Category Close-Up: Coffee - Expert Analysis

Speaker 1 [00:06] Thank you so much for joining us for the first episode of our new video series, Category Close-Up. On the show, we'll bring together a group of experts from across the industry to take a deep dive into the market trends and overall business climate shaping a major food and beverage category. In conversation with analysts, investors, distributors, retail buyers, and brand leaders, we'll go beyond the headlines to examine the mechanics that are driving categories forward, from investment activity to changes in the retail landscape. To the impact of product innovation and the influence of rapidly changing consumer preferences. To kick off the series, we'll be taking a look at an established category that remains one of the most dynamic beverage types across all retail channels, and that's ready to drink coffee. The panel is going to examine how the category, including both refrigerated and shelf stable segments, is positioned to cope as the effects of the COVID-19 pandemic continue to ripple across the beverage industry and the global economy. Now following each episode of Category Close-up, we'll shift the perspective to hear directly from the brands and entrepreneurs that are actively processing these major, progressing these major categories at retail on product showcase. In the first episode, which is set to air tomorrow, uh, Taste Radio host Ray Latif and I will interview a range of RTD coffee brand leaders, each allotted 5 to 7 minutes to discuss product strategy and new product information. And now I'd like to introduce our guest for this episode. Uh, first, we're gonna start with Matthew Swenson, who's the chief product officer at Chameleon Cold Brew. Now, Matt brings expertise from soil to bottle. He's worked directly with the partner farms from across the world, from which Chameleon sources its organic fair trade coffee, all the way through to developing the ready to drink products that you'll see on store shelves around the country. Thanks for joining us, Matt. Next we have Jim Watson, senior beverage analyst at Rabobank. Now, Jim studies the big consumer and industry trends that are shaping the beverage world, looking at how each beverage segment fits into the overall drinks landscape. He has led Rabobank's research efforts in coffee and non-alcoholic beverages in North America, tracking developments from the farm level through the entire value chain, and works with clients on everything from understanding new markets to strategic planning and M&A. Next we have Julie Terazino, who's the senior category manager of shelf stable beverages at Khe Distributors. Now with over 30 years of experience in the CPG industry across roles in distribution, manufacturing, wholesaling, and marketing and beverage, Julie has been at the forefront of identifying the items, trends, and programs that drive success, including in water, coffee, tea, juice, and in functional beverages. Last but not least, we have Dan Gluck, who's the managing partner at Power Plant Ventures. Now as many in the industry watching now will know, Power Plant Ventures is a California-based private equity growth fund investing in emerging consumer plant-based food, beverage, food service, and food tech companies. The firm has backed a wide variety of growing brands, including Beyond Meat, Ripple Foods, Five Organic, Rebel, and Own, to name a few. As well as Jot Coffee, a new concentrated ultra coffee product that launched online in May, of which Dan is also a board member. Prior to joining Power Plant, Dan was the co-founder and board chairman at plant-based superfood company, Health Warrior. We got to thank the panel so much for joining us here today and really excited to get in this conversation. Now, finally and lastly, before we begin, let's just set the stage a little bit. Um, you know, despite the disruption caused by the COVID-19 pandemic, ready to drink coffee remains in a strong position. In terms of sales growth. According to the most recent data set from IRI, refrigerated ready to drink coffee has grown 24.1% year over year through August 18th of 2020, while sales of shelf stable coffee are up 4.5%. Considering what we've seen so far this year, uh, I'd like to just open it up for the panel to, to ask this question, you know, how is RTD Coffee positioned to cope with overall market changes and shifts in consumer behavior that we've seen so far this year, uh, due to COVID-19, and how is that relative to other major RTD beverage categories? Um, Jim, would you like to start?

Speaker 2 [04:18] Absolutely. Uh, so as a primarily at home beverage, this is obviously a, a great place for ready to drink coffee. Um, and I think there are a couple of ways in which it, it should be, uh, in a great place, more specifically. So one, you're gonna have people wanting to replace the coffee shop experience. So it's one thing to be able to make a black coffee at home or add a little bit of milk and sugar, but the extra flavors and textures you can get from a ready to drink coffee are often, uh, you know, much closer to what you get in a coffee shop and much harder to recreate in a number of other ways that I think is, uh, you know, gives it a real advantage. I would, uh, I would say there's one disadvantage it has as well that's worth talking about. It is generally not a pantry stocking product, so a number of other beverages, you know, you may buy a case of Coca-Cola, of flavored water, you're generally not doing that with ready to drink coffee. So I think that that's been a little bit of an impact on the sales of the category.

Speaker 1 [05:15] Julie, I'd like to, you know, ask you, from what you've seen relative to other categories, is RTD Coffee in a better position to continue growing relative to maybe some of the other categories in terms of the effects of COVID?

