In June my family took a vacation to Belgium, Germany, and Switzerland - first time for me in all 3 places!

Couple highlights of a great trip (not in pictures: me falling in the plane and twisting my ankle and knee, getting crutches for the rest of the trip…but lots of nice Belgians/Germans/Swiss helping me get around)

Intro

2/3 of American adults drank coffee yesterday - coffee plays a daily part in our lives and daily rituals (morning cup of coffee, coffee chats), where we spend our time (the 'third place' of coffee shops as a place to spend time outside of home or work), and the makeup of our cities and streets.

It also has continued playing a bigger role in our economy - more and more chains, with related trends like plant based milks benefiting from that growth.

I took a quick deep dive into coffee shops, here's a few snapshots of the state of coffee shops.

1) Caffeine: What’s happening in the broader caffeine market, in which coffee largely sits

• Tea – Globally, tea consumption remains 3 times that of coffee! Regions tend to be coffee or tea heavy (almost no countries have an equal mix) - tea heavy regions:
  
  • Broader Asia 
  • Middle East 
  • Mixed – Africa and Latin America
• Coffee – 2/3 of US adults drank coffee yesterday. For most American adults, it is a daily part of our lives. Regions tend to be coffee or tea heavy (almost no countries have an equal mix) – coffee heavy regions:
  • North America
  • Western Europe
  • Australia/New Zealand
  • Brazil
  • Columbia
  • Mixed – Africa and Latin America
• Soda
  • While a long-term category, in the 1990s Coke and Pepsi made major strides compared to coffee popularity and marketing.
  • Fast food meals normalized soda as the default beverage for millions of people
• Energy Drinks
  • Millennials like these, and Gen Z likes these even more...
  • This category was fairly nascent until the 1990s, and over the last few decades drinks like Red Bull and Monster Energy have gained more and more consumers.
  • At coffee shops, these have names like Strawberry Yuzu Refresher and Mango Pineapple Flash.

2) What's happening with coffee drinking today in the US

• US Coffee History
  • Coffee became more mass market after Civil War when soliders were given it
  • By WWII got up to about 4 cups of coffee per day for US adults, before dropping steadily to about 2 cups a day in 1990.
• There was a drop in Americans drinking coffee from 1990 – from about 67% to 50% of adults drinking coffee.
  • Coffee was fairly bad – much of what was sold was low quality coffee
  • Younger adults thought of coffee as old fashioned, coffee wasn’t cool anymore.
  • Few consumers saw café-going as an aspirational lifestyle – that shift began in mid 90’s
  • Coffee had bad health image – thought of harmful to health and contributing to anxiety and dehydration
  • Preference for sodas over coffee was rising
• But then resurgence
  • Starbucks made coffee cool
  • Reversal of health image with coffee shown to have neutral or even good health impact
  • Better quality coffee
  • Consumer demand for affordable luxuries
• Starbucks impact double click
  
  • Starbucks repositioned coffee from a commodity product one size fits all
  • Source better quality beans
  • Italian café vocabulary made ordering coffee feel more elevated
  • Rise of not just coffee but lattes and mochas (overcame the ‘coffee is bitter and bad’ image)
  • ‘third place’ in culture – another place outside home and work to hang out
  • Media/pop culture impact made coffee seem ubiquitous and a daily, premium habit

3) Coffee Houses - recent history in the US

• 1990: In 1990 it was mainly small chains and independent stores (5,000 total, $3.5 billion in coffeehouse sales), plus Starbucks with about 100 stores (Starbucks only had 15 stores in the mid-1980s).
• 1990s: Then in 1990s Dunkin Donuts and Peets started growing.
• 2000s: Chains started expanding, and by 2010 Starbucks had 10,000 stores.
• 2010s: Then in 2010s another wave of chains came – Blue Bottle, Stumptown, La Colombe, etc.
• 2020s: Post Covid has been an indie resurgence in cities
• Steady rise of drive throughs: Throughout this time have had more drive through chains in suburbs and smaller cities.
• Market Growth 1990 to Now: Now size of market has 10x’d in coffeehouse sales to over $35 billion

4) US Coffee House Callouts (not quite exhaustive)

• Titans (2) – 10,000+ stores
  • Starbucks (titan Sr.) 
  • Dunkin (titan Jr.)
• Very big (6) – 100+ stores
  • Peet’s
  • Dutch Bros
  • Scooters
