Roasted Coffee

SIC 2095

Industry report:

This category covers establishments primarily engaged in roasting coffee and in manufacturing coffee concentrates and extracts in powdered, liquid, or frozen form, including freeze-dried. Coffee roasting by wholesale grocers is covered in SIC 5149: Groceries and Related Products, Not Elsewhere Classified.

Industry Snapshot

Beginning in the early 1990s, small and large coffee roasters enjoyed strong markets. Coffee consumption also was brisk, with coffee shops maintaining their presence throughout the country. Thus, companies like Starbucks achieved positive growth and other players entered the specialty coffee market. By the mid-2000s, coffee was the second largest import, second only to oil, and one-fifth of the world's total coffee was consumed by Americans. According to National Coffee Association (NCA) and Datamonitor research in 2007, about 57 percent of adults across the country drink coffee daily while 51 percent drink soft drinks. Ground coffee was most commonly used, followed by instant and specialty coffee mixes. The NCA also reported that the market was valued at $29.3 billion in 2006 representing an increase of 9 percent from the 2001 value with an anticipated growth to $39 billion by 2011. Brewing at home is expected to continue its decline as "away-from-home" purchases are expected to account for 75 percent of total sales during the five-year period ending in 2011.

Coffee has not always enjoyed its recent level of popularity. Between 1970 and 1980, U.S. per capita consumption of coffee in gallons had dropped from 33.4 to 26.7, although it held steady at that approximate rate throughout the 1980s. At an estimated 1.75 cups, daily per capita consumption of coffee in 1991 was a far cry from that of the all-time high of 3.1 cups reached in 1962. The advent of specialty coffees seemed to signal a turnaround in the coffee industry. Having in past decades exported a taste for instant coffee, the United States began importing a demand for specialty coffees. By the 2000s both daily and occasional consumption of specialty coffee was increasing according to the Specialty Coffee Association of America (SCAA)--16 percent consumed it daily in 2006 (up from 12 percent in 2003) while 63 percent consumed it occasionally (up from 54 percent in 2003).

Despite the explosive growth of specialty coffee, by the mid-2000s the traditional brands still held the lion's share of the market. Folgers was the top brand, with nearly one-fourth of the market, followed by Maxwell House with just under one-fifth. Coffee brands from Kraft and Procter & Gamble each had one-third of the market.

According to the U.S. Census Bureau, approximately 311 establishments operated in this category for part or all of 2005 for the coffee and tea manufacturing industry. Industry-wide employment totaled approximately 12,351 workers receiving a payroll of nearly $526 million. Companies in this industry tended to be smaller in size with 65 percent employing less than 20 workers. The Annual Survey of Manufactures reported that the industry had total shipments of more than $6.2 billion in 2005, an increase from the 2004 total of about $5.8 billion. Additionally, a total of 6,887 employees worked in production in 2005 putting in more than 14 million hours to earn wages of nearly $290 million.

The Annual Survey of Manufactures reported overall shipments for the coffee and tea manufacturing industry were valued at nearly $8 billion in 2008, falling slightly to nearly $7.8 billion in 2009. In addition, a total of 9,153 employees worked in production in 2008, putting in nearly 17.6 million hours to earn wages of nearly $332 million. In 2009, there were 8,947 employees that worked in production putting in 17 million hours to earn wages of $320 million.

In the late 2000s, there were an estimated 634 establishments engaged in roasting coffee, and in manufacturing coffee concentrates and extracts in powdered, liquid, or frozen form, including freeze-dried with shipment values of nearly $2.5 billion with industry-wide employment of 11,184 workers in 2009. On average, sales per establishment reached $5.4 million with 19 employees. States with the highest concentration were California, Texas, New York, Florida, and Washington.

Roasted coffee manufacturing was responsible for about half of industry market share and nearly $1.6 billion of the nearly $2.5 billion in industry shipments. The coffee roasting (except by wholesale grocers) sub-category held 39.4 percent of industry market share valued at $848.3 million, while instant coffee manufacturer's product shipments totaled $10.1 million. The production of ground coffee, mixed with grain or chicory added $13 million to the industry sales, while coffee extracts producers generated $9.9 million.

Organization and Structure

Due to a climate that cannot support coffee trees in areas other than Hawaii and Puerto Rico, U.S. production of coffee beans has been negligible. Instead the United States has become the largest importer of the beans, purchased from producing nations through traders. For this reason traders play an important role in the U.S. coffee industry, albeit one constrained by their obligation to serve the requirements of roasters. Thus, the National Coffee Association (NCA), formed in the early 1970s, is dominated by the roasters.

