The coffee market has enjoyed a rapid growth in recent years with US coffee chains like Starbucks setting up shop around the globe. And as UK consumers’ palates continue to evolve beyond the humble milk and two sugars variety, for the first time in five years the instant coffee market has experienced a fall in both value and volume.
Not only are instant brands having to contend with a growth of choice in the way in which coffee can be consumed in the home, there has also been a shift in demand towards the premium end of the market.
For Sara Lee-owned brand Douwe Egberts, this is not such a bad thing. It is currently looking for an advertising agency to handle its above- and below the-line advertising business (MW last week).
It is up against two big competitors, with market leader Nescafé, owned by Nestlé, and Kraft’s Kenco, which is also reviewing its agency arrangements. According to Mintel data in the overall UK coffee market Nestlé remains firmly in the lead with an estimated value of £304m in 2007. It is followed by Kenco with £139m, then Douwe Egberts with £47m. But while its share is relatively small compared with the top two players, it has recorded a 17.5% growth since 2005 to 2007. During that same period, Kraft was up just 8.6%, while Nestlé fell 1.3%.
Sara Lee managing director Julie Baker says not only are consumers trading up to more premium offerings, for the first time freeze-dried instant products are grabbing a larger share of the coffee category than granules – 41% versus 30%, according to IRI data. “Douwe Egberts, as a number three brand is a key driver of that growth.
We are seeing strongest value growth at 18% year on year, whereas Nescafé is growing by 9% and Kenco at 5%,” she says. Douwe Egberts has been around for over 250 years and has its origins in roasting and grinding coffee. But more recently it has moved into the instant coffee market and was introduced into the UK in 1981.
Last year it relaunched its freeze-dried instant range under the “Pure” brand. Baker says it has aimed to make it “much more emotional and improve its everyday accessibility”. Overall in 2007, the company invested £7m in coffee category marketing.
Adrian Goldthorpe, head of consumer strategy and innovation at Future Brand, says there has always been a perception that Douwe Egberts is a better quality coffee. “It’s got a slightly exotic sounding name and has a continental feel. “It also has a slightly quirky label and the weight of the jar is slightly heavier, so the semiotic cues make it more premium.
It’s a tiny brand, but it could have good opportunities for growth,” Goldthorpe says. Yet while the brand appears to be performing well, Mintel senior market analyst Mathide Dudouit says the overall instant coffee sector is experiencing a short-term “wobble”. She says value and volume declined last year for the first time in five years as retailers and manufacturers reduced their reliance on volume-based promotions and looked to develop the premium end of the market.
She says: “The decline is due to consumers reducing their coffee intake, or shifting into the roast and ground sector.” Dudouit says penetration has decreased from 77.9% in 2003 to 74.2% in 2007.
Many industry observers believe Nescafé’s brand positioning is not as strong as it used to be, partly because of the move towards premium end of the market. “The product quality [of Nescafé] hasn’t changed, but our perception of it has – we’ve downgraded it,” Goldthorpe suggests.
He adds that while Kenco has maintained its slightly more premium positioning by highlighting its ingredients and provenance, Nescafé has primarily focused on the consumer and the benefits of the product. “Which is what good marketing should do, but it doesn’t answer the question ‘why does it give me a more stimulating moment than another coffee brand?’ It’s not enough to just say ‘because it’s Nescafé’,” Goldthorpe says.
For Anna Eggleton, director at The Value Engineers, the big question for Nescafé is whether it can stretch beyond the instant market and capitalise on the positioning Douwe Egberts enjoys. Another factor the instant brands are being affected by is the growth of roast and ground coffee. According to Mintel, the value of the category has increased by 65% since 2002 to reach £132m in 2007, with consumers wanting to recreate their coffee shop experiences at home by buying into premium non-instant sectors. But this trend is something that appears to be working in Douwe Egberts favour thanks to its heritage in roast and ground coffee.
Instant brands may also have to contend with the emergence of the ready-to-drink category. In 2005 Marks & Spencer launched a ready-to-drink coffee brand served in a tetra pack. All consumers had to do was heat it up in the microwave. And as Coca- Cola links with Illy and PepsiCo extends its agreement
with Starbucks, it is a category that may yet take off.
Although Douwe Egberts continues to enjoy strong growth, Goldthorpe says it must start evolving its communications to consumers to withstand any swings away from the instant market. “I think they have to do something unexpected. It is about layering the emotional benefits of the brand,” he adds.
Facts and figures: Douwe Egberts
• The UK coffee market is estimated to be valued at £720m in 2007, up 19% from 2002
• Instant coffee is by far the biggest contributor to the coffee market with 81% of value share, but value sales fell last year as consumers shifted into premium non-instant sectors
• Meanwhile, the roast and ground coffee category is a growing sector for at-home coffee consumption, increasing by 65% between 2002 to 2007, to £132m
• In the overall coffee market, Nestlé is leads with an estimated value of £304m in 2007, followed by Kraft with £139m, and Douwe Egberts with £47m
• Douwe Egberts was established over 250 years ago and has its origins in roasting and grinding coffee. It then moved into the instant coffee market and launched in the UK in 1981.