaching this affluent consumer could boost supermarkets' bottom lines, he said.

The price of single-serve coffee machines needs to drop to $50 or less before sales of the machines and their pods start taking off, said Suzanne Brown, international marketing consultant for Brown Marketing Communications in Atlanta. Prices are currently higher than that: Home Cafe Krups costs $119.99, and Keurig's home brewing appliances range from $99.95 to $279.95, for example. Brown also said that the pods need to be standard for all machines before the category finds its feet.