Processing of coffee beans is performed by manufacturers that roast the beans for packaging. Also, roasters often further process the beans to be sold for brewing and instant coffee. At least until the mid-1980s, coffee produced in the United States was thought to be inferior to that of other countries. Some industry observers attributed this to the dominance of multinational conglomerates within the industry, which were preoccupied with profits and quantity instead of quality processing.

Background and Development

The U.S. coffee industry can be traced back to the seventeenth century, when coffeehouses, already quite popular in Europe, began to open in the colonies. Indeed, Revolutionary War strategy was often plotted in these establishments. At that time, only whole coffee beans were available, and these were sold from a barrel to be blended and ground in the home for boiling.

This method of preparing coffee proved its inconvenience during the Civil War, when transporting beans and grinders was quickly found to be unwieldy. As an alternative, coffee was made into a sort of concentrate by grinding it into a pulp that was shaped into bricks and allowed to harden. This preparation allowed soldiers to slice off an appropriate amount for boiling. In the meantime, however, entrepreneurs saw an opportunity. By roasting, blending, grinding, and packaging the coffee for sale, they offered consumers a welcome convenience.

Coffee beans are mainly categorized into two major varieties: arabica and robusta. Arabica beans are the most flavorful, and gourmet coffees are made with this type. Robusta beans are used in commercially packaged and instant coffees. Roasters store the purchased beans in silos until they are blended, which occurs immediately prior to roasting. Control of the blending process is usually done electronically, with preset percentages of the different varieties going into the blend. In addition to the type of bean used in a blend, roasting plays an important role in the resulting coffee's taste. Roasting eliminates the moisture from the bean, releasing the flavor. The color of the roasted beans determines the flavor, and consistency of color throughout a bean produces a high-quality brew. The beans should be dark enough to give the maximum amount of flavor, though not so dark that the coffee tastes scorched.

Until the end of World War II, robusta beans commanded a significantly lower price than arabica because they are less flavorful and can be harvested more easily. Thereafter, the price differential was reduced by two developments: demand for robusta was boosted by coffee-consuming nations' shift toward blends that combined both kinds of beans and, on an even larger scale, the introduction and great success of soluble coffee (or "instant" as it would later be known) derived largely, though not exclusively, from robusta.

The percentage of robusta beans used in coffee production increased significantly from the 1940s to the 1970s, as did the market for soluble coffee. Key points in the rapid development of the U.S. coffee industry during the decades after World War II included the pioneering of a soluble process by Hills Brothers in 1953, Nestle's introduction in the same year of decaffeinated instant coffee, the emergence of freeze-dried coffee in 1965, and the creation of continuous freeze-drying systems in 1975.

The increasing demand for robusta had a sharp impact on the coffee-producing nations. Central and South America, where much of the world's arabica is grown, dominated coffee production before the 1950s. By the late 1980s, however, more than a third of world coffee production took place in the robusta-growing countries of Africa and Southeast Asia.

Latin America also suffered when the coffee boom, occurring from 1955 to 1962, was followed by a slump in prices triggered by over-production, a crisis that led in 1962 to the first of several International Coffee Agreements intended to stabilize prices through the use of export quotas, which were imposed on nations producing coffee. Some industry observers felt that the swift and concerted response by the U.S. coffee industry to the slump-induced crisis in Latin America reflected the political climate of the time (fear of Communist inroads into countries with deteriorating economies) as well as concern about the possible overall disruption of world coffee production and an attachment to neighbors and long-term trading partners.

Despite numerous reports linking various health problems with coffee consumption, the results of such studies have been inconclusive and ambiguous. There is no definitive proof that coffee drinkers are at higher risk for high cholesterol, heart disease, birth defects, cancer of the bladder or pancreas, or high blood pressure. Though the drop in coffee consumption through the 1960s and 1970s may have reflected anxiety induced by the sheer number of these reports, it may also have been prompted in part by dissatisfaction with the quality of the product.

The increasing demand for specialty coffees suggested that consumers were attracted to higher quality brews, especially when accompanied by lower levels of caffeine--arabica beans are not only less bitter than robusta but also contain about half as much caffeine, the component of coffee most frequently cited in connection with potentially harmful side effects.

Coffee shops continued to enjoy prominence throughout American society during the mid-1990s, with Starbucks the unchallenged leader. Numerous smaller roasters, however, had also entered the market, enjoying measured success on a less dominant basis.

The industry looked strong in early 1997, with coffee markets showing record levels as roasters took advantage of favorable prices and rising inventories. However, speculation about the amount of coffee that Brazil, the world's leading producer, would harvest in late spring 1997, indicated some uncertainty about whether these strong levels could be maintained.

