Retail challenges in the post-pandemic era

Covid’s influence still lingers in the post-pandemic era, combined with inflation, rising costs of goods and labour, as well as supply chain and logistics pressures, have all impacted the consumption of coffee and tea and consumers’ purchasing behaviour of both products in the United States. Despite all of this, at home consumption for both coffee and tea remain strong, as such, so does retail spending. By Gordon Feller

Retail sales of coffee and tea in the United States are undergoing a transformation – especially in grocery stores and mass retailers.

Commenting on the changing retail world, Peter F Goggi, currently president of the Tea Association of the USA, and who previously spent 32 years working for Lipton Tea as part of Royal Estates Tea Company – he was the first American-born tea taster in the history of TJ Lipton/Unilever – said that during 2023, “inflation driven by supply chain costs, shipment imbalances, low unemployment and government spending reached levels not seen for 40 years”, averaging 8.0 percent for 2022 (In 1981 it was 10.33 percent). In that light, he believes “this level of inflation has certainly impacted the cost of goods and apparent growth rates in dollar terms.”

Tea Imports for 2023 were dragging, due mainly to the high level of inventories taken on by the trade during the supply chain-challenged Covid years. Tea companies anticipate that normal imports will return shortly. In regards to the market, Goggi thinks that “sales in dollar terms continue to grow. Volume declines are being seen in ready-to-drink (RTD), but are growing or staying flat in tea bags, specialty and foodservice.”

Qualitative research now indicates that at-home consumption remains high, and Goggi points out that “the likelihood for consumers to consume tea out of home declined. The hybrid way of working, with many workers continuing to split time between the office and home, will help sustain gains in consumption trends.”

Consumers are looking for specific health and wellness benefits from their food and beverages, placing that above sustainability. According to Tastewise’s 2023 trend report, “While health and wellness and international flavours have been trending in food and drink for years, this report shows preferences are evolving and consumers are zeroing in on specific niches that interest them.”

These trends complement tea’s strong position as a plant-based, healthful drink, consumed for its variety of benefits, rooted in its high flavonoid content. In fact, several new research papers were published in 2020 and 2021 illustrating tea’s extraordinary ability to act as a booster of human immune systems, followed by an important study in 2022 highlighting tea’s high content of a class of key bio-actives, flavan-3-ols.

Among the challenges facing the tea industry continues, Goggi points to these facts: too much tea is being produced; prices are too low; tea is a leader in ecological sustainability, but social and economic legs are struggling; retailers continue to push down pricing; costs are being pushed up the supply chain.

Americans still love their coffee

Which of these tea-related insights carry over into coffee’s retail reality? Three insights emerged in the 2023 National Coffee Data Trends (NCDT) report published by National Coffee Association of the USA. Firstly, more Americans drink coffee everyday than any other beverage, including tap or bottled water. The pandemic didn’t change how much coffee Americans consume, though it did impact where.

Secondly, “coffee consumption at home peaked when Americans were kept home by pandemic restrictions, with 85 percent of past-day coffee drinkers consuming their brews at home in January 2021.” Today, at-home consumption is slightly above pre-pandemic levels (82 percent compared to 79 percent in January 2020).

Thirdly, “coffee consumption outside of the home fell by almost 25 percent between January 2020 and January 2021,” before recovering as Covid restrictions eased. Today, out of home past day consumption is back at 34 percent, near pre-pandemic levels.

Fourthly, the most popular place of purchase for at-home coffee is the grocery store; 39 percent of past-day at-home coffee drinkers bought their coffee at the grocery store. Mass merchandisers were the second-most popular place of purchase for at-home coffee at 23 percent. “Both of these figures have remained consistent since January 2020.”

Stephanie Harlow, senior trends analyst at GWI, examines US consumers who regularly/often consume coffee and tea, said that buying by this type of person “has remained unchanged in the last three years. That said, if we look at Gen Z, there’s a slightly different story. The number of Gen Z regularly/often consuming coffee has sustained a small growth at 3 percent but the amount consuming tea has grown by 13 percent in the same timeframe.”

Harlow thinks “this growth is in part due to more Gen Z picking up a coffee to go or while out and about; the number who say they regularly/often drink coffee outside their home has grown 6 percent since Q4 2020.”

