Coffee pods boom as hot drinks cool

Coffee is injecting some much needed growth into the hot beverages category. And we’re not talking about any old cup of Joe - the pod generation is taking over as Brits demand coffee shop quality at home.

The blistering performance of roast & ground coffee - which includes sales of coffee pods - has left the rest of the market looking decidedly lukewarm. Tea is down 3.5% - or £21.5m - on volumes down 3.3%; instant coffee lost £9.8m as volumes fell 0.7%; and only price increases have maintained the value of the hot chocolate & malted drinks category, with volumes down 3.3%.

But while there are plenty of reasons to cry over spilt milk, roast & ground coffee has added £36.6m to the market this year thanks to the rise of pods. Tassimo secured the single-largest growth of the category, up £20m or 43.5% on volumes up 32.2% as its average price increased 8.5% - ahead of the 4.9% increase across the total market.

“Tassimo remains the major driver of coffee growth for [brand owner] Jacobs Douwe Egberts (JDE) and the overall category, a trend that’s likely to continue with the penetration of single-serve machines expected to hit 15% by early 2016,” says Martin Andreasen, marketing director for retail at JDE. 

The brand has focused on partnerships with UK favourites such as Costa, Kenco and Cadbury over the past year, with the likes of its Costa Vanilla Latte adding £3m to brand value. “The familiarity and variety of choice these partnerships provide to consumers have allowed us to grow significantly over the past year,” adds Andreasen.

Nescafé Dolce Gusto has also soared in value, up £15.4m as innovation focused on coffee house flavours such as Vanilla Latte Macchiato and Chococino Caramel. 

Dualit and Lavazza are also riding the pod trend, along with Taylors of Harrogate, which entered the arena in June with three single-origin Nespresso-compatible coffee pod variants. Having added more than £100m in incremental sales to the market over the past few years, Nespresso-compatible pods are attracting new players all the time, and not just brands, either: for example, last year Lidl entered the market, and just this month Spar did too. 

Yet despite the rise of pods, the roast & ground category is still only half the size of the £702.2m instant coffee market. And demand for better quality java has given instant brands the opportunity to trade consumers up.

“Trade-up is happening within instant coffee, with strong performance seen from super premium instant coffee and mixes,” says a spokesman for Nescafé owner Nestlé. “Brands like Nescafé Azera, Nescafé Café Menu and Nescafé Original In 1 are changing the way instant coffee is drunk in home and we are winning share .”

Nestle has put plenty of marketing muscle behind its instant coffees, with the Be Your Own Barista ad push for Nescafé Azera highlighting the ‘coffee shop at home’ message in instant, and Gold Blend supported in the spring with the £7m Golden Opportunities Await TV campaign. Despite such activity, Nescafé sales have fallen 3.6% on volumes down 2.4% over the past year. 

It’s a similar picture for Kenco. Though overall value sales dipped slightly - despite 2.2% volume growth - micro-ground coffee is adding value to the instant category, with Kenco Millicano contributing £11.9m, boosted also by Dark Roast 95g and the Big Tin 170g range extensions this year.

“Shoppers who purchase micro-ground coffee are paying double the price per cup than someone who purchases from the granules segment and 50% more than someone purchasing from the premium freeze-dried segment,” adds JDE’s Andreasen. In contrast, sales of stablemate Douwe Egberts rose 32.4% in value on volumes up 38.7%.

Lavazza also targeted the premium instant sector with its Prontissimo NPD, featuring two variants that both have a percentage of roast and ground coffee in the mix. 

Own label has struggled to keep up with the level of innovation and premiumisation offered by brands and has performed behind the overall market in both instant and roast & ground categories. 

In a similar fashion, everyday tea is being upstaged by premium, green, herbal and fruit teas. “Tea drinkers are expanding their repertoire, adding fruit and herbal teas into the mix,” explains Tom Blair, brand manager at Yorkshire Tea, one of the few brands to have bucked the downwards trend. Sales are up 2.1% in value on volumes up 9.1%, partly a result of investment in marketing through its Brewtopia TV push. Further investment of £6.5m is lined up for the next 12 months.