Speaker 3 [05:28] The category is similar to most of the other shelf stable beverages, ready to drink beverages, in, uh, as Jim said, if it's a grab and go type drink, it's a little tougher at-home market, uh, where the other categories have, some of the other categories like water, juice have big multi-serve packaging and make it a little bit stronger category to um. Survive the, the pandemic with people shopping less, um, making less frequent trips to the store, less stores they're going into. Um, but the coffee is still a, a category that people drink a lot of, and they aren't able to go to the food service places that they were going to. So, I think we are seeing some shift, uh, where initially, the ready to drink was a little bit, uh, damaged. I think it's coming back because people are saying, hey, I'm not gonna be able to get back to those coffee shops. I need to figure this out. I'm bringing uh ready to drink products home. And uh we've seen multi-serve uh increase in, um, cold brew coffee seems to really have done a, a good job. Getting into that right away. So I, I think there's, uh, they're faring fairly well.

Speaker 1 [06:48] Matt, I wonder, is, is that sort of consistent with what you've seen? Have you seen that, uh, that sort of pantry stocking is maybe a little bit more, uh, is a little bit of a different concept, um, for shoppers in this category when it comes to cold brew?

Speaker 4 [07:02] It's a little bit different, right, because as a refrigerated product, you only have a, a limited number or limited space in your at-home refrigerator. Um, but we've been seeing a lot of these same numbers that, that echo that you, you mentioned early on and, and Julie you as well where, Um, we've had a, a tremendous growth the last 3 to 6 months. Um, and where a lot of that growth is coming from is that multi-serve, ah, packaging. So our, our 32 ounce concentrate and our 1 gallon bag in a box. Um, those are, are really the true drivers of the business right now. Um, at the start of the pandemic, we had a, a huge dip in, in the convenience store channel, right, where that was just, you didn't have people filling up gas and, and you had a, a dip there. Um, but that's starting to, to stabilize and, and climb back up and scratch its way back. Um, but I will say that, the key driver is multi-serve and, and what we've seen is these, um, the consumers are really looking to, to recreate the best quality experience, um, when they're not going out to the coffee shop, but that out of home experience is just not in reach for them at the moment. Um, from a logistics standpoint, they'll, um, they'll recreate with a high quality, ah, cold brew at home.

Speaker 1 [08:14] And you know, Dan, uh, I, I, you know, you are power plant, you know, recently invested in jock Coffee, which is a very interesting concept, super concentrated, uh, kind of perfect for at-home use. Um, but, you know, as an investor, and, and Jim, you know, if you'd like to comment on this as well, I wonder, do you still view sort of cold brew as the tip of the spear driving this segment? Is that really still what, um, what consumers are looking for and what you're kind of interested in as an investor?

Speaker 5 [08:41] Yeah, I think there's a lot of excitement around uh cold brew, and particularly kind of, you know, to answer your question around sort of, you know, the, the RTD coffee relative to other um categories, I think everyone brought up some really good points, and um Matt's last point about people are still looking for premium coffee um and get that same experience. And interestingly enough, while It seems like a horrible time to launch a new business, you know, in the midst of COVID. It was almost as if Jock was built specifically for COVID, um, because their entire thesis was built around this concept of the 4th wave of coffee consumption, where high quality meets high convenience, um, kind of taking sort of from what, you know, Blue Bottle had done with 3rd wave coffee drinks. Drinking and so I think you know the whole concept around a direct to consumer model that can still give the consumer a premium coffee with that convenience and a great home experience uh is primed for growth right now. So, um, you know, and, and then, you know, similarly as, as I mentioned, we are investors in Rebel which doesn't describe themselves as as a coffee business but given that. They have several skews that are focused on that. The direct to consumer business has been taking off. It went from almost virtually nothing to, um, to, you know, a pretty meaningful number, and the concept of people building your own and larger formats for their coffee products has really proved, you know, very successful.

Speaker 2 [10:12] I'll jump in on the, the, the cold brew question you asked Marty, uh, first versus. Kind of ready to drink. It's probably worth thinking a little bit about, um, you know, I, I've often conflated the two thinking the ready to drink category is a lot like, uh, you know, heavily driven by cold brew and cold brew is a lot ready to drink, um, and they probably were, some of that probably due to to chameleon, as one of the first, uh, you know, true new ready to drink competitors to, to Starbucks coming out and, and being a cold brew. Um, but I think that, that those lines are blurring a lot now, so a ton of new drinks coming out, uh, don't necessarily have cold brew. Cold brew sold in, in coffee shops is, you know, equally a, a huge category on its own without being ready to drink. Um, but, but I did wanna think about one thing that Dan just said, and this gets into mentioning the, the convenience store weakness. Uh, so much of what's going on through COVID is about where you sell, and so, a, a lot of the new brands, I mean, especially something like Jot, uh, where it's, it's kind of primed to be, uh, an e-commerce brand is, you know, especially powerful and, and probably, uh, put some of ready to drink coffee, those, those that can do e-commerce pretty well in a, in a much better position over the last couple of months.

Speaker 5 [11:26] And if I could just follow on to that, what's interesting about the cold brew concept and particularly even more so, not, not to sort of, you know, you know, harp on this, but, you know, the, the uniqueness of a 20X concentrate makes the unit economics from, from a shipping perspective very attractive, whereas just a traditional RTD. Uh, beverage, as, as we all know, is, it's expensive to ship, you know, you know, liquids. Uh, so that's something where most beverage companies have struggled with an online format, but when you have a unique 20X concentrate where one tablespoon can make an entire cup of coffee, that creates a very attractive platform for a DTC model.

