RTD Coffee's Sweet Surge

Consumer trends place cold brew and iced coffee among the most craved beverages
Photograph: Shutterstock

CHICAGO — Ready-to-drink (RTD) coffee has opportunity written all over it. The segment took off as a sweet treat more than 20 years ago in the form of the Starbucks Frappuccino, distributed by PepsiCo. It’s booming now as a healthier alternative to soda and energy drinks through a variety of iced-coffee and cold-brew products.

“This has come on fast,” says Chris Long, who recently joined Des Moines, Iowa-based Kum & Go as beverage category manager after holding the role at Yesway. “Starbucks still owns the business, but there is finally some competition.”

And there is a lot of runway for continued growth:

  • Sixty-four percent of American adults drink coffee nearly daily, according to a 2018 National Coffee Association (NCA) survey, and consumers are developing a taste for coffee at a younger age.
  • RTD coffee has experienced double-digit volume growth over the past five years, according to Beverage Marketing Corp. (BMC).
  • In 2017, RTD coffee represented only 2.1% of the total $80 billion U.S. coffee market, according to New York-based BMC, suggesting there’s plenty of room to expand.

“The potential growth runway on RTD coffee is great,” says Mark Miles, group director of coffee for Coca-Cola North America, which markets Dunkin’ Donuts Iced Coffee, McDonald’s McCafe Frappes and Far Coast Cold Brew. According to Nielsen data, annual penetration of the category is less than 15%, relatively low compared to other beverage categories, he says. “Purchasing tends to be an impulse vs. planned buy as the category continues to grow.”

But there are some issues holding the segment back.

Differing Tastes

Ask 10 coffee drinkers how they like their coffee, and they will likely provide 10 different answers. That’s one of the major hurdles RTD coffee has faced in meeting its potential as a packaged beverage.

“Ready-to-drink coffee really hasn’t developed that much,” says Gary Hemphill, managing director and chief operating officer of BMC. “One thing that’s held that back is you can walk into a Starbucks or [Dunkin’] and get your coffee prepared just the way you like it.”

This makes creating an RTD beverage that’s acceptable to a large group of consumers complicated—and why variety is key to the segment’s success.

In 2017, nearly 1 in 5 (19%) global new coffee launches was an RTD beverage, up from 16% in 2015, according to data from Mintel’s Global New Products Database. That boost in variety is good news for convenience stores, where dollar sales of RTD coffee drinks were up 9.9% in the 52 weeks ending March 24, 2019, according to Chicago-based IRI.

Distributors have also seen the growth. McLane Co. reports “seeing 30% to 40% unit increases in RTD coffee for the first three months of 2019, especially on national brands,” says Michael Carlson, manager of merchandising for the Temple, Texas-based distributor.

“Three or four new RTD coffee manufacturers have been introduced into the McLane network within the last year,” Carlson says. “Part of the reason this category is doing so well is due to the convenience of the items, as well as the better-for-you aspect.” Specifically, he references RTD coffee’s reputation for having a clean label and using real sugar instead of corn syrup compared to soft drinks, as well as coffee’s heart-healthy halo.

Meanwhile, RTD beverage varieties have increased by about 37%, says Emily Wood Bowron, associate vice president of strategic marketing for Red Diamond Coffee and Tea, Moody, Ala. “The RTD category continues to explode in coffee,” she says. “It’s largely driven by the RTD cold brews.”

Red Diamond, traditionally a fresh tea company and coffee roaster, was among the manufacturers adding to that list of new varieties, having launched its Fitz Cold Brew Coffee in bottles in mid-2018, following success with the brand as a dispensed beverage.

Similarly, coffeehouse chain Peet’s launched an RTD cold brew in 2016 after it saw cold-coffee sales double in its cafes when it replaced traditional iced coffee with cold brew on tap.

“If it’s Red Bull vs. RTD coffee, they’re reaching for the one that isn’t sweetened with sugar.”

“For cold brew specifically, consumers are attracted to the smoother, less acidic taste created by the cold-brewing process,” says Gretchen Koch, senior director of marketing and innovation for Peet’s, Emeryville, Calif.

Bowron says the move from beans to bottles and cans is being driven by consumer trends.

“It’s really in tune with your typical c-store consumer,” she says. “Traditionally, you’ve had the sugary and flavored options around forever. Now it’s: How can we make this heathier? Are there any functional benefits? It’s consumers looking for a cold brew instead of energy drinks.”

In some cases, however, it’s consumers looking for coffee drinks that are also energy drinks.

Monster Beverage has made something of an art of it. After seeing success with its Java Monster line of sweet flavored coffee drinks with a full ration of caffeine (160 milligrams per 15-ounce can), Monster added Espresso Monster in 2017 and Caffe Monster in the past year.