The growing pressure on everyday tea has prompted an increase in promotional activity. Yorkshire Tea, like its competitors, has had to promote hard to maintain market share this year in an already heavily promoted category. “Everyday black tea is over-promoted,” says Blair. “Intense price activity does not lead to value or penetration growth but ultimately erodes price; an unsustainable position.”

Tetley has been hit hard by this. Its average price has fallen 6.3%, leading to an 11.4% drop in value sales to £90.5m. “Promotion levels are higher than they have been in a long time - up 3.5% year on year - and we are seeing volumes rise accordingly,” says Andrew Pearl, director of customer and shopper marketing for Tetley. 

The brand may have taken a hit but Pearl remains confident that recent NPD - in the form of Tetley Super Green Teas and, more recently, Tetley Super Fruits - can help drive much-needed value back into the £579.8m category. 

“The nub of it is that promotions are needed and they are drawing shoppers back into the tea aisle,” he says. “Once there, our job is to take their interest beyond their immediate purchase to the selection of higher-value teas in the growth areas of greens, fruits and herbals.” 

PG Tips also saw further potential in green, fruit & herbal teas, expanding its range with four new lines - blackcurrant; lemon & ginger; cranberry & apple; and mint green tea in February. 

NPD is prevalent throughout the fixture. Twinings - at the vanguard of tea innovation in recent years - launched two variants inspired by tastes in British gardens; Pukka Herbs added fruit infusions; and Clipper rolled out a five-strong range of organic fruit, flower and herb infusions. 

“Enlightened retailers are giving increased space to green and herbal categories and added-value brands,” explains Teapigs co-founder Louise Cheadle. 

But with category juggernauts undercutting established players on price, the fight for shelf space is becoming fiercer as buyers look closely at their ranges. And while all hot beverages have been subject to range rationalisation, tea has arguably been hit hardest. Clipper’s range in Tesco was nearly halved while Yorkshire Tea suffered delistings of its fruit and herbal teas in Tesco and Asda.

“Enlightened retailers see the benefit of giving more space to green & herbal teas”

“The simplification, with the removal of smaller brands, has helped consumer choice and focus and the category overall,” says Tim Westwell, co-founder of Pukka Herbs. And he believes the increased focus of PG Tips and Tetley on herbal and fruit tea is a good thing. “Once consumers have entered, for whatever reason, they tend to finetune their taste buds. That’s where Pukka comes in.”

But while much of the trade is focused on growth-driving fruit & herbal teas, black tea represents the majority of the category and must not be overlooked, warns Kate Hearn, senior brand manager for PG Tips at Unilever. The brand tackled this head-on earlier this year with a revamp of its entire range. 

“[It was] the biggest pack change we’ve initiated since the introduction of the pyramid bags, designed to make the brand more distinctive and drive relevance with the aim of appealing to a younger audience and growing category value,” says Hearn. 

PG Tips also launched a range of ‘affordable’ speciality tea including Earl Grey, English Breakfast and Assam in its pyramid teabags. With an rsp of £1.99 for 40 bags, it significantly undercuts its rivals in the premium sector. 

With pods adding so much value to the coffee category, Unilever is exploring the opportunity for Nespresso-compatible tea pods too, launching a four-strong PG Tips line-up comprising caramel & vanilla black tea; green tea; peppermint; and raspberry & apple in 10-capsule packs.

The pod format has also been extended to hot chocolate, and could add value to a category struggling for volume growth, as value has remained flat. Growing penetration by encouraging new usage occasions will also help, suggests Susan Nash, trade communications manager at Mondelez, which saw a 2% decline in value of Cadbury hot chocolate. 