Speaker 1 [12:09] Well, you know, a lot of this, it kind of boils down or comes back to, you know, what are consumers asking for in this category? What do they want out of, out of their coffee right now? Um, and, you know, one of the, the, the clearest trends that we've seen in the, in the past couple of years has obviously been plant-based milk and, uh, specifically oat milk, um, you know, emerging as, as really a strong player in this. I wanted to throw it out there, you know, um, has Oat milk emerged as the definitive leader in terms of plant-based milks are integrated into RTDs, and, you know, based on what we've seen over the past couple of years with a lot of these launches, how much more runway for growth is there, uh, with that particular segment?

Speaker 5 [12:45] I'll simply say that uh I still think we're in the early innings for plant-based beverages to continue to grow, uh, while we've obviously seen the growth of just traditional, you know, non-dairy milks go, you know, from, you know, low single digits as a percent of milk consumption to I think we're up to 13+%. They could probably get better statistics than I can, um, and it's relatively new though for a lot of these ready to drink coffee. So I think that'll continue to, to sort of grow, but at the end of the day, um, I don't think that necessarily is as we don't really view that as what's defining innovation anymore within coffee. I think. You know, brands need to be a lot more forward thinking in terms of how they truly innovate to create a disruptive RTD coffee product, whether it's with other functional benefits which we, I think we might, you know, talk about, uh, we can get dive into that a little more, uh, or and or entirely new, uh, delivery mechanisms.

Speaker 2 [13:51] What, what's interesting about what we've seen in oat milk compared especially to other oat milks, other, other plant-based milks, um, is this is by far the most branded and, and for, for this, we could probably credit or, or blame Oatly depending on how you look at it. Um, you know, traditionally, uh, this has been a category that sat, you know, in different aisles and with a, you know, kind of a different mind space from the rest of what we would consider the, the CPG, you know, especially a startup branded world, uh, Oakley has bridged that gap, so now we kind of have a different product, especially also if you consider how they've started up through coffee. Shop, so I think it kind of changed the consumer mindset on how uh how people are looking at plant-based milk in a very positive way for the ready to drink segment. So to be able to combine a coffee with, uh, you know, a category that has much more consumer acceptance like oat milk, uh, just, you know, really drops sales even further. Yeah,

Speaker 4 [14:50] and just to jump onto that as well, I mean, I think there's still a lot of room to innovate around oat milk. I think this is kind of The tip of the spear as far as um the, the plant-based milk that consumers have bought into most to date, um, but there hasn't been a lot of innovation around the, um, the texture or, um, you know, the sourcing around oat milk. So I think there's still a little bit more of runway to, to really expand that a little bit and then layer some of that additional innovation on. Um, whether it's functional or extra caffeine or some of these, these, um, these coffee plus items that we may start to see, you know, in, in the coming months or years.

Speaker 3 [15:32] Yeah, I would, I would agree with, with Matt. Uh, where I think oatmeal oat milk has an advantage is two things that are trending in the category that I don't think they've really used to their advantage, uh, at least speaking about being, hey, I'm oat milk. I have oat milk in my product. Is, um, the functionality of oat milk, right? There's omega threes and other benefits to oat milk as well as the sustainability factor. So, um, I think talking to that a little bit more would certainly help elevate oat milk even more. Um, it's a. You know, what it, it has versus some of the others is almost allergen-free. Um, no nut issues. Uh, it's got the smooth texture. It's a little bit closer to texture of regular dairy milk than a lot of the other. Uh, plant-based milks, but there's still a lot of other plant-based milks, I think we're going to see too. I mean, oat isn't going to be the end all. It just helps bring more focus into the plant-based category. So I think we'll see avocado milks and barley milks and pistachio omega, there's still a whole lot more that'll come, and each one will add its own benefit. And for that, some consumers will find that more attractive than others.

Speaker 5 [16:50] I also think, you know, your question. Brings up another question around sort of is innovation or brand more important to to category, uh, strategy and growth and and that's something that we actually spend a lot of time on a power plants thinking about first, you know, where is the true innovation happening, uh, and you know, something that can deliver an entirely new experience in the category, but that obviously comes with with challenges, right? Um, consumers typically aren't ready to necessarily adopt, you know, entirely new. Um, you know, concepts, and, and that's really where as, as investors and consumer brands, we, we think that that's where brand can ultimately be, you know, the seemingly familiar hand that guides the consumer, you know, or the foot that, you know, keeps us in the familiar while the other steps into the unfamiliar, and so that's something that it's, it's subjective and it's hard to really understand that, but we're always looking at, uh, who are the brands that are bringing these new innovation, uh, concepts to market.

Speaker 1 [17:51] The interesting thing to me is that, uh, that, uh, oat milk really benefited a lot from discovery in coffee shops. We saw a lot of, uh, menu growth being added to the menu, really a strong appeal with Gen Z, I believe as well. Will the sort of effects that we've seen from the, from the pandemic, um, you know, with just to go orders and that kind of change in coffee shop culture, is that gonna affect, um, sort of discovery and, you know, introduction to these different kinds of things, specifically, I guess, with plant milk?

