Can Cold Brews Heat Up Sales For Dunkin’ Donuts And Starbucks?
Consumption of the world’s beloved beverage, “coffee,” has been steadily increasing over the years. In the 50 years until 2000, the average annual growth rate of coffee consumption was 1.9%. This accelerated to 2.4% by 2012, driven by a higher demand, especially from millennials, young adults born between the early 1980s and late 1990s. According to the U.S. Census Bureau, millennials make up approximately 23% of the U.S. population. The generation of millennials drinks more coffee than any previous generation of the young adult cohort. Based on a study conducted by National Coffee Association, daily coffee consumption among ages 18-24 more than doubled to 51 percent in 2014, up from 25 percent in 2000. Further, the U.S. Department of Agriculture estimates global consumption of coffee to rise 1.2% in the ongoing year to a record 150.8 million bags. This growth expectation can be attributed to a number of factors, such as cheap oil and the resultant increase in purchasing power, millennials’ love for experimenting with the beverage, and lower prices for coffee beans.
The U.S. consumption of coffee accounts for over 16% of the world’s coffee consumption. Moreover, at 20%, the U.S. is the second biggest importer of coffee the world-over. The average amount spent by a regular American on coffee is as high as $21.32 per week. Despite the high growth numbers, the U.S. coffee market is nowhere near maturity. According to the U.S. Department of Agriculture, the coffee consumption in the U.S. is expected to be up 1.5% in 2016, owing to the increasing purchasing power of millennials who prefer coffee over any other beverage. Within this 18-24 category, the market share of gourmet coffee beverages (includes espresso-based beverages, and iced coffee or cold brews) has been on the rise. In a survey conducted by the research firm Mintel, cold brew was named the fastest growing beverage, with a 75% increase in consumption between 2005-2015. Moreover, at an estimated growth rate of 115% in 2014-2015, this market was worth $7.9 million. ((U.S. cold coffee sales grow 115% in 2014-15, Mintel, September 2015)
Source: United States Department Of Agriculture
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To tap into the increasing popularity of cold brews/iced coffee (a cold brew is essentially coffee extracted over long periods of time in cold water), giants like Starbucks and Dunkin’ Donuts have decided to expand their offerings to include cold brews or iced coffees in their menu. Starbucks and Dunkin’ Donuts, with a market share of 42% and 25%, respectively, are the strongest players in U.S. coffee market.
After the success of the newly launched iced coffee in its stores, as highlighted by a 20% increase in its iced portfolio, Starbucks has begun bottling these cold brews and selling them in retail and grocery stores across the U.S. This decision is aimed at strengthening the company’s foothold in the ready-to-drink market, where cold brew has a very small presence (0.4%) currently.
Overall, 24% of consumers currently drink retail-purchased cold brew coffee. The move into the ready to drink segment will allow Starbucks to reach out to those Americans who prefer such coffee, in addition to those who consume their coffee at home.
Following Starbucks’ footsteps, Dunkin’ Donuts recently announced the launch of its cold brew coffee, available at their restaurants in the New York and Los Angeles markets. This move is the latest in a series of extensions to the brand’s coffee offering, consisting of Macchiato, an espresso-based beverage introduced last fall, and Health and Almond Joy iced coffees, introduced in May’16.
Cold brew coffee holds immense growth potential for the two companies, especially Dunkin’ Donuts, which is hard-pressed to perform against McDonald’s “All Day Breakfast” and its main competitor in the coffee space, Starbucks. If successful in establishing a foothold, this segment could result in as much as 10% upside to our price estimate for Dunkin’ Donuts, given our forecast period.
You can modify the interactive charts below to gauge the effect of a change in Dunkin’s revenue in the U.S. and international markets on our price estimate for the company.
Have more questions on Dunkin’ Brands (DNKN)? See the links below.
- What Is Dunkin’ Brands’ Revenue & EBITDA Breakdown?
- By What Percentage Have Dunkin’ Brands’ Revenues And EBITDA Grown Over The Last Five Years?
- How Has Dunkin’ Brands’ Revenue And EBITDA Composition Changed Over 2011-2015?
- Where Will Dunkin’ Brands’ Revenue And EBITDA Growth Come From Over The Next Three Years?
- Dunkin’ Brands’ FY 2015 Earnings Review: Dunkin’ Donuts US & K-Cups Drive Revenue Growth, Baskin-Robbins International Struggles
- Dunkin’ Brands’ Q1 FY’16 Earnings Preview: All Eyes On Comp Sales Growth Of International Segments
- What’s Dunkin’ Brands’ Fundamental Value Based On Expected 2016 Results? (Updated After Q1 2016 )
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