The growing supply of coffee--about 107 million bags in the 1998-99 season, up 9 percent over 1997-98 production levels--caused prices to spiral down, leaving the value of coffee exports 10 percent lower, to $11 billion in 1998-99. While robusta beans increased about 5 percent in price, primarily due to drought conditions in Asia, arabica beans saw prices plunge around 30 percent in 1999. Prices at the wholesale level affected prices at the U.S. retail level; instant coffee prices in 1999 were slightly higher than in 1998 and 1999 roasted coffee prices were about 10 to 15 percent below the 1998 level.

By late 2002, coffee prices were at an all-time low, causing major problems for coffee growers worldwide. Prices at this time were approximately 50 cents per pound, while production costs were about 80 cents per pound. Amid these conditions, many coffee farmers in areas like Central America and Vietnam were starving. In Central America alone, some 600,000 farmers were out of work by the early 2000s. At the same time, Business Week indicated that profits for coffee sellers were skyrocketing, reaching $181 million in 2000--three times that of 1997 levels.

Increased productivity in Brazil, the world's leading coffee producer in 2002, as well as ramped up production in nations like Vietnam, were contributing factors to farmers' woes. In particular, Vietnam benefited from an increased demand for robusta beans, as opposed to the higher-quality arabica beans more widely used in the past. By the early 2000s, roasters had developed ways to remove the harsh taste of robusta beans through steam cleaning and the use of flavor additives. Thus, they were able to sell lower quality coffee and still earn healthy profits.

As popularity of coffee grew and the coffeehouses added food to their menus, restaurants were beginning to reevaluate what they served to their customers. Some restaurants were beginning to treat coffee as they would wine, offering their customers a wide range of choices and matching different types to different foods. The SCAA felt this pattern would introduce more people to specialty coffees, leading to greater sales at coffeehouses and at the grocery store. In fact, by late 2002 many of the world's leading packaged goods companies were focusing more heavily on this market segment at the retail level. For example, Kraft was experimenting with the sale of Gevalia, its well-known mail order coffee line, via retail stores. In addition, the company also was licensed to sell Starbucks coffee in grocery stores, along with its line of Maxwell House Premium Cup coffees.

According to Datamonitor and National Coffee Association (NCA) research, the industry stood at $29.3 billion in 2006 with growth of $10 billion projected by 2011. Of this, 34 percent of sales were made through retail channels while the remaining was in the foodservice sector. By 2011 retail channels are expected to drop to 27 percent of the market while 73 percent will be in foodservice. Coffee shops experienced fast growth from 2001 to 2005 of about 50 percent with an anticipated value of $16 billion by 2011. However, about one-third of "at-home" users indicated that private label coffee had improved from 2004 to 2006 when surveyed.

In the mid-2000s, the fate of the world's coffee growers persisted as a pressing and widely discussed coffee-related issue, both within and outside the industry. Prices continued to fall, and many farmers were becoming impoverished as production costs exceeded earnings. This situation was widely covered in leading newspapers and magazines and was a major agenda item for a number of environmental groups.

Concerns for the plight of the world's coffee growers led to an increased call for "fair trade" coffees. Fair trade coffee is made from beans for which growers receive more than the market price. Although many of the leading roasters bought fair trade coffee, it represented a small percentage of their total purchases in the early-to-mid 2000s. Since 2003 Procter & Gamble has sold "Fair Trade Certified" coffee through its Millstone brand--but not in its popular Folders brand. However, the category was experiencing strong growth in the specialty coffee sector in the mid-2000s, supported by socially conscious consumers who were willing to pay a higher price to support coffee growers. Per international human rights group Global Exchange, as of late 2007 only five companies in the United States offered 100 percent fair trade coffee: Equal Exchange, Caf� Campesino, Cloudforest Initiatives, Peace Coffee, and Dean's Beans. More than 100 companies had licensing agreements to distribute certified fair trade coffee in 26 states. But, worldwide coffee prices remain low and often fair trade sellers are forced to sell at reduced prices--about 80 percent of sales. Progressive Grocer reported that certified fair trade coffee accounted or $900 million in 2006 retail turnover in the United States.

In the specialty coffee market, the number of coffeehouses in the United States has continued to grow. In the early 2000s, the Specialty Coffee Association of America (SCAA) predicted the number of coffeehouses would rise to 18,000 in 2015, a huge increase over the 12,000 in 1999. By 2006, however, there were already about 15,500 coffeehouses across the country, earning $8.53 billion with a total market of $12.27 billion (also including kiosks, carts, bean roaster/retailers, and specialty bean sales). Meanwhile, a National Coffee Association study indicated that 16 percent of adults consume specialty coffee on a daily basis.