Speaker 3 [18:20] I think they're going to have to rely on the natural channel, uh, early adopters at this point to bring new products to market, uh, especially something that's different and filling some white space. Uh, grocery tends to be a little bit slower to grab onto those ideas. They want to make sure it's proven and that it'll be worth the valuable shelf space they have. Uh, so, leaning into natural channel is probably going to be. The right way for those new innovations to get into the market without food service help.

Speaker 4 [18:59] Yeah, I, I would jump on it and agree with that as well. I think that, um, you know, what we've seen with, with similar economic downturns and when there's a lot of uncertainty on, on people's future, they tend to experiment less, um, and we're seeing that with the retailers as well, is they're prioritizing products and innovation that are familiar to consumers. So they're, they're less, um, experimental with the purchases they're they're buying and, and really want to make sure that the dollars they spend. Um, are gonna have a, a good reward for themselves, right? And, and they'll, they'll get benefit from that. And so it'll be interesting to see how that plays out in, in terms of innovation and, and some of these, uh, new and, um, experimental products, if you will.

Speaker 2 [19:42] So, so I agree on the, the, the skew reduction and that's something we've seen kind of from, from retailers, from, uh, corporates, I mean you've seen Coke's announcement of cutting its zombie brand. Um, and it does say, OK, so if you're gonna see less innovation coming through the traditional grocery retail channel, uh, you know, I agree that we're gonna see it through the natural channel, but then I also think we're, we're gonna see it through, uh, e-commerce, right? So you're forcing all the, the long tail, and they're the ones who are really gonna lose out on those new grocery placements. Uh, so I think you're gonna see a lot of it just spill over, you know, in, into the digital world, and so that's obviously a hard place for a new brand, but if you have, you know, a good team and good backing, uh, going DTC or getting on a big platform, even, you know, plenty of coffee sales on Amazon, uh, there, there are ways to get out there, uh, that aren't the traditional coffee shop route.

Speaker 1 [20:32] I would say, yeah, I mean, I've

Speaker 5 [20:33] I've spoken to this before, uh, in, in my some of my past comments, but yeah, I think this is where direct consumer models can really Speak directly to a captive audience, uh, you know, in today's, in today's day and age, um, I think we already were seeing a lot of the new consumers who are willing to adopt a lot of sort of these more innovative products. They're typically millennials, they're living more online these days anyway. Way and in light of COVID that's only compounding that, uh, we also, you know, some of the trends that we've looked at is showing how home brewing is actually growing relative to out of home consumption in coffee. You know, the latest statistics I saw indicated that 79% of consumers are brewing coffee at home, which is up from 75%. percent just two years ago versus out of home consumption was actually declining by 4% from 36 from 40 to 36% over that same time period. So I think people, consumers are looking for that coffee experience and what a great way to sort of right now grab that attention is, is through digital marketing, through prep to consumer delivery. Uh, so I definitely think that that's an area that will continue to proliferate over, over time regardless of COVID, frankly.

Speaker 4 [21:51] Yeah, I'll, I'll add, and, and this is not necessarily meant to be a, a, a plug, but it shows the, the shifting in our thinking as a brand as we start our own DTC site as well, um, just at the beginning of the pandemic to really start to look at what the needs of the, the consumers are and where the, the sales were shifting. And so this was a, a, a huge move by, by Nestle Brand to start that, um, but it shows that, um, this is where, where a lot of business is moving and, and, um. Ah, where RTD Coffee has some, some room to play and, and to continue to grow still.

Speaker 1 [22:27] Well, well, just to pick up on that, Matt, I mean, do you, does, you know, as a company, do you guys see, uh, is this a part of incremental growth, or is this something where you guys are sort of making up ground for maybe, uh, a consumer that is sort of less, uh, apt to experiment and, and maybe skew reduction at retail. Um, is this gonna be a supplement or is this gonna be sort of a replacement?

Speaker 4 [22:51] Ah, I mean a little bit of both on the, on the single serve, but what we're seeing is people that are, you know, unlike the refrigerated products where you, you're not really able to, to pantry stock, so to speak, um, here we're able to sell full cases of the, the single serve cans, ah, and we're seeing people that really have an interest in that, those specific products that they know and have had before, where they're, they're stocking up through that, ah, that method. And so we'd like to look at it as incremental, um, but at the end of the, at the end of the day, it's, it's backfilling some of those sales and then hopefully getting to incremental growth as we, as we go beyond, um, this pandemic.

Speaker 1 [23:28] And I wanted to circle back, we, we've talked a little bit about plant-based milks, um, but certainly functional benefits and sort of how that's being, uh, defined within the context of coffee is sort of changing. Um, you know, I wonder, um, you know, Jim, you know, how, how are these sort of functional ingredients and, and unique preparation methods sort of working themselves into coffee, and, and, you know, are we seeing enough of a differentiation with these functional benefits that are, you know, not just plus protein, plus, uh, energy or something else like that? Is there a sort of a, a real, um, you know, place that coffee is defining for itself in terms of functional, functionality?

