Every morning, I make myself a double espresso in my fancy new espresso machine. It’s not just that I love the taste; it’s a ritual for me – morning paper, tasty espresso in my favorite cup, and a dark chocolate candy. My husband prefers to drink his coffee by the gallon and attack his busy days with reckless abandon. But he still takes it seriously, brewing his filtered drip coffee in a complicated, hand-assembled Dutch contraption of which he is immensely proud. Indeed, it seems that almost every family in the United States starts its day with a coffee of some sort. Call it what you will – taste, habit, addiction, obsession. Coffee is culture.
According to www.statista.com the size of the coffee shop market in the US was $45.4 billion in 2018, $47.5 billion in 2019 and $36 billion in COVID-traumatized 2020. Coffee consumption is also growing significantly year on year. According to USDA data, in 2019/2020, the US imported 25 million 60 kg bags of coffee and expected to increase imports to 27.15 million 60 kg bags in 2020/2021. Even by my husband’s voracious standards, that’s a lot of joe! Domestic consumption was 25.5 million 60 kg bags in 2016/2017 and is expected to reach 26.6 million 60kg bags in 2021. By extension, the coffee shop industry is also growing and is expected to continue to grow. Different estimates project a compounded annual growth rate of 4% to 5%. Within the coffee industry, the production of premium coffee (specialty coffee) is the fastest growing segment.
One thing is clear from all of this data – Americans love their coffee, and particularly their fancy coffee! In fact, coffee is the second most popular non-alcoholic drink after water. And while the market is dominated by behemoth chain stores like Starbucks, the popularity of local, independently-owned coffee shops cannot be underestimated. Coffee shops have become go-to destinations for entire neighborhoods. They define the vibe and popularity of neighborhoods and drive foot traffic to other businesses. If properly managed, they are profitable, and they undoubtfully play an important role in local communities. People go to coffee shops to hang out, to work, to read, to meet with friends – even to drink coffee. The cozy and relaxed ambience of the idealized neighborhood coffee shop is a tremendous magnet for all types of customers.
2020 was undoubtedly a setback. Many Americans like their coffee filtered, but not through a mask, and six-foot social distancing requirements are at odds with the cozy atmosphere typical of coffee shops. Coffee shops have adapted in the short term as best they can. But people still love coffee, and once the world reopens, coffee shops will return to popularity. I actually envision a short-term spike in the market size as people sort out their caffeine withdrawal symptoms and shake off their extraordinary cabin fever. Coffee shops will return to sustainable business models as soon as public safety is again universally recognized. There are lots of things to fear in 2021, but coffee is not one of them.
The market is undoubtedly saturated and its trends are clear. Successful businesses in this industry will have to address several issues:
Branding. A compelling branding and identity will be very important for future success in the industry. Experiences are becoming as important as products, and successful branding will take advantage of both. A successful owner should not underestimate the importance of social networks and perceptions and reputational drivers. Generation Z likes to work from coffee shops where they can see and be seen, and it forms its opinions with a heavy reliance on social networks. A successful shop cannot simply be reliable; it must also be desirable.
Be environmentally friendly and sustainable. Sustainability is gaining traction as an animating concern in consumers’ selection of products and services, and coffee shops are no exception. You don’t necessarily have to emulate John Kerry and offset your carbon use, but you will need to concentrate on what is important to your customers – recyclable cups, reusable straws, coffee bag recycling, and other environmentally conscious initiatives. GlobalData’s most recent consumer survey found that 43% of global consumers said that how ethical, environmentally friendly, or socially responsible the product or service is always or often influences their product choice.
Many consumers also care about business models. From where is your coffee sourced? Do you have insight all the way to the farm level? Is your coffee fairly and ethically sourced? More and more often, your customers will be influenced by these decisions. My go-to coffee shop when I worked in New York had baristas who were on a first name basis with their coffee distributors, who in turn could speak ad nauseum about the specific sub-plots of the farms in the regions of the countries where their coffee was produced. I might as well have been in Columbia, but without cocaine and cartels.
Multi-format. More and more service industry-oriented specialists are likely to work remotely in the near to mid-term future, or to become freelancers. In either case, these folks do not always want to work from home, which means they need a workspace. Coffee shops are often used for this purpose already, and are an obvious choice. Therefore, it no longer be sufficient to have an Instagram friendly design; premiums will be placed on excellent WI-FI, comfortable furniture, and a menu with snacks.
Current and adaptable product offerings and product innovations. Coffee shop owners will have to follow their customers and offer products that are “trending” – in the near future, those may include snapchilled coffee, healthy coffee, non-dairy milk, ready-to-drink coffee, coffee subscriptions, specialty drinks, coffee infused drinks, and other items. While stopping short of dandelion coffee is probably advisable, a firm grip of the latest market trends and a general sense of adaptability will be key to winning and retaining new clients. At the same time, perfecting classic offerings may be key to retaining existing loyal clientele.
Know your customers and their habits. According to the National Coffee Association:
- Coffee drinkers age 60+ are more than twice as likely to consume traditional, “non-gourmet” coffee than 18-24-year-olds
- Drinkers age 25-39 led the increase in espresso-based beverages, which are favored by 27.5% of Americans under 40, compared to 17% for seniors
- Nine out of 10 older coffee drinkers have coffee at breakfast, compared to 7 out of 10 of the youngest drinkers, who are almost twice as likely to drink coffee at lunchtime than their older counterparts
- Since 2015, consumption is up 40% among drinkers age 18-24, and nearly 25% for drinkers age 25-39.
Loyalty programs. For smaller coffee shops that are not part of a big chain, it is important to create client loyalty efforts, whether creating a loyalty program, or dialoguing with your customers through prizes, seasonal offerings, newsletters, reviews, and feedback. The more personal it becomes, the more chances that a client will become “sticky”. Quality of service is becoming more and more important, and the power of personal relationship cannot be overstated. In a New York Starbucks, getting my name spelled correctly on my oddly sized cup was an Olympic sport. At my go-to shop, however, they new my name, my profession, my sports team, my dog, and, most importantly, my coffee beverage of choice.
Up to Date Technology. It is not necessary to have people beelining to your nearest location using a smartphone application like your shop is a rare Pokemon, but it is important to be technologically advanced. Lots of coffee shops have adopted cashless systems to speed customer service and reduce risk. Having proper applicationss, cashless systems such as Apple Pay or Samsung Pay, tap options for credit cards, prepaid cards, etc., are quickly becoming standard. I would expect this trend to continue, with companies adding gamification through promotions, cashback, grades of memberships, and other promotions.
About Comer Business Brokers
Comer Business Brokers, LLC, is a full-service business brokerage firm with locations in Fairfield County, CT and the Raleigh, NC metro area. CBB services the entire state of Connecticut, Westchester County, NY, and the Research Triangle area and the Eastern part of North Carolina. Owner and founder Irina Comer has more than a decade of experience in mergers and acquisitions of all types and sizes. Prior to starting her career in the business brokerage industry, she spent 10 years at PricewaterhouseCoopers advising local, national, and international companies on transactional issues, including valuation, diligence, structuring, and positioning. After obtaining her MBA from New York University’s Stern School of Business, Irina worked with the mergers and acquisitions division of Bank of America Merrill Lynch.
Comer Business Brokers is a recognized industry leader when it comes to coffee shops and coffee roasters. If you want to value or sell your business, Comer Business Brokers can help you to structure a deal that makes sense and close efficiently and with confidence, all while maintaining the strictest confidentiality of your personal and commercial information. Give us a call today; the first consultation is always free.