“Challenging perceptions of hot chocolate as simply a functional ‘warm me up’ or ‘help me to sleep’ product will be key in helping to grow the category,” she adds.

Top 10 Instant Coffee

				£m	change (£m)	change (%)
Total volume change: –0.7%			Total Category	702.2	–9.8	–1.4
			Total Own Label	70.1	–6.3	–8.3
1	1	Nescafé	Nestlé	368.8	–13.9	–3.6
2	2	Kenco	JDE	124.3	–0.7	–0.6
3	3	Douwe Egberts	JDE	66.8	16.4	32.4
4	4	Carte Noire	JDE	37.3	–3.9	–9.4
5	5	Rappor	JDE	6	–2.3	–27.7
6	6	Maxwell House	JDE	5.6	–1.2	–17.7
7	7	Percol	Food Brands	4.5	0.3	7.8
8	8	Mellow Birds	JDE	3.3	–0.4	–10.3
9	9	Clipper	Clipper Tea	2.3	0.2	10.3
10	10	Cafédirect	Cafédirect	2.1	0	–0.2

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Top 10 Roast & ground coffee

				£m	change (£m)	change (%)
Total volume change: 8.3%			Total Category	305.5	36.6	13.6
			Total Own Label	65.4	–2.0	–3.0
1	1	Tassimo	JDE	66	20	43.5
2	2	Nescafé Dolce Gusto	Nestlé	53.1	15.4	40.8
3	3	Taylors Lifestyle	Taylors Of Harrogate	37.3	0.4	1
4	4	Lavazza	Lavazza	30.5	2.9	10.6
5	8	Cafédirect	Cafédirect	7.9	1.6	24.8
6	6	Illy	Illycaffè	6.9	–0.0	0
7	5	Douwe Egberts	JDE	6	–0.9	–13.2
8	7	Costa	JDE	5.8	–0.6	–9.6
9	11	Taylors Origins	Taylors Of Harrogate	4.2	0.2	4.8
10	9	Percol	Food Brands	3.1	–1.1	–26.6

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Top 10 Tea

				£m	change (£m)	change (%)
Total volume change: –3.5%			Total Category	579.8	–21.0	–3.5
			Total Own Label	85.4	–2.8	–3.1
1	1	PG Tips	Unilever	132.5	–15.9	–10.7
2	2	Twinings	ABF	110	2.8	2.6
3	3	Tetley	Tata Global Beverages	90.5	–11.6	–11.4
4	4	Yorkshire	Taylors Tea	78.5	1.6	2.1
5	5	Typhoo	Apeejay	20.7	1.1	5.8
6	6	Clipper	Clipper Tea	14.5	–0.4	–2.9
7	7	Pukka	Pukka Herbs	11.2	2.8	32.8
8	9	Teapigs	Teapigs	5.7	1.3	29
9	8	Scottish Blend	Unilever	4.4	–0.4	–8.6
10	12	Tick Tock	Wistbray	3.2	0.3	10.3

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Top 10 Chocolate and malted drinks

				£m	change (£m)	change (%)
Total volume change: –3.3%			Total Category	143.9	0	0
			Total Own Label	13.9	–1.7	11
1	1	Cadbury	Mondelez	31.2	–0.6	–2.0
2	2	Horlicks	GlaxoSmithKline	18	–0.9	–5.0
3	3	Options	R Twining	12.7	–0.3	–2.3
4	5	Ovaltine	R Twining	11	–0.3	–3.0
5	4	Cadbury Highlights	Mondelez	9.7	–1.7	–14.7
6	6	Cadbury Cocoa	Mondelez	8.1	–0.3	–3.0
7	7	Galaxy	Aimia	7.1	0.3	4.6
8	9	Tassimo	JDE	6.5	2.5	61.4
9	10	Nescafé	Nestlé	5.8	1.7	43.3
10	8	Green & Black’s	Mondelez	4.2	–0.2	–4.2

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