How is the economy impacting coffee sales

October 19, 2009
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Coffee, anyone? It is a question asked as easily as “How are you?” The question to ponder is: Are people still buying their favorite coffee during this dismal economy?

The coffee industry has certainly had its boom times in recent years. Coffee houses have been popping up throughout the U.S. The National Coffee Association — established in 1911 and the only trade association that serves all segments of the U.S. coffee industry — accounts for 90 percent of the U.S. coffee commerce. It provides a wide array of services and focuses on market and scientific research. Its core purpose is to champion the well-being of the U.S. coffee industry.

As recently as March, Robert Nelson, NCA president and CEO, stated: “Consumers all see coffee as an integral part of their everyday lives. Even if economic conditions cause some to alter their coffee choices, they nonetheless continue to enjoy coffee at levels very much on par with recent years.”

The coffee industry has proved resilient as evidenced by new data from the NCA’s 2009 National Coffee Drinking Trends market research survey conducted in March. Daily consumption remained consistent in 2009 with 54 percent of the overall adult population partaking. This is on par with the 2008 figure. While the numbers among adults held steady, a small number of less frequent coffee drinkers fell by 3 percent. Does age make a difference? The pendulum that shifted at the start of the recession has steadied for young adults (18-24), proving that lifestyle changes have become ingrained enough to be maintained, even in a difficult economy, with this group.

With the “coffee wars” heating up between Starbucks and McDonald’s, coupled with the poor economy, I thought I would research and find out how our local coffee/tea houses are surviving.

The Grand Rapids area has just fewer than 100 coffee shops, excluding restaurants, fast foods and gas stations. Long popular in Europe and on the West and East coasts of the U.S., the real influx in coffeehouses here has a history of 15 to 20 years. A typical coffee/tea house is small and features hot and cold coffees drinks and flavored teas, plus a variety of desserts, muffins and bagels, and sometimes even sandwiches. The customer service and quality of the brew are paramount to a return visit. 

In addition to multiple Starbucks and Biggby Coffee shops, and local establishments such as Bagel Beanery, Kava House and Schuil Coffee and Tea Shoppe, there are coffee shops in retail stores such as Target, Family Fare, D&W and Meijer. Lake Michigan Credit Union has opened a branch on Michigan Street in the “Medical Mile” that features a coffee shop called The Perk. Even McDonald’s is competing to take its share of the growing market. This past summer the company offered a free iced or hot mocha every Monday, one of the largest sampling incentives the company has taken on.

Is this industry growing? Carolyn Cui from the Associated Press reports: “Thrifty coffee drinkers are increasingly brewing their own cups of Joe.” In the March survey by the NCA, 80 percent of U.S. coffee drinkers responding said they made coffee at home, up from 75 percent in 2008. Global coffee consumption rose 1.2 percent and tea consumption rose 4.8 percent in 2008. The demand saw an increase of 7.3 percent in cost to the coffee shops.

McDonald’s has seen an increase in its core business as one might expect during this poor economy. It now also sees an opportunity to increase its flavored coffee business. It appears to be a two-pronged strategy that includes price and media hype. Price is easy — they are the cheapest. Media hype has worked in that the news media has declared that a “coffee/tea war” exists between McDonald’s and Starbucks. This elevates the quality of McDonald’s brew in the eye of the consumer to be of equal value and/or quality to Starbucks. 

Starbucks’ response was to launch a multi-million dollar campaign that speaks to the high quality of its product. “We don’t want the public to be misled that all coffee is equal, because it’s not,” Starbuck’s Chief Executive Howard Schultz said. It will also cut the price of its “Grande” iced coffee 45 cents in some markets, putting the cost below $2. Starbucks has already seen profits drop due to this economy. It has cut costs by closing stores, laying off employees, renegotiating rents, reducing the number of bakery suppliers and making sure stores run more efficiently. In January, Starbucks announced plans to lay off another 6,700 employees and close 300 more stores. In 2008, it closed 600 stores.

McDonald’s may indeed attract new coffee customers with its lower prices, but here will its flavored coffee business be when the economy improves? How then will this venture affect its core business?

An article in The Wall Street Journal’s June 17, 2009, issue stated that Starbucks was making changes that included the way it grinds and brews coffee, with the goal to win back customers during the weak economy. To combat its lower-priced competitors, which also include 7-Eleven stores, Starbucks began an advertising campaign warning consumers: “Beware of a cheaper cup of coffee. It comes with a price.”

To survive in this economy, coffee houses must tighten their belts and weather the storm. They must lower costs, but still maintain a high-quality product and good service.

My favorite home coffee brew comes from locally owned Schuil Coffee Co. I visited the company and chatted with its owner, Greta Schuil. Greta’s father, Garry Schuil, started the company in 1981 as the first specialty roaster in Michigan. The company is primarily a wholesaler selling to grocery stores, restaurants, offices and coffee houses. There also is a retail store in front of the manufacturing facility on 29th Street. I have shopped there for more than 20 years. The original company philosophy is still in place: Offer the highest quality and freshest coffee and sell it quickly at a good price. Garry passed away last year, and his daughter has been at the helm of the business for quite some time.

Many who travel to Grand Rapids from other states and countries visit the store. Why? Greta cited the company’s green coffee products, its commitment to purchasing the best quality beans, its clean roasting equipment, excellent customer service, well-informed employees, its testing of flavored coffees and its long history. When Garry Schuil started the business, there weren’t any coffee shops in town. His business concept was truly innovative.

In light of the poor economy, Greta said that a year ago she made changes in her marketing strategy that included: a third size (small) of cold coffee drinks to offer customers a savings; mini-baked goods (less expensive and fewer calories); and the introduction of such items as tea cups, coffee mugs and silver spoons. Schuil also offered new and interesting tea options with better health benefits. The next change will be to add a French pastry chef. “We know what we’re doing,” she said, and I would have to agree.

Maria Landon is an affiliate instructor at Grand Valley State University’s Seidman College of Business.

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