Current Conditions

"Positioned as a relatively inexpensive luxury, upscale coffee sales continue to thrive even as many other industries suffer from consumer cutbacks on nonessential purchases," as reported by market research publisher Packaged Facts. Between the foodservice sector and retail, coffee sales increased to an estimated $48 billion in 2009 that translated into a four percent annual growth for both 2008 and 2009. The National Coffee Associations annual survey agreed, however, concluded more consumers chose to brew their own coffee. In addition, 40 percent of coffee brewed was gourmet.

While short-term coffee consumption remains steady as 66 percent of all consumers drink at least one cup of coffee daily, market research firm, Mintel warned the industry they need to step up their marketing placing more focus on the 18 to 24-year-olds to sustain growth in the long-term.

Going forward, the National Federation of Coffee Growers reported Columbia's coffee output was expected to climb 41 percent in 2010, as a result of favorable growing conditions coupled with proper fertilizing. Thus, output was projected to reach 11 million bags, compared to 7.8 million bags in 2009, but lower than 12.7 million bags produced in 2007 and 11.5 million bags in 2008.

Elsewhere, less than ideal weather conditions were compromising Latin America's coffee crop, while Vietnam and Brazil were plotting to keep their stockpiles as U.S. coffee stockpiles reached a ten year low. In effect, the already volatile coffee prices reached a 13-year high. For the first ten months of 2010, exports totaled 78.9 million bags, compared to 81.5 million bags reported for the first ten months in 2009, a decrease of 3.3 percent. Coffee production in 2009-10 totaled 119.8 million bags and is projected to reach 133 million bags for crop year 2010-11.

Industry Leaders

Within the coffee industry, the so-called "Big Four" roasters--Kraft, Nestle, Procter & Gamble, and Sara Lee--play a dominant role on the retail front. According to Gale Cengage Learning's Business & Company Resource Center, Northfield, Illinois-based Kraft Foods Inc. reported total sales of nearly $34.4 billion in 2006 with about 90,000 employees; Nestle USA Inc. of Glendale, California, reported more than $6.7 billion in 2005 sales including their Taster's Choice brand; Cincinnati, Ohio-based Procter & Gamble--makers of Folders-- reported nearly $76.5 billion in 2007 sales with about 138,000 employees; and Sara Lee Corp. of Chicago reported nearly $12.3 billion in 2007 sales with about 52,400 employees. In addition to these packaged goods giants, which market a variety of other products besides coffee, companies like Starbucks also are major players.

Because the leaders in the U.S. coffee business imported--in pre-roasted or even ready-soluble form--so much of the coffee they used, much of the coffee processing actually done in this country was performed by smaller concerns, including those companies marketing the increasingly popular specialty coffees.

Among coffee manufacturers, Starbucks Corporation led the way. Starbucks is the leading retailer of specialty coffee in North America. The company opened its first store in Seattle in 1971 and by October 1999 had nearly 2,500 coffee shops throughout the United States in office buildings, shopping centers, airport terminals, cruise ships, and supermarkets. Starbucks has aggressively marketed its whole beans through the Internet, direct marketing, grocery stores, and coffeehouses.

Starbucks went public in 1992, with continued success well into the early 2000s as Americans continued their obsession with gourmet coffee and related products. Starbucks has also introduced coffee-flavored ice cream and, with PepsiCo, launched a cold coffee drink called Frappuccino and DoubleShot (espresso mixed with cream). The company expanded outside the United States in 1996 with its first international stores in Tokyo and Toronto. By 2004 Starbucks had ballooned to 8,500 coffee shops in 30 countries--this figure nearly doubled by 2007 with more than 15,000 stores in 43 countries and 170,000 employees (dubbed "partners"). In the United States, Starbucks had 7,087 company-operated stores in 2007 as well as 4,081 licensed locations. The company reported revenues of $5.3 billion for fiscal 2004--by 2007, this jumped to about $9.4 billion.

The largest specialty coffee retailer, Starbucks with more than 16,850 coffee shops posted revenues of $10.3 billion in 2008 to $10.7 billion in 2010 with 137,000 employees. While coffee consumption has remained steady, however, with the majority of consumers preparing their own coffee, Starbucks announced it would be shedding an additional 300 stores in January 2009. The company reported revenues fell 69 percent from the first-quarter 2008 and first-quarter 2009. The total number of employees fell to 137,000 employees by 2010, as did company-operated stores to 8,800 or nearly half.

