Cold War: Coca-Cola and Dunkin’ Take Aim at RTD Coffee

2017 is shaping up to be the year in which Coca-Cola wakes up and smells the coffee.

The world’s largest beverage company is not so much stepping into the nearly $2 billion dollar RTD coffee segment as they are diving in full force with an ambitious multi-brand strategy aimed at capturing the all-important millennial consumer base, including a high-profile partnership with retail coffee powerhouse Dunkin’ Donuts that is being positioned as direct competition to products from the Starbucks/PepsiCo alliance.

Coke’s plans exemplify a pair of trends within the category: retailers moving successful products from stores to conventional CPG channels, and a growing thirst for iced coffee beverages, specifically cold brew, among millennials.

According to statistics from market research firm Mintel, cold coffee products are growing fastest in retail, with nearly twice as many millennials, defined as individuals of ages 18-34, drinking iced coffee than those in the 34-54 age range. RTD coffee is now growing faster than in foodservice, with a 69 percent consumption rate amongst millennials.

Cold brew has been a major driver within the segment, growing 338.9 percent from 2010 to 2015. According to research provided by Mintel, 28 percent of U.S. adults consume cold brew coffee as of June 2015. Amongst millennials, that rises to 48 percent, with another 48 percent saying that they have not tried cold brew but are interested in doing so in the future.

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While smaller coffee operations were early adopters of cold brew, major retailers are only recently joining the fray. Starbucks launched cold brew coffee in its 2,800 retail locations last year, followed by a 400 store launch in Peet’s Coffee and Tea. The former also released a bottled RTD version this summer, while Peet’s debuted a three SKU line of packaged cold brew offerings in July.

In October, Dunkin’ Brands CEO Nigel Travis told the Associated Press that the company’s cold brew coffee, which debuted in June, was proving particularly popular with millennials and called it Dunkin’s most successful product launch since 2000. The company credited iced coffee for a 2 percent increase in U.S. stores open last year.

On September 29, also known as National Coffee Day, Coca-Cola announced its entrance into the arena with an agreement with Dunkin Donuts to produce, market and distribute a line of bottled RTD iced coffees that will debut in 2017. All four SKUs — Original, Mocha, French Vanilla and Espresso — will be packaged in 13.7 oz. PET bottles and made with high quality Arabica coffee blends along with milk and sugar, offering a sweeter taste profile similar to the popular Starbucks Frappuccino line,

“This is a big bet for us, and we’re confident we have the right strategy in place to capture the tremendous opportunity we see ahead,” said Geoff Henry, vice president of coffee and tea at Coca-Cola North America, in an interview with BevNET. “As the leader in the hot and iced coffee categories in the U.S., Dunkin’ Donuts RTD coffee is a unique, strong brand with a loyal following of fans who will be excited for new offerings [in the category].”

Henry also said that the product line is designed to match what customers currently drink in Dunkin’ restaurants. “Dunkin’ RTD coffee will be marketed to the general population as a rich, smooth RTD coffee beverage that can be enjoyed throughout the day,” he said.

By expanding the brand’s penetration into conventional groceries and convenience stores, Dunkin’ is solidifying its position as an overall leader in the coffee category. But even in partnering with the world’s largest beverage company, the brand will face the daunting challenge of knocking Starbucks from its perch at the top of the RTD coffee market. The PepsiCo/Starbucks North American Coffee Partnership, which has been selling bottled products like Starbucks Frappuccino and Doubleshot since 1994, holds a 97 percent share of the category. Starbucks cited high income from the Partnership as a primary driver of higher operating margins in its Q4 2016 earnings report.

Nicole Regan Miller, a managing director and senior research analyst at Piper Jaffray who covers Starbucks, said that Dunkin’s management structure has made its ability to catch up with its rival in the RTD category more challenging. As part of the agreement, Coca-Cola will pay Dunkin’ a fee that will be divided between the corporation and the individual franchisees that operate its retail stores in order to cover potential sales lost to bottled products.

“The reason that Dunkin’s time frame is different is its operating model is different,” Miller told BevNET. “With a 100 percent franchise model, there’s a lot more things that have to be worked out. That is your partner that you have to go and promote to them how it’s not going to cannibalize anything they are doing and that they work hard for day in and day out in the stores they are running.”