Speaker 2 [24:08] Yeah, it's interesting. I, I don't think we've gotten nearly far enough with just, uh, you know, plus energy or, or plus protein yet. Like we, those, those haven't been nearly as explored as, as I would have thought the, you know, the ready to drink coffee industry would have been by this point. Um, I, I think what we're seeing is, you know, you start out in coffee with ready to drink and the, the base is like, OK, we're just making a coffee the same type you'd get in a coffee shop perhaps, um, and, and we're gonna put it in a different packaging, um. The end game is perhaps what does the rest of the soft drink and, and, you know, startup world look like? Why wouldn't a coffee drink uh have any of the same exact functional ingredients in literally any other non-out beverage that you'd see. Uh, I mean, you could think, right, coffee is a morning play, so the, the protein side makes so much sense, right? Morning workout, you have your coffee that has protein in it like a recovery beverage. There's some that are gonna play more naturally with coffee. That's from a functionality standpoint, from a taste standpoint too. There, there are certain ones that may work better, um, but, but I don't see that there's anything really holding back what coffee could be offering, and, and I don't think we're, we're, you know, 10% of the way there to, to what, you know, final coffee beverages could look like.

Speaker 3 [25:23] I, I agree with you, Jim. What, what we see kind of across all categories, not just beverages, is that people are using food as medicine. And coffee is just a little bit behind the curve on that. And when you think about when a lot of people take vitamins or supplements, it's first thing in the morning. And boy, if they could add it into their coffee, instead of having to take a pill, just makes life a lot simpler and easier and probably less expensive and more enjoyable. So, I think we will see more of that. Um, I think they're just catching up a little bit. Um, like I said, the, the creamers are already, they're already taking the coffee with the creamer that's got functional benefit. It's just a natural flow from here.

Speaker 5 [26:05] Yeah, I, I would concur. I think we're in the early innings of functional coffee growing. Yeah, we, we in our own little world, as, as, you know, sort of coffee experts and people on the for, you know, on the front lines of, of the natural food movement might think that it seems overcrowded, but I think we're just getting going, you know, speaking of of Rebel is one of the brands that has been, you know, somewhat of a leader in the. Functional coffees, they have several stews. They have a cold brew with added protein. They have a mocha cold brew. They have a rishi cold brew. Uh, you know, very few companies in the past that have added rishi mushrooms. Um, I think they're probably still even ahead of the curve, uh, but the velocities in natural they're doing phenomenally well. Julie could probably speak to that. Um, there's going to be, you know, now sort of that transition to more into sort of, you know. Mass market, but I think it's coming, and we, we see it through the velocities in the natural channel right now that consumers are looking for these, these, these functional benefits, you know, so I think keto is obviously something that, you know, people are looking for, you know, keto coffees, uh, overall protein, and then just overall wellness, and, and that sort of, you know, speaks to sort of, you know, some of the adding genic ingredients like, like a rishi. Uh, so I think we are in the early innings of, of functional coffee, uh, continuing to grow.

Speaker 1 [27:27] I wanted to get your opinion too, Matt, just as someone who's, you know, worked in developing these products, is there, uh, is there sort of an, a lot more natural runway for, for these kind of functional, uh, beverages to, to work in coffee, or is there any sort, do you see any sort of natural, uh, boundaries for that kind of thing?

Speaker 4 [27:45] No, I think there's still a lot more runway. I mean, to, to use Dan's term, early innings for sure. Um, I mean, we're seeing a lot of, um, consumer insights coming from, you know, health and wellness. And same thing is we're all, you know, locked in at home and, and have a a mindful eye on, on health. Um, that's the next natural progression and, and that's what we've seen, um, that in, in functional terms of clean energy and things, um. You know, the, the one thing though is, you know, you can develop any product, but if you don't get the retailer buy-in and, and what we're seeing from the retailers again is um not stepping too far outside of the, the realm and experimental and keeping it, it's, it's very kind of baby step driven, um, to where it makes sense and um, Um, consumers aren't, aren't asked to step too far away from their comfort zone in these products, and so, um, I think that's where the next steps will be more based in health and wellness, um, either that or the clean energy for us.

Speaker 2 [28:44] Well, I think coffee has a, a wonderful health halo compared to other beverages and in as much as you think of it as an energy drink. Um, they can play this game far better, right? So in energy, if you want a, a health, you know, benefit, you're, you're sort of probably playing the game like bang, you're going hardcore workout, uh, fitness side, and that, that's like a, a different angle than what coffee can play, but, um, there's a lot more room on the, the health side, and coffee is much better for anybody with caffeine than any of the other categories that, that play

Speaker 5 [29:15] there.

Speaker 1 [29:18] Well that's interesting because uh one thing that we've certainly seen, uh, is the rise of, of, um, of caffeinated sparkling water in, in, in, in recent months and years. Is something like that, is something that has, you know, maybe a little bit of the health halo in terms of, you know, no sugar, that kind of, uh, aspect to it, not necessarily the exact same nutritional uh profile. But is, are those kind of products, do you see that as something that, um, is sort of beneficial for, for the proposition of coffee, or is that something that could maybe, uh, take some growth away from it?

