Discounter Gains and Single-Serve Drive Private Label Coffee
BY Howard Telford – Senior Beverages Analyst
According to Euromonitor International’s latest estimates, private label accounts for about 10% of total global coffee volume. Private label share of the coffee market understandably rose over 2005-2012, during the worst of the economic downturn, but slipped slightly over the last two years of relative recovery. Private label coffee is still primarily a developed market option, sustained in large part by value priced modern retailers. Store-brand coffee has a negligible presence in Asia and Latin America, but a significant impact in Western Europe, where private label coffee accounted for 26% of total market volume in 2014, up from 22% in 2005.
This regional variance highlights several important factors behind the success of private label coffee: a growing, modern, discount oriented retail environment and a consumer preference for fresh, rather than instant coffee. Increasingly, a preference for pod based, single-serve coffee at affordable price points could generate even more momentum in private label. The rise of premium supermarket chains, like Whole Foods in the US, is potentially another factor influencing the future of private label ‘brands’ that are winning consumer acceptance.
Modern retail and hard discounters drive private label share gains
Prominent modern grocery or convenience chains are necessary to provide the scale, supplier influence and retailer brand power to develop and sustain private label options. Western Europe and North America have both the strongest supermarket/hypermarket networks and the highest penetration of private label coffee. It is no surprise that the biggest, most influential grocery retailers in the US – Kroger, Wal-Mart and Safeway – also own the largest private label coffee brands in the US. In contrast, the retail landscape in Asia, Latin America and the Middle East continues to be dominated by independent, traditional grocery retailers, typically owned by families and/or run on an individual basis, which helps to explain the limited presence of private label coffee in these regions.
The established presence (and in some cases, dominance) of no-frills, hard discounters like Aldi and Lidl in European markets has been responsible for building private label share in coffee, and across all European consumer goods to a much greater extent than in the US. In Germany, hard discounters now account for more than a third of total grocery sales. The presence of discounters, in which private label options dominate the overall shelf mix, also increases consumer acceptance of private label options in other grocery channels, placing greater pressure on supermarkets to match low prices. Because of this robust store-brand environment, Western Europe accounts for 71% of all private label coffee volume sold globally.
In Europe, Aldi and Lidl are growing their share of the grocery market and winning consumers, impacting coffee along with other beverages and packaged foods. In the UK, the figures are striking, with discounters growing their sales by 62% in constant terms between 2009 and 2014, whilst the UK grocery market overall declined by 1.6%. Even in the United States, discounters grew 4.6 times faster than hypermarkets between 2009 and 2014, whilst supermarkets actually saw their sales decline by 2.3% in constant terms. Schwartz Group, owners of Lidl, are planning a US introduction of the brand before 2018.
How will the surge of discount grocery impact the retail coffee market? Can we expect private label coffee to experience growth corresponding to the success of these economy discount chains? Despite across the board gains for discounters, low price is only one part of the value equation when it comes to shaping consumer attitudes to the coffee category. As established mass-market brands have lost share, specialty or premium coffee brands have seen gains in and outside of the grocery retail channel. Within the supermarket, the most premium brands have gained while economy branded coffees have lost share. Retailers seeking to grow their private label coffee lines must be cognizant of changing consumer tastes, and aware that a ‘bottom-dollar’ mentality alone will not sustain private label coffee.
Private label must adapt to the single-serve surge
Private label market share varies according to retail environment, but also according to the format of the coffee being sold. Interestingly, private label seems to be more accepted in fresh coffee than in instant coffee. In 2014, private label accounted for nearly double the global volume share of fresh coffee than instant coffee. The consolidated competitive landscape of instant coffee may make it difficult for private label to gain a foothold. According to Euromonitor International, Nestlé accounted for 42% of the global instant coffee market in 2014. This is in sharp contrast to the fragmented global fresh coffee industry, where leader Mondelez, accounted for just 8% of the total market. Nestlé’s dominance in instant coffee stems from the ubiquity of its Nescafé brand, which is the leading instant coffee brand in every region by a wide margin. Sectors that are dominated by power brands, such as Nescafé, are typically the hardest for private label to penetrate, since consumers’ attach a high level of trust and loyalty to these familiar brands and products. Furthermore, a retailer’s price advantage in the affordable instant coffee segment may not be significant enough to compel the consumer to trade down the shelf to a private label line.
Pods are the opportunity for private label coffee penetration
Innovation in newer single-serve formats will be integral to the continued success of private label in coffee. Coffee pods offer great opportunity for private label players to enter a high value, convenience driven area of the market. As the pod market continues to expand, the price of system compatible pods is an important differentiator for consumers, making private label pods an attractive option. Over the last three years, coffee pods accounted for 79% of the absolute value growth of private label coffee globally. While increased innovation and variety will help the potential of private label coffee to continue to grow, the penetration of fresh coffee and modern grocery formats will also remain key prerequisites of its success.
In the US and Europe, retailers are starting to introduce their own versions of coffee pods and single-serve cups that are compatible with popular branded systems and were formerly supplied only by the original manufacturers. After the expiry in September 2012 of Green Mountain Coffee Roasters’ patent for the original K-Cups for the Keurig coffee machines, many retailers introduced private label single-serve coffee cups compatible with the system, although the company’s 2014 launch of the Keurig 2.0 system was primarily intended to make private label pod alternatives more difficult for retailers to introduce. In the past year, small roasters have introduced third party coffee pods in an effort to circumvent or ‘hack’ the Keurig 2.0 DRM technology.
In Western Europe, it should come as no surprise that discounter giants are working into the coffee pod game. In October 2013, both Aldi announced the launch of their own private label pod coffee products. Aldi Sud introduced an Espressi pod based system in 2013 while Aldi Nord – the independently owned Northern Germany version of the Aldi banner – introduced Moreno coffee pods in April 2015, to be compatible with the Nespresso pod system, Europe’s leading pod based coffee brand.
The next stage of private label coffee: Can retailers add value?
In developed markets, private labels have become an essential component of consumers’ shopping baskets. According to Euromonitor’s Global Consumer Trends Survey of 2013, as a many as 89% of shoppers already buy private label products, with just 11% claiming never to do so. While private label frequently represents a lower priced alternative to branded products, the widespread consumer acceptance and increasing quality of roast blends available to retailers for private label use suggests that retailers can also compete in the higher quality, premium space for whole beans as well. Private label share gain is not simply a function of price advantage. Nowhere is this better exemplified than Whole Foods Market, a retailer with a strong reputation for quality sourcing and a brand that can resonate with its private label Allegro coffee brand. According to Euromonitor International, Whole Foods has grown to be the fifth largest supermarket in the US since 2009, and remains the place to be for many healthier, premium soft drink and hot drinks brands nationwide.
The gap in perceived quality between branded products and private labels continues to shrink, especially in markets like Western Europe and North America. To achieve parity with branded competitors, private label coffee players should continue to increase their organic and fair-trade offerings, while also adding new flavours and roasts, to keep up with increasing variety of branded coffee products. The retailing environment in the US and Europe suggests that private label is here to stay.