Kraft Foods Inc. posted revenues of $40.4 billion with 97,000 employees worldwide in 2009, a 3.7 percent decline compared to $41.9 billion reported in 2008 with the "beverages" segment (primarily coffee) responsible for 19.9 percent of overall sales. Nestle USA Inc. reported $10.4 billion in sales for 2009.

Procter & Gamble who owned the Folgers coffee brand for 45 years exited the coffee business in 2008. The J.M. Smucker Company based in Orrville, Ohio announced its plan to purchase the leading coffee brand, Folgers from Procter & Gamble for $2.95 billion in stock to be completed by the end of the year. Upon completion, the company planned to add over 1,250 employees as it opened additional manufacturing plants and a distribution center. The company's revenues have increased from $2.5 billion in 2008 to $3.7 billion in 2009 and $4.6 billion in 2010 with 4,850 employees. Since the purchase of Folgers the company's illustrates its success. Smucker, which will also assume $350 million of Folgers debt, said it expects the acquisition to increase earnings next year by 9 percent. Revenue is expected to rise to $4 billion in Smucker�s 2009 fiscal year, compared with $2.15 billion in 2007.

Workforce

According to the U.S. Department of Labor's Bureau of Labor Statistics, a sizable increase in employment in the other food manufacturing industry is expected through 2014 (by 10,000 workers to 164,000 workers) after a significant increase from 1994 to 2004 of 5,000 workers. A BLS report in May 2006 indicated overall employment stood at 159,121 workers with production occupations leading all categories with nearly 46 percent with a mean hourly wage of $13.27 for a mean annual salary of $27,600. Transportation and material moving occupations ranked second with more than 22 percent of the industry's workers with a mean hourly wage of $13.56 for a mean annual salary of $28,190.

America and the World

Coffee is produced in only a few areas around the world, yet it is consumed by people all over the world. The largest coffee-consuming countries produce very little coffee. Coffee production occurs in warm climates, such as those in South and Central America, the Caribbean, and parts of Africa and Asia. In the 2000s Brazil was the world's leading coffee producer with 32 percent of the market in 2005 (36.1 million 60-kilogram bags) as well as the leading exporter with 28 percent of the market. Vietnam was the second leading producer, with crops producing 12.3 million 60-kilogram bags for 11 percent of the worldwide market. In 2005, 53 percent of coffee produced was from Brazil, Vietnam, and Colombia while the three countries accounted for 55 percent of worldwide exports. Followed by the United States, France, Germany, and Japan historically have accounted for about one-half of all coffee consumption.

Since coffee accounts for high export earnings in Central America, the weather is a big factor--from freezes and drought to too much rain. For example, Hurricane Georges and Tropical Storm Mitch blew through Central America in 1998, causing widespread damage. It was estimated that those storms caused a loss in coffee crops of around one million bags of coffee, with a value of $100 million. In October 2005, Tropical Storm Stan caused a loss of about 3 to 5 percent of El Salvador's coffee crop (an estimated 1.4 million 60-kilogram bags) while a volcanic eruption during that time (near the Ilamatepec volcano) destroyed about half of the coffee fields.

Research and Technology

For several reasons, the leading manufacturers of coffee in the United States, despite their dependence on imported beans, managed to resist any competition from among the coffee-producing nations. One key advantage was patented technology and consequently automated production on a huge (and therefore highly economical) scale. Eliminating much repetitive labor in loading and unloading, the continuous roaster enabled a single person to operate two units continuously producing 5,000 kilograms per hour, thereby doubling productivity to the level of 1,600 bags per person per day. The developing coffee-producing nations could neither match this technological advantage nor afford to compete with U.S. manufacturers in a field characterized by heavy promotional and advertising costs.

Another obstacle preventing coffee-producing nations from manufacturing coffee for the U.S. market was that the industry leaders had used their technological advantage to shape local tastes to specific blends manufactured with great consistency. A single coffee-producing nation could not possibly draw on a sufficient variety of coffees to match these exact blends.

With the shift in national taste toward specialty coffees, quality of beans became a paramount concern for new producers entering the developing gourmet market. In response, the established American manufacturers began experimenting with refined versions of popular lines and researching possible new products, such as iced and other specialty coffee. Additionally, coffeehouses and a growing number of restaurants strive to receive the "Gold Standard" certification from the Specialty Coffee Association of America (SCAA), which is based on their coffee's quality.

© COPYRIGHT 2018 The Gale Group, Inc. This material is published under license from the publisher through the Gale Group, Farmington Hills, Michigan. All inquiries regarding rights should be directed to the Gale Group. For permission to reuse this article, contact the Copyright Clearance Center.

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