Speaker 5 [29:52] I'll chime in and I'd love to sort of hear maybe, you know, from Julie looking at the data and where the trends are, but I, I view caffeinated coffee is more of a competitor relative to carbonated soft drinks. I don't know if someone's making a choice between a sparkling water and a coffee. I think there's different uses and occasions and formats that would draw a distinct line between the two categories. Uh, so I I think the growth in in caffeinated water really just speaks to the general health and wellness trends of the entire beverage category, and that's can take share from carbonated soft, traditional sugary soft drinks, but not necessarily steal share from coffee. I think coffee is still just a massive industry, and people are always going to continue to consume it as as that experience and taste, as opposed to just the caffeinated, you know, the functional use of it.

Speaker 3 [30:50] Yeah, definitely agree, Dan. The, the caffeinated drinks, uh, that traditionally were caffeinated like waters really have stolen from the CSDs, uh, because of the focus on sugar re reduction. Like coffee didn't have that same issue for the most part. Uh, most coffee does not have sugar in it. People add it themselves. There are some that do have sugar, but it's not, um, It's not the same as a traditional can or bottle of carbonated soft drinks that's very high calorie, very high sugar. So, um, yeah, I think there's certainly more room for coffee to even add more caffeine, become highly caffeinated, uh, which is where the energy category really went to. So, you know, is there that demand that's being on Met, uh, or, you know, not much out there for a highly caffeinated coffee, uh, or the experience, you know, I, I think Matt talked about this, the, and making the experience more like what you would have in a, in a coffee shop. So, um, I, I, I think that there is not competition really in the, for coffee and the, from the other caffeinated products.

Speaker 4 [32:13] Yeah, I would, I would agree, just add on that. I don't really have ah too many original thoughts here, but Dan, you, you kind of nailed it. And, and Julie as well with um taking share out of carbonated soft drinks and um it's different usage occasions and, and potentially different consumers um for those products. Um, and so I, I think if, if anything, it will help, um, expand our RTD as opposed to, to contract it.

Speaker 1 [32:38] We talked a little bit about, uh, about e-commerce earlier and I wanna jump back to that, but first, just I wanna sort of take a look at what we're seeing in, in retail right now and, and maybe Julie, you can speak a little bit to this. Um, in terms of what we're seeing in stores, you know, in terms of merchandizing, are there any particular ideas or concepts around this category that are really driving growth in terms of cold stacks, cold box versus shelf stable? Where's the growth happening?

Speaker 3 [33:04] Well, Matt touched on this earlier, uh, as well as I think, uh, Jim did also, is that multi-pack is what's driving the growth, um, or multi-serve really is, so the larger sizes that people can take home and put in the refrigerator, so they aren't having to go back to the store so much, buy so many little bottles. Uh, that's where we're seeing a lot of growth. I think that's where retailers are making space in their cooler. I think Matt talked about that earlier too. Um, that they're leaning into the big brands that are providing those multi-serves, uh, earlier than some of the others, and, and it probably is causing some, uh, attrition of newer smaller brands. So they do need to, um, the smaller brands need to think about that, uh, think about multi-serve and, um. As well as the retailers need to think about how are we going to keep innovation in our store and be able to provide white space, uh, ideas. So there's both things going. Growth is definitely gonna come from multi-serve right now, but innovation is always gonna drive more business.

Speaker 1 [34:14] Great. So I want to talk a little bit about sort of the investment climate around RTD Coffee at the moment and sort of how that stacks up relative to other categories. So, you know, Dan, I guess you can start here, but, um, you know, taking something like uh the recent investment um from Super Coffee, uh, they, you know, recently signed a master distribution agreement with Anheuser-Busch, um, $25 million investment, um, from ZX Ventures as well as others participating in that. How does something like that, um, you know, just taking a sort of maybe a case study, how does sort of that reflect how the strategics are sort of viewing this market in this current opportunity?

Speaker 5 [34:52] Yeah, that's a good question. I, I think there's a lot of interest right now from, from strategics, uh, to push into some of these more functional RTD coffee concepts. Uh, if you look at the market share, I think it's roughly 70% of the US coffee market is owned by 5 players, and so what we're seeing is major disruption like brands like Chameleon. Where Nestle wants to go and acquire them, and we know it firsthand through some of, you know, conversations we've had with some of the large other beverage strategic companies out there that, you know, functional coffee and RTD is an area of interest and so I think we're going to continue to see. Uh, see a lot of activity, you know, and, and again, and that's specific to this category, but I think it's also just speaks to the entire investment climate right now of what's happening with all of these smaller insurgent, you know, growth brands continuing to take share from the large incumbent, you know. It's natural, uh, to consumer brands anyway, but we certainly hadn't seen that much innovation in the food sector relative to a lot of other, uh, consumer categories. So I think right now we're, it, it's, you know, we're, we're primed for that continued investment activity.

