What is the coffee industry brewing today?

The coffee industry is seeing its ups and downs in terms of production, consumption, influx of varietals, the consumer shift to specialty coffee, and, most noticeably, increases in price.

“Simultaneously extremely exciting and a little tumultuous” — this is the state of the U.S. coffee industry today, according to Jason Sarley, associate editor of Coffee Review, a publication dedicated to be a high-end coffee resource for consumers.

Coffee consumption: The downward trend

According to the USDA’s recent coffee report, coffee consumption in the U.S.—the second largest consumer of coffee globally behind the European Union—was up slightly in 2014 from 2013. However, USDA predicted a 1% drop in U.S. coffee consumption for the 2015/2016 year, to 23.7 million from 24 million in 2014. Global coffee consumption, on the other hand, is predicted to increase.

Findings from the National Coffee Association’s National Coffee Drinking Trends study confirm this downward trend in U.S. coffee consumption. The study found that “59 percent of Americans drink a daily cup of coffee, down from 61 percent in 2014 and 63 percent in 2013,” Fortune reported. Americans drank 1.85 cups of coffee per day, according to the study, down from 2.01 cups in 2014.

This is in part being driven by Americans aged 60 and older, who comprise the largest group of coffee drinkers but who are also contributing significantly to the decrease in U.S. coffee consumption. According to the study, “Sixty-five percent of Americans aged 60 and older said they drank a cup of coffee the prior day, the same rate as 2014 but down from 76 percent in 2013,” Fortune reported.

But is consumption really going down?

While overall coffee consumption may be dropping, consumption of cups per day for specialty coffee rose in 2014, and this segment now claims more than half of the coffee market share for the first time at 51%. Specialty coffee comprised less than 10% of the market share in 1999, said Sarley, and only 40% of the market share in 2010, according to the Specialty Coffee Association of America.

Also seemingly contrary to the USDA report, single-serving coffee pod sales have actually skyrocketed 133,710% since 2000. However, when people drink coffee pods, they actually end up drinking — and wasting — less coffee.

“People used to make a pot of coffee, now they make a cup,” Pedro Gavina, owner of Vernon, California-based roaster Gavina & Sons told Reuters. “Right there we’re losing the sink as a consumer.”

However, though consumption by volume is decreasing, spending on coffee in the U.S. is rising. Americans spent $11.9 billion on coffee in 2014, a record high, and are predicted to beat that record by spending $12.8 billion in 2015 and $13.6 billion in 2016, according to Reuters. How is this possible? K-Cups and increasing prices for the rest of the coffee industry drive spending up.

Prices continue to increase

Another likely driver of the consumption decrease is coffee prices, which haveincreased significantly in the past few years. Issues with crop production due to rust and other unfavorable weather conditions have hampered the supply of coffee beans and thus driven costs up for manufacturers.

Manufacturers have then had to pass along those cost increases to consumers. J.M. Smucker Co. increased its prices by about 9% last year, Kraft by about 10%, and Keurig Green Mountain raised K-Cups’ prices by 9% as well.

These price hikes have not been confined to major commodity coffee companies but to coffee roasters across the board, including specialty and ultra-premium coffee companies as well, Sarley said. According to the Specialty Coffee Retail Price Index, specialty coffee prices rose by 1.5% in Q2 2015. Year over year, prices increased by 12.5%. The lowest-priced specialty coffees saw a 1.1% increase, while the highest-priced coffees saw a 20.9% increase.

The price hikes have hurt some major coffee companies, such as Smucker, which called the price hike a “misstep,” after sales volumes dropped significantly and Smucker saw a 3.5% drop in profit for fiscal Q3 2015. The company recently scaled back its prices by 6% for most of its Folgers and Dunkin’ Donuts brands to try to lure consumers back. While no other companies have made similar announcements yet, Smucker could be the first of several commodity coffee companies to lower their prices.

Defining craft coffee

Defining craft coffee is an elusive term to pin down.

“Craft coffee is a marketing term,” said Sarley. “Craft coffee ranges from good but not fantastic, such as some local roasters who probably do a lot of wholesale clients and restaurants, but they’re still craft roasters dedicated to the roasting process and quality coffee, often with an emphasis on fair trade and organic labeling. Then there’s the ultra-premium roasters who are only buying 90-plus grade coffee. They’re also craft roasters, but they have very different priorities.”

In another definition attempt, it could be said that all craft coffee must be specialty coffee, which receives an 80 out of 100 or higher grade from the Grading Green Coffee protocol based on the SCAA Green Arabica Coffee Classification System. This protocol determines the coffee’s amount of defects or taints.

That, however “could be unfair,” said Sarley, because some old-style Italian and other European blends use blends with robusta, which cannot be used in specialty coffee because it is a lower-grade coffee plant. He said these blends use a small percentage of robusta to give the coffee a rich, creamy mouth feel, but it technically would not be seen as specialty.

“In terms of the quality of the actual cup they’re producing, it’s craft,” Sarley said. “So it’s a little bit unfair to say that it has to be specialty coffee to be craft, but I would say almost all thoughtful, crafted coffee is happening in the specialty industry.”

The rise of single-serving coffee

Single-serving coffee is causing a stir in the industry, for better or for worse. Some consumers can’t start their day without it, while others, particularly some experts, find it less appealing.

“The whole system of single-serve coffee is antithetical to that ideology of craft, fresh-roasted, freshly prepared coffee,” said Sarley. “The whole craft idea is to be present in every step, and that’s not true in single-serve coffee. That’s not to say there aren’t good single-serve coffees. There are a number of grocers that produce high-end single-serve coffee. But as far as the highest end of the market, consumers and professionals alike, it’s kind of looked on as a sinful activity.”

Regardless of what coffee experts might say about single-serving coffee, its growth is undeniable, as pod-based coffee machines are now in nearly one-thirdof American homes. Single-serving coffee is also currently taking over some of traditional roasted coffee’s market share.

Increased prices for coffee across the board are making traditional coffee grounds and whole bean coffee less accessible. Today, these traditional coffee companies can’t always stand behind the lower price point as a reason consumers should stick around.

Instead, single-serving coffee offers a convenience factor that is dominating and transforming the coffee industry.

Single-serving coffee producers are seeing an economic boon, which is helping at least part of the industry. However, arguably the biggest concern is K-Cups’ effects on the environment, as coffee pods are both plentiful, with a 22% increase for Keurig K-Cup sales over the past year, as well as previously non-recyclable and non-biodegradable.

To alleviate some of these effects, Keurig released a recyclable version of the K-Cup for the Keurig 2.0 system in March, and the company has vowed to make all pods recyclable by 2020. Smaller companies have created similar products, and more small and large coffee companies will likely follow as environmental concerns over single-serving coffee mount.

All this considered, Sarley has a mixed outlook for the future of the coffee industry.

“Consumers have never had more choices, and that will continue to be true, especially for the premium market,” said Sarley. “You can pretty much find anything you want flavor-wise in your morning cup, which I think is really spectacular.” Coffee companies have responded to consumers’, especially millennials’, desire for more exciting products and flavors for their beverages and will likely continue to do so.

However, he also points out that along with this variety and the current issues the coffee industry faces today, costs will continue to be a pain point for companies and consumers alike.

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