Single-Serve Coffee 2.0 (Pt.1)

Demand for quality and innovation fuels growth in the coffee industry - especially at home

We’ve witnessed the growth of coffee stores over the last 30 years, the ready-to-drink (RTD) coffee boom, and more recently the explosive demand for cold brew and subscription craft coffee. Then the pandemic turned the world upside down and transformed the way we live and work forever, and with it our way of consuming coffee at home. So, it’s no surprise that single-serve coffee has taken off, leading to a new age of accelerated growth and opportunity in the coffee industry.?

The Beginning of Single-Serve Capsule Coffee

The demand for convenience, ease-of-use and affordability gave rise to the single serve coffee industry we know today. In coffee, convenience is and always will be king.

Single-serve was popularized in Europe by Nespresso in the 90’s, and here in the US by Keurig in the early 2000s. The industry exploded in the new millennium as American consumers enjoyed this new format in their offices, in hotels and then eventually at home. Although it feels like coffee capsules have been with us forever, it is in fact a relatively new format.?

Single-serve coffee solves many problems for the consumer – freshness, variety, mess-free dosing and clean up, the reduction of coffee waste, time savings and yes even cost savings. You don’t need a grinder, a separate kettle or a PhD in coffee preparation to get a basic decent cup of joe.?

?As a result, the industry has now grown beyond $7B in the US, dominated almost entirely by Keurig, whose 25+ year-old platform enjoys approximately a 90% market share. In fact, the Keurig ecosystem continues to transform the US Coffee Market and is now approaching half of all coffee retail dollars compared to all other coffee formats (whole bean coffee) sold in grocery stores.

A Bump in the Road?

Around 2015, the single-serve industry began experiencing a staleness in growth (down to low single digits) caused mainly by a lack of successful innovation and the absence of competition, but also because of a growing demand for quality. With the rise of specialty coffee shops (aka. 3rd wave or craft coffee), consumers developed a taste for good coffee, and the single-serve offering just couldn’t hold up to the standards of ever-more discerning coffee consumers.?

Capsules and brewers were also relatively expensive, with brewer durability called into question; you’d have to replace your average single-serve brewer within two years. Add to that, growing environmental concerns around single-use plastics. The inability to recycle the capsules meant that single-serve coffee was perceived as bad for the environment, barely acceptable in taste, and not much better on the quality chain than instant coffee.?

But write-off single-serve coffee at your peril, as all those negative perceptions are proving to be a thing of the past.?

A New Age of Single-Serve Coffee

2020 marked the dawn of single-serve coffee 2.0 – back to double-digit growth, innovation, adoption among high value (younger) consumers, competition, and some exciting specialty brands and roasters adopting the format. Covid has also supercharged the demand for at-home coffee consumption and single-serve is a direct beneficiary. Today 8.5 out of 10 cups of coffee consumed in America daily are consumed at-home. And while Covid was the catalyst for this change in demand, there’s no question that the repercussions will outlive the pandemic. Working dynamics have shifted irrevocably and as a result more and more businesses are closing their offices and opting for remote employees, which means more people spending more time at home - drinking specialty coffee.

Here is the shocking reality – capsule-based single-serve coffee is likely to grow 2.5x in the coming years. Today, about 35 million households in the US actively use a single-serve brewer. Soon that number is likely to be 65 million households and beyond. We’ll still be behind countries like Belgium and France in terms of household penetration, so these are very realistic growth rates and projections.

Let’s put this in perspective. For the very first time ever, in the last quarter of 2020 (Oct-Dec) sales of single-serve brewers in the US actually outpaced the sale of traditional coffee machines. More people are buying single serve machines than traditional coffee brewers for the very first time.?

In 2020 alone, Keurig sold 11 million brewers driven mainly by innovation in brewer designs, the introduction of "recyclable" k-cups (although this claim is the subject of a class action lawsuit being settled) and the focus on household penetration. Keurig’s US household penetration increased from 6% in 2011 to 25% (33 million Keurig brewers installed and actively used) in 2020.

Basic convenience, ease of use and affordability has underpinned single serve 1.0. The considerations driving the growth of single-serve 2.0 are going to be very different. With increased competition from new and exciting companies bringing in breakthrough innovations in plastic waste solutions, coffee extraction technology, and connectivity, we’re going to see a new wave of high value consumers – millennials and Gen Z — s adopt this format.

Single-serve 2.0 will continue to offer the benefits of convenience, ease of use and affordability but will increasingly offer so much more, and will fulfill far more of the needs of today’s discerning and quality focused specialty coffee consumer at home.