Beverage Marketing Corporation

Latest News

Main Content

The BMC Beverage Blog
Coffee Wars: May the Froth be With You


Written by: Brian Sudano

The Cola Wars defined the 1980s for the global soft drink companies, a conflict which was won handily by Coke. After the Cola Wars beat down by Coke, a newly innovative PepsiCo came out slugging in the New Age beverage battles of the 1990s and early 2000s, recouping some much needed momentum. However, in recent years as New Age evolved from niche to mainstream, CSDs volumes fell and bottled water rose to prominence, Coke and Pepsi appear to have spent more time fixing their challenged North America distribution systems than innovating to win consumers.

With slowed LRB volume and share trends as a backdrop, we think the next battlefield between the soft drink giants might be over one of mankind's oldest and most favorite hot beverages, coffee. With the creation of Keurig Dr Pepper (KDP) and the recent news of Coca-Cola buying UK-based coffee chain Costa Coffee, 2018 will likely be seen by history as the year in which the beginning shots of the Coffee Wars were fired.

Mo Money, Mo Coffee. So far this year, nearly $24 billion has been spent in major deals connecting soft drink and coffee companies. In July, Keurig Green Mountain acquired Dr Pepper Snapple Group for $18.7 billion, creating Keurig Dr Pepper, now the third largest beverage company in North America behind the Coke and Pepsi systems. After that head scratcher of a deal, Coke announced it was buying the UK-based Costa Coffee chain for $5.1 billion, a serious departure for the soft drink giant but one that makes more sense when considering the future for hot drinks and the actions of KDP. With a dynamic hot drinks platform like Costa, Coke's got a lot of runway to play with and this includes new distribution within stores as well as expansion into new markets.

Consider that while in the US Coke and Pepsi have been moving around their big bottling pieces to save costs and maximize efficiency, new entrepreneurial products, especially in health and wellness categories, have sprung up to put market share pressure on the big players. The result is that many traditional liquid refreshment beverage (LRB) brands and categories look under pressure for the long-term.

In comparison, driven by mega-chains like Starbucks and at-home consumption innovations, the coffee category continues to go from strength to strength. As noted in our recent Beverage Marketing Corp. report U.S. Coffee through 2021, for the past several years, unlike most LRB categories, per capita consumption has grown steadily. For example, average intake of coffee was 2.1 gallons higher in 2016 than it was in 2006. In 2016, US consumers drank the equivalent of 21.1 gallons of coffee — up from 20.8 gallons in 2015. In 2017, per capita consumption is estimated to have increased again to 21.2 gallons.

Coffee's long-term fundamentals look strong to boot. When we think about beverage mega trends, it's hard to argue against the pendulum swinging toward deeper commercial involvement with coffee for the big soft drink players. The deeper we dive, the more we think coffee's future looks nearly bulletproof. In our recent article Coffee: Still King of the College Dorm, we highlighted our landmark report U.S. College Student Beverage Consumption and Attitudes, in which we saw nothing but green lights for the future. So as much as we were surprised by the creation of KDP and Coca-Cola's announcement that it was buying Costa Coffee, in retrospect that news shouldn't have been as surprising.

After these two big deals by the company's key competitors, the ball is now clearly in PepsiCo's court. PepsiCo has a long-held dominance in RTD coffee through the Starbucks partnership. However, the new Keurig Dr Pepper has an extraordinary advantage in home brewed coffee through the Keurig system and its multitude of K-cup options. Now with Costa Coffee, Coke will own a 'proper' (to borrow a Britishism) retail outlet and brand for global expansion. For incoming PepsiCo CEO Ramon Laguarta, a possible strategic counterpunch will likely be added to his laundry list of challenges. We think it is possible that the next 'out of nowhere' big coffee deal may be a defining one for the soft drink industry. PepsiCo needs to pay attention.

To adjust to a more competitive coffee environment, Pepsi will need to protect and possibly reinvigorate its powerful Starbucks RTD franchise. PepsiCo has been an effective steward of RTD coffee and the category has had a terrific run in recent years. From our proprietary DrinkTell database, RTD coffee grew to 64.5 million cases in 2017 at a CAGR of +12.2% since 2011. The PepsiCo-Starbucks partnership is the lodestar for the category with 60% share, with some share erosion as new products have entered the market. PepsiCo must protect and grow this.

If PepsiCo chooses to get more aggressive in coffee, the company may have to consider something completely out-of-the-box to get back on track. Not surprisingly, Wall Street immediately took note of Dunkin' Donuts as a possible target after the sale of Costa. We have no idea if PepsiCo would be interested in the venerable chain, but it certainly can't be ruled out. We expect PepsiCo must be looking at options everywhere in the world if it wants to keep up with peers and not get locked out of this important source for growth.

We like a stiff cup of coffee in the morning. We imagine PepsiCo might too.

For more information on the coffee market see:

« Back to Latest News