Sean Naughton, a senior research analyst in the consumer sector at Piper Jaffray, said Dunkin’s strong brand loyalty would translate well into the RTD market.

“Another brand with high affinity with consumers, coming in there with backing from Coke, I think is going to be mildly disruptive,” Naughton said. “Dunkin’ clearly has a very strong brand. Starbucks is really the 800 lb. gorilla in that particular segment, but I think Dunkin could have an impact.”

The partnership will, however, not include a RTD version of one of Dunkin’s most in-demand menu items: cold brew.

Coke has plans to release its own RTD cold brew, along with a line of tea lattes, through its Gold Peak brand in 2017. The Gold Peak cold brew line will be made with real cream and sugar and available in two SKUs, Salted Caramel and Almond Toffee. Henry said the tea lattes, available in Chai Latte and Vanilla Chai Latte SKUs, were inspired by company research showing millennial consumers were seeking more indulgent tea offerings.

3Both Gold Peak products will be available in 13.7 oz. PET bottles. They will also launch in re-sealable packaging in early 2017 for sale in conventional grocery and convenience store channels, and future food service components are being explored for each.

The developments within the Dunkin’ Donuts and Gold Peak lines could have a knock-on effect on Coke’s existing RTD coffee product illy issimo, a joint venture with Italian coffee specialist illycaffe S.p.A. launched in 2009. Four of the five SKUs — Caffe, Latte Macchiato, Caffe Macchiato, and Cappuccino — contain milk and sugar.

When asked about creating distinction between Coke’s coffee brands, Henry told BevNET: “Each of these brands has its own unique taste and identity, so we expect minimal overlap or cannibalization. Each brand plays an important role in our strategy to offer a variety of great-tasting options and helps the Company become a major player in a beverage category that continues to rise in popularity.”


THE BULLETPROOF CHILDREN ARE COMING

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When Silicon Valley entrepreneur and bio-hacker Dave Asprey first posted his recipe for Bulletproof Coffee in 2009, it caught the interest of a few narrow demographics, mainly fitness enthusiasts or fellow tech-industry power players like Asprey.

Seven years later, a new generation of entrepreneurs and brands have begun building the niche product into a legitimate RTD coffee sub-category, each taking different approaches towards tweaking Asprey’s original formula and expanding the drink’s customer base.

Asprey’s original formulation is a blend of hot coffee, butter from grass-fed cows, and coconut oil, which contains medium-chain triglycerides (MCT), a form of saturated fatty acid that purportedly improves cognitive functioning, uplifts mood and can help the body burn fat.

In subsequent years the Bulletproof brand has broadened its direct-to consumer offerings to include coffee beans, add-ons like “Brain Octane MCT Oil,” XCT Oil, and other products, as well as a retail coffee shop in Santa Monica. Last year Bulletproof introduced an enhanced water line called FATwater, which combines water with small amounts of XCT Oil.

Thus far, Bulletproof has not produced any RTD coffee offerings, leaving a new wave of brands seeking to fill that space. But before that can occur, coffee producers still need to bridge the gap in consumers’ understanding of the product.

Bulletproof-style coffees were one of the first items added to the menu when Naomi Seifter opened Blue Northern Cafe in Austin, Texas in 2013. She has witnessed first-hand the initially slow process of educating consumers on exactly what the product is and its benefits. It is now the cafe’s bestselling item, and Seifert’s confidence in the category’s potential led to Blue Northern producing a three-SKU RTD 10 oz. bottled butter coffee that will launch in Whole Foods in spring 2017.

“I was expecting people to ‘get it’ right away, but it was totally the opposite,” said Seifter, who uses Bulletproof brand MCT oil at the cafe. “We had to sit there and convince people why they should try it and what the experience will be like. It took about a year of us doing that every single day with every customer to convince them before they would try.”

Romy Raad and Natalie Neumann, co-founders of Brooklyn-based Metabrew, stumbled on Asprey’s concept while doing research for a thesis paper on how food can enhance performance and productivity. They adopted the complete Bulletproof diet for several months and were impressed with the results. To create their own formula, the pair added organic raw cacao, swapped butter for organic raw cashews, and lowered the caffeine content to make a lighter, easier-to-digest beverage.

“The amount of caffeine in an entire bottle is only 53mg, which is like a cup of tea,” Raad told BevNET. “We added cashews because they make the flavor much nicer. There’s no buttery aftertaste or smell. It also adds creaminess. People are pleasantly surprised that the drink is light.”