Speaker 2 [36:08] I, you know, I, I think looking at it, uh, starting from the big strategic side, uh, virtually every company and what's interesting, you know, Super Coffee getting the investment from AB, um, you know, we, we have discussions with beer companies about this. Uh, certainly every non-al company, uh, virtually everybody can kind of want to play in coffee, and every company is looking at their portfolio, looking for, looking at white spaces and saying, OK, how, how do we get in here, and that's, that's why Coke has caught the coffee now, uh, so on the big side we, we have that where virtually everybody wants to be in the coffee space in, in some way and then on the small side you have so many startup ready to drink brands. And one challenge we've had talking to a number of brands that are looking for investment is, you know, investors saying, you know, back to us, OK, but how do, how do we know about this brand? There's just, you know, hundreds out here, we, we see them coming through all the time, uh, so it's interesting that you brought up Super Coffee, right? They're the, they're the one in the middle of this, right? They grew so big and so fast that they stood out from the pack of all the other startups, clearly, uh, you know, that their numbers are great. And what do you see from the big side? You see people who weren't in coffee still trying to get in and and taking this as a path.

Speaker 1 [37:23] Well, I guess, you know, Jim, just kind of sticking with you here, uh looking specifically at Coke, I mean, that's a really interesting approach that they've taken. It's sort of this integrated approach where they have food service, they have, uh, grocery, they have, uh, coffee shops and e-commerce. You know, is that, is that something that, uh, we're maybe gonna see, uh, maybe other, uh, strategic try to replicate, or is that something that is gonna have sort of a, a major ripple effect, uh, across the, the sort of coffee landscape, taking that approach?

Speaker 2 [37:52] Well, you know, it's interesting because when they picked up Costa Coffee, you know, you looked at it and Costa was primarily a coffee shop and their, their second, uh, you know, go to market was really vending machines. Uh, and so, you know, those, those were kind of interesting. You don't think of Coke is going to be a coffee shop operator. Uh, the vending is a big part, right? So now you can have, you could theoretically take that vending machine everywhere, um, that Coke would put a machine and so you could serve all these places, and Coke obviously has the feet on the ground to, to service all the, you know, hospitals, universities, places with a vending machine for a coffee that you wouldn't get. Nobody else could do that. Um, yet here we are a couple of years in and virtually all they are, are pushing is ready to drink coffee, uh, and, and so I think it kind of says that all of those other opportunities in coffee are, are pretty complicated where, you know, if you're a Coca-Cola, a canned drink that just goes right through your system, goes everywhere you are anyway, it's just such the natural fit that that's obviously gonna be the, the focus point for the near term, and I think all the rest of that is gonna take a while to develop.

Speaker 1 [38:57] No, it just kind of, you know, sticking with that, Julie, I wonder, you know, you, you are see new brands and products and, and stuff like that all the time, you know, what does it take for, um, you know, besides obviously a strong sales, you know, what, what does it take for sort of an independent RTD coffee brand to really stand out, um, amongst, you know, the, the thousands of brands I'm sure you see all the time.

Speaker 3 [39:19] Well, there's a, there's a lot of things that will attribute to their success, you know, they have to have graphics and packaging that speak to the consumer. Um, consumers now are into, you know, mission-based or brands with a story. They wanna be able to read about it on the can, understand the product, understand the difference between the product right away, some messaging. Is really important. Um, they have to be very passionate about their product and be willing to like give their heart and soul and blood, sweat, and tears for the brand to make it work. So, being out there, not just relying on somebody else to get the job done, they need to get the job done, get out there and, and, you know, show, tell everybody why, why their product. Uh, but ultimately, it also has to be a great tasting product. If it has all those other things that doesn't taste good, it won't get past that first try. So, um, There, there's a lot of different variables, but I, I, passion, I think is really gonna take people a long way. They're the new brands and um being out there, getting as much exposure as possible on the brand.

Speaker 1 [40:32] And just kind of wrapping things up here, you know, I wonder if we could just sort of go down through the line and we, we, we, we discussed a lot of the changes that are happening, um, you know, ongoing, but if you had to sort of, uh, take a look at what are gonna be, what's maybe gonna be the major long-term impact from some of the changes in consumer behavior that we've discussed, e-commerce, multi-packs, that kind of thing. Um, you know, if we're looking out in the next 6 months to a year, you know, what, what do you think is gonna be the biggest impact from some of these changes we've, we've seen on the RTD coffee category? We can start with you, Julie, if you like.

Speaker 3 [41:08] Sure, um, well, I think they have to take advantage of what's out there right now. What's, what's the competitive advantage, and that's that people are at home, so they need to make sure they are serving that community, uh, with multi-serve offerings, uh, the functionality that the consumers are. Requesting they want stronger, you know, products that have more immune properties so they stay healthier, um, more protected from what's going on right now and in the future, as well as other added functional benefits. They just want more and less.

Speaker 4 [41:46] Yeah, I, I would echo those, those same thoughts, right? Um, you know, the multi-serve and looking at, um, some of, some of the, the sizing and, and the value of each product, um, functional, whether it's um. Added energy or, or health and wellness, but also the, the channel too, right? Where we talked a lot about direct to consumer and catering to what the consumer needs here. Um, there's gonna be a, I think a big growth category or growth in, in that portion over the coming months and hopefully that will sustain over the long term too, as consumer habits change, um, even through the end of the year.