Among consumers who consume coffee at home, the number reaching for iced coffee has grown 19 percent since Q4 2020. And Harlow’s data indicates that, “while the number going for ground coffee pods has grown 8 percent in the same timeframe. The number of consumers preferring whole bean coffee has fallen 5 percent. The number who say they drink herbal tea has grown 13 percent since Q4 2020, with the number who say they drink black tea growing by 10 percent in the same timeframe.” Chamomile tea drinkers have also grown by 8 percent and green tea drinkers by 6 percent. Kombucha is more out of favour though, the number saying they drink it has dropped 13 percent in the same timeframe.

Harlow noted that Folgers is currently the top brand – and “among consumers who drink coffee at home, it has overtaken Starbucks,” which sat on the top spot in Q4 2020. The number choosing the brand has grown by 11 percent.

Beleaguered by labour shortages

Erwin Henriquez, Euromonitor’s senior research analyst, has a different take on the current situation. He believes that “coffee and tea continue to evolve and transform beyond the pandemic. Despite the apparent recovery of hot drinks in foodservice industry, the rising prices of goods and labour shortages continue to pose a challenge, which may impact the industry’s growth in the future. Foodservice has changed since 2019, with increased digital ordering leading to more complex orders”.

This has, of course, compounded labour problems for short-staffed teams. As a result, Henriquez thinks that “US coffee shops are pushing for higher wages and benefits. This is all to say that the industry is facing significant challenges in on-trade channels, which explains in part why the industry is focusing on the retail channels in search for growth.”

Henriquez and his colleagues said the data clearly shows that “pandemic purchasing behaviour is still very much present, with consumers still partially working from home and realizing that the difficult economic situation means fewer trips to cafés and more in-house coffee cups.”

However, retail sales growth of hot drinks (mainly in coffee) is driven by the continuation of price increases and inflationary pressures. Henriquez concludes that “while the industry saw declining volume, it managed to grow in value terms at higher rates than in the past. Inflationary pressures and general price action is part of the equation”, but he adds that premiumisation also plays a key role here.

Henriquez believes that consumers facing challenging economic conditions “are more willing to trade up in coffee/tea for the home,” which is still significantly cheaper than a cup in the on-trade. “We can see the rise of premium and specialty brands in the retail aisle, with more and more players gaining space in the already crowded market.”

Coffee and tea e-commerce retailing was significant in 2023, but for Henriquez “not as much as in the past.” The pandemic has played a significant role in adopting e-commerce retailing, especially for grocery items. While e-commerce sales continue to grow, they are doing so at a slower pace than in 2020. Due to rising inflation, there might be a significant shift towards in-person shopping soon. According to Henriquez, as grocery shopping is becoming increasingly expensive, data shows that people are now more carefully monitoring their expenses and removing non-essentials. Ordering groceries online, which often comes with an extra charge, is one such non-essential, especially now that the physical risk of Covid-19 has been reduced.

Coffee shop spending rebounds

Facteus’ co-founder and head of data & growth, Jonathan Chin, argues that spending at coffee shops “has definitely bounced back and surpassed 2019 numbers. Some regions in the US have bounced back higher than others. Surprisingly the Midwest and South have jumped way above their 2019 numbers more than the coasts. This is a bit counterintuitive, but perhaps with all the pandemic exoduses and work-from-home trends many coastal people moved to the South and Midwest. Maybe they took their coffee habits with them?”

Chin argues that “coffee shop spending has bounced back strong since the pandemic.” Spending is now well above 2019 levels, despite inflation; “it was always a question on how coffee spending habits would react post-pandemic with the influx of home coffee equipment and work from home trends.” Chin quotes Howard Schultz about the various ways in which coffee shops still offer, post-pandemic, “a ‘third place’ where people could enjoy and spend quality time.”

In the view of James Watson, executive director of beverages research at Rabobank US, “we’ve seen a strong post-Covid recovery for coffee shops. Meanwhile, retail coffee is not doing nearly as well.” He think there are many other segments of the beverages economy where consumers are looking for cheaper options. “It is not a completely zero-sum game. It’s possible to make coffee at home and then go out to get a second cup. Indeed, overall, coffee volume is probably slack, or growing ever so slowly. The shift is going back to on-premise. Covid saw a net decline in the number of coffee shops. This meant a boom for at home coffee. Office attendance is at 50 percent, during the very best weeks. What we have today is not a return-to-office story. What we have is a return to previous consumption habits.”

  • Gordon Feller, based in California, travels the world reporting about innovations that can change our economies and strengthen small enterprises. Since 1980 he’s been publishing reports and magazine articles about coffee/tea innovations on five continents. He is both an ABE Fellow – Japan Fdn. and Global Fellow – at the The Smithsonian Instition. He can be reached at [email protected].

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