Califia Farms recently entered the category with Full Shot, an 10.5 oz. SKU of MCT oil-infused cold brew coffee with almond milk and coconut cream. In an interview with BevNET, Califia founder and CEO Greg Steltenpohl said the company’s interest in Bulletproof-style coffees was sparked after several major national food retailers approached the brand. “[The retailers] wanted to have a trusted brand to address the category,” Steltenpohl said. “There are a lot of new players, and you’re not always sure about the background and level of nutritional integrity [with them].”

Meanwhile, Shari Leidich, co-founder of natural food company Two Moms in the Raw, is aiming to disrupt the creamer industry with KnowBrainer, an MCT oil-infused coffee creamer. Leidich told BevNET that the product allows butter coffee drinkers to exercise portion control. Each 30g packet contains half a teaspoon of grass fed butter.

“If you are going to have that morning coffee, why not get something amazing in return,” said Leidich. “Why not get all these things? For me, I feel like I’m making this accessible to everyone.”

As consumers continue to learn about butter and MCT oil-infused products, its nutritional benefits will likely be a key point of discussion. The high saturated fat content in such products varies widely — ranging anywhere from 3.5g (16 percent of daily value) to 17g (85 percent DV) — as do calories and caffeine.

Steltenpohl underscored the importance of backing the product with solid science.

“The nutritional benefits have some guard rails around them,” said Steltenpohl. “But the fact that we have a very senior food scientist on board who has a lot of expertise in the area gave us confidence that we could approach it in the most sensible way.”

Steltenpohl pointed out that one area of concern was how everyday consumers would respond to a coffee-based ketogenic beverage. One of the goals with Full Shot, he said, was to have a saturated fat content lower than 20 percent of the recommended daily allowance. Full Shot also does not contain butter.

“We certainly could have just added the same amount of pure MCT oil as other people, but we felt the lack of public understanding on the ramifications of large amounts of saturated fat without exercise would not be beneficial to people’s general health,” said Steltenpohl.

There have been more than a few voices raising skepticism over Bulletproof-style coffee’s health benefits. As a meal replacement, for example, Bulletproof-style coffee provides almost no nutritional value and just one gram of protein. And while nutritionists recognize that a “reasonable” amount of saturated fat is fine, consuming nearly the total recommended daily value in one cup can be harmful in the absence of an overall balanced, nutrient-rich diet and regular exercise.

Asprey himself has also been scrutinized for some of his claims, including the role of mycotoxins, a potentially toxic form of mold that can develop in coffee beans and cause health problems if ingested in large amounts. Asprey has said that that he has developed a proprietary process that dramatically reduces the presence of “inflammation-causing and performance-robbing” mold and bacteria in the Upgraded Coffee sold on his website, yet medical studies suggest that methods already used by coffee producers, such as wet processing, reduces mycotoxins considerably below dangerous levels.

The Bulletproof website contains a disclaimer stating that none of the information on the site has been evaluated by the U.S. Food and Drug Administration (FDA).

Leidich contends that changing attitudes towards saturated fats will ultimately lead a broader audience to butter and MCT oil-infused coffees, and product development continues apace. Each packet of KnowBrainer contains 200 calories and 16g of saturated fat, equivalent to 80 percent of the recommended daily value. The creamer comes in a nine-count caddy for groceries and an 18-count caddy for use at coffee bars.

“Originally we thought every coffee shop would want this, but a lot of shops want to make it themselves” said Leidich. “We are getting lots of orders from coffee shops but also from chains.I think they will look at us to possibly use in their own offerings, rather than doing something on their own.I think the big companies are going after starts ups and they are going to support companies like that.”

Yet to truly scale up, butter and MCT oil-based coffees will have to expand their appeal beyond health conscious and high-productivity audiences.

To accomplish that, brands are focusing on product demos at fitness centers and yoga studios, betting that once consumers try their product, they will be able to feel the difference between it and other coffee and energy drink alternatives. More brands are emerging, and shops and home consumers continue to try out their own variations.

“It’s a niche market, but a very big niche market,” said Raad. “There’s a lot of companies that have healthy functional beverages, and that helps a lot with customer education. The more brands there are the more people are exposed to it.”