The reimagining of coffee as an enhanced beverage was an obvious fit, says Chris Schmidt, director of category management for Corona, Calif.-based Monster. He cites data from Numerator, the Chicago-based data source formerly known as Market Track and InfoScout, that shows 5.4% of RTD coffee trips also include energy drinks. “Energy drinks are 2.3 times more likely to be in the RTD coffee basket than all shopper baskets,” he says.

The shift also expands the consumer reach of the drinks.

“RTD coffee shoppers are more likely to be older, more educated and earn higher incomes than energy-drink households,” Schmidt says. This opens the energy-drink category to a new audience.

Who’s Buying?

The demographic buying RTD coffee is one more reason to expect the segment will continue to grow.

“Primarily where we’re seeing the increase is a younger demographic: 18- to 39-year-olds,” Bowron of Red Diamond says.

Some of these are energy-drink consumers who have “just grown up a bit,” Long of Kum & Go says. The boom has meant expanding space in the cold vault for the drink segment, he says, mostly at the expense of carbonated soft drinks (CSDs). “We have added at least a shelf to each set [at Yesway], and other retail peers of mine have done the same,” he says.

Meanwhile, the RTD coffee consumer is getting even younger. “Last year, the National Coffee Association expanded its interviews for data trends to as young as 13 years old,” Bowron says. “So it’s becoming increasingly acceptable to drink coffee at a younger age, and if it’s Red Bull vs. RTD coffee, they’re reaching for the one that isn’t sweetened with sugar.”

“Younger consumers are entering the coffee category via cold coffee and RTD coffee, as it offers a healthier pick-me-up vs.  traditional CSDs or energy drinks,” says Koch of Peet’s. “As a result, coffee consumption is expanding into multiple forms and new dayparts.” Forty-one percent of consumers drink coffee between breakfast and lunch, which is up from 36% in 2012, he says, citing NCA data.

“We are seeing consumers embrace coffee earlier than ever before, with about half entering the category drinking a cold vs. hot coffee,” says Miles of Coca-Cola North America. “This trend is helping fuel the growth in RTD coffee as consumers are looking for a way to enjoy a cold coffee during the day for a pick-me-up.”

Total c-store sales of RTD and refrigerated coffee drinks (IRI reports them separately) were $1.67 billion in 2018, compared to $8.98 billion for energy drinks. RTD coffee unit sales were 582 million in 2018 vs. 3.5 billion for energy drinks, suggesting another reason coffee drinks sales should continue to blossom.

“You will continue to see growth in this category because if consumers are being introduced to coffee at a younger age, they’re going to grow into it,” Bowron says. “It is going to become more and more important because we know that Gen Z is always focused on convenience.”

Miles agrees. “RTD coffee growth will continue for years due to shifts in how (cold and hot) and when (throughout the day vs. morning) consumers drink coffee,” he says. “To fuel this growth, brands will need to create products that address current and future needs while delivering on the taste and other benefits that consumers are looking for.”

The key to future growth, Bowron says, is personalizing the packaged beverage. “How do we in the RTD category make it more customizable?” she says.

Expect the innovation to continue to keep the segment fresh and growing.

“I am excited because of the increased sales dollars, assortment options for our customers and the innovation,” Long says.

The Biggest Brands

The largest ready-to-drink coffee brands in U.S. retail generally revolve around quick-service restaurant names.

SupplierShare of Market
North American Coffee Partners (Starbucks)69%
Danone North America (Stok)13%
Coca-Cola Co. (McCafe, Dunkin')6%
Private label4%
Califia Farms2%

Note: Monster’s coffee-based energy drinks are not included in this breakdown. | Source: Nielsen via Wells Fargo Securities

Trending RTD Coffee Brands

C-store sales, 52 weeks ending March 24, 2019

Ready-to-drink coffee is generally divided into two segments: cappuccino and iced coffee, which represent 90% of the category and are primarily sold shelf-stable; and cold brew, which includes a mix of shelf-stable and perishable refrigerated offerings. Here are the leading products in convenience stores.

Cappuccino/iced coffee

BrandC-store sales ($ millions)PCYA*Unit salesPCYA*
Starbucks Frappuccino$585.12.3%193.00.7%
Starbucks Doubleshot$438.6(3.4%)152.2(4.7%)
Java Monster$342.516.8%123.813.6%
Dunkin’ Donuts$87.7(2.9%)31.5(3.7%)
Private label$45.036.5%20.032.8%

Cold brew

BrandC-store sales ($ millions)PCYA*Unit salesPCYA*
Califia Farms$1.45.3%0.45.2%

Source: IRI | * Percent change from a year ago

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