Speaker 5 [42:26] Yeah, I, I think these are all good points, and I would add, you know, just, just one other concept because I, I agree with everything that Julie and Matt said. Uh, I, I think also companies that can help consumers recreate that out of home experience somehow, um, because, you know, there is that experiential, uh, part of coffee consumption, whether, you know, Starbucks. led, you know, was a leader in that, but people continue to like to go to the blue bottles and here in Northern California Equator Coffees, and you have that whole experience. And so if you can have, you know, companies trying to help the consumer recreate that in their own home, that would be really innovative and trying to fill a gap right now, uh, that is being unmet.

Speaker 2 [43:13] I, I, I'll, I'll go with that and, and wonder, you know, what that might look like over the next, you know, 6 months or 12 months thinking, you know, so many companies, especially on-premise focus or coffee shops or, you know, you can extend, extend this to craft breweries, uh, if you didn't have a big retail presence. All of a sudden the massive hole in your strategy is very apparent, and I wonder if we're not going to see, uh, you know, some attempt at a number of coffee shops trying other ways to get to market. So you know there are plenty of places that have a small little bit of ready to drink that might sell in their own shop. Uh, or, you know, specialty instant coffee you see sometimes, just anything that they can put their brand on they can sell in another channel, uh, and I wonder if we'll see, uh, a bit of, uh, you know, an explosion in that, and that may be just very local sales, and then, you know, we're not talking about new national entrance, but, uh, uh, you know, if you go to a local store that you might see more local products, uh, from, from the coffee shops that are trying to find new channels.

Speaker 1 [44:13] You know, with the economic downturn that we've seen, uh, due to COVID, how is that gonna sort of impact, I guess, specifically, you know, refrigerated, premium cold brew, um, you know, is that sort of segment, or, or do we anticipate to see, you know, uh, that segment, um, you know, maybe decline or, or change as, uh, you know, people's economic priorities shift during this time.

Speaker 2 [44:37] I'll, I'll jump in and just say, you know, a lot of the data we've seen so far, uh, you know, retail pricing is, is up significantly, um, you know, overall sales for a number of categories, even, you know, in alcohol where we have some better data on total sales, uh, you know, are up in volume in a couple categories, um, we haven't seen the recession effects hit massively yet and, uh, so you know. One that may be coming as unemployment benefits wear off, but there's also another factor to consider the consumer who is drinking, you know, a more premium ready to drink coffee may be among the insulated consumers, so consumers who are fine working remotely and, and, you know, are secure in their jobs but spending less on travel, spending less on going out to eat. Uh, so there's more disposable income actually for, uh, you know, a, a certain segment of the consumer, and that might be a classic ready to drink consumer, uh, so in as much as this plays as a premium category, it might be less affected than in a typical recession.

Speaker 3 [45:42] I agree 100%. Uh, I also think, and Matt can probably speak to this better than I can, but the, the, the, the bigger brands that are providing multi-serve have found now some economy of scale with more production and more efficiency, so the price is actually coming down on, on some of the. Those products, but exactly to what Jim's saying, I think there's a, a captive audience at home that has a lot of money and willing to pay for premium coffee and a great experience, and they just need to be reached out to.

Speaker 4 [46:20] Yeah, um, totally, totally nailed it there, Jim. I think there's, um, um, a lot of consumers that continue to want to have that high quality, ah, coffee when they can't go out to the coffee shop and, and still have that, you know, affordable luxury that, that they can, they can enjoy on a daily basis. And so, um, you, you, we kind of look at two sets of data, right? You have, you have one that, you know, an impending recession and how consumers behave then. And then you also have this insulated group where um they want to spend money on high quality coffee because they don't have the, the outlet there. And so, you know, we've got to decide on, on where to go from a brand perspective, but from us, we're um we're, we're very much committed to never compromising on that quality and maintaining that high quality route. That way, um, we, we never kind of degrade the brand or degrade the, the product, we double down on the quality. Ah, to provide that best possible experience when, um, a, a newfound set of consumers are not able to go to the coffee shop. Um, so that's kind of our or been our path and, and we'll continue through the remainder of this pandemic and beyond.

Speaker 5 [47:29] And I, I would simply just add to everything. That, um, You know, most of the, the consumer the consumer profile that we are talking about right here for a lot of these ready to drink premium coffees, you know, this isn't necessarily a trade-off between, you know, a chameleon or a rebel cold brew versus a a Dunkin' or a 7-Eleven, you know, $1 you know, cup of coffee for $1. So, you know, these are a lot of millennial consumers, other high income consumers that, as you know, everyone's already alluded to, are often going out consuming 4 or $5 cups of coffee in the store. And if they're not doing that and yet can get an RTD for $3 or $250 that actually becomes, that actually is a trade down for them. So you could actually make the argument that maybe they even, you know, that there's some offset there, as people generally think about recessions looming and people trading down, maybe the trade down is from that in-store experience from a $4.5 latte to a $3 cold brew.

Speaker 1 [48:37] All right. Well, I'd like to thank our panel again, Julie, Matt, Dan, and Jim. Thank you so much for being here and discussing coffee with us, uh, for the past hour. It's been really great. I'm gonna go make myself a latte myself after this discussion. So, we hope to chat with you again soon and thank you viewers for watching. Tune in for the next episode of Category Close Up coming soon. Thanks again.