Why investors should double down on coffee, America’s favorite beverage

As I think about all the investing possibilities in food and beverage, I’ve always had a beverage bias - there’s usually less complexity, generally higher margins and more consumption occasions. 

Recently, we’ve seen trends in teas, bottled water, non-dairy alternatives, and of course, juice.   But what about coffee? America’s favorite beverage?  If you’ve ever considered an investment in a beverage business, coffee has to be the best and obvious choice.

Here’s the case for investing in coffee, particularly the “at-home” coffee segment and more particularly, the single-serve category, which is going through both a resurgence as well as a change for the first time in years.  

The case for coffee

Coffee is the most enduring and largest beverage category in the US. 

Coffee is a daily needs beverage, consumed by over 62% of adults daily. In fact, it’s the No. 1 consumed beverage in America. Even a staggering 50% of young adults 18-24 drink coffee on a daily basis (and throughout the day, especially thanks to the recent popularity of cold brew). 

To get a sense of just how big the US coffee market is, consider this:

·     92 million households consume coffee every day. That’s 73% of all households. 

·     Those daily coffee drinkers are having an average of 3.2 cups per day.

·     Keurig single-serve coffee makers are being actively used in over 25 million households. (There’s another 13 million lapsed households, but that’s another story for another article.)

Coffee has been consumed for hundreds of years. What makes it such an enduring beverage?

·      It’s a daily affordable indulgence. Life can be tough, yet coffee can be a daily, affordable treat.

·     It’s the first real functional beverage. Caffeine helps reduce fatigue and increase focus

·     It offers flavor complexity. It can be distinguished in taste and quality. With over 1,200 compounds, it’s probably the most complex beverage out there.

·     It has a story. There are the farmers, and different processing methods, roast styles and so on. Hundreds of people over multiple geographies create an amazing chain of custody before coffee makes its way into our hands.

·     It’s a social beverage. Whether consumed at home, at the office or at a coffee shop, coffee brings us together, for conversation and connection.

·     It’s consistent, yet adaptable. The way we prepare coffee has changed drastically over time and across cultures, therefore always remaining relevant.

·      It’s good for you.Like all things, in moderation, of course.

For investment opportunities, take the road toward “home”.

So, coffee is big and its popular, but where are the investment opportunities?

I cut my teeth in the coffee business working at The Coffee Bean & Tea Leaf?for almost 20 years.  I was actively involved in coffee retail, wholesale and DTC.   When I became CEO in 2008, we launched drive-thru stores, RTD product, cold brew, single-serve machines and so on.  Years later, with the benefit of hindsight, as well as some venture and private equity investing experience, I have developed some clearer thinking around what part of the coffee industry really presents the largest scalable financial opportunity, with the least amount of complexity.    

No, it’s not opening a new retail chain operated by robots or serving high tech $1 coffee like Luckin (we’ve recently seen how that venture was riddled with fraudulent reporting).  It’s not investing in store roasting technology, and its certainly not about developing yet another RTD coffee product fighting for limited shelf space.

There are three main places to enjoy coffee - at work, at home, and at coffee shops or restaurants - but coffee at home is reliable, recurring, recession proof- and as we’ve unfortunately learned, pandemic resistant and resilient. 

·      Of the 62% of American adults who drink coffee daily, 80% of them do so at home. (That’s more than bottled water consumption).

·      At the beginning of 2020, at home consumption was up 2% from the prior year.  Post Covid-19, expect it to reach as high as 85-90%.

·      At home coffee consumers look for convenience, but thanks to the influence of specialty coffee, they demand better quality and great variety. As a result, traditional coffee makers and 30 year old technology doesn’t meet their needs.

According to the 2020 National Coffee Association report:

“Home brewing equipment has changed dramatically over the past five years, with Americans now 24% less likely to use a traditional drip coffee machine than they were in 2015. Meanwhile, ownership of single-cup brewers is up 50% over the past five years”

And therein lies the answer. Investors looking to get on the coffee train should think about single-serve coffee for the at-home consumer. 

Here’s why:

·     It’s the second most popular way of consuming coffee at home and enjoys very high future purchase intent.  

·     Compared to most of Europe, single-serve is significantly underpenetrated in the US.  Arguably, the current $6B industry should be $15B, based on business modeling and projections.

·     It’s an industry dominated by only two players – Keurig and Nespresso, with ~91% and ~7.5% market share, respectively. Think how Dollar Shave Club, Warby Parker and others successfully exploited entrenched industries dominated by monopolies.

·     Convenience at home never gets old. Single-serve capsule machines really do solve for the mess and difficulty of coffee preparation – while keeping coffee fresh for months.

·     In terms of coffee, water and energy usage, single-serve is more environmentally friendly than other brewing methods. Yes, there’s the BIG issue of plastic waste, but that can and has been solved with some of the latest technologies yet to be implemented.

·     It’s high margin with a razor/razor blade model, and therefore ultimate “sticky” subscription business.

Coffee Single Serve Wins

After studying the latest coffee trends and reports, and with the benefit of 20+ years’ experience in the coffee industry, I’m saying invest in Keurig, Nespresso - or better still, find the next challenger to these two businesses who have found a way to improve the taste/quality as well as the plastic waste issue. 

If you think that coffee investment opportunities are only available to large conglomerates like Nestle, JAB or even the likes of Coke, think again. There are plenty of incredible start-ups - including one that I am backing called Bruvi? that ticks all the boxes and will potentially disrupt the at-home coffee market by finally meeting the needs of the American at-home coffee drinker. 

For more information on Bruvi? or to talk coffee, reach out to me at [email protected]  

By Mel Elias, Co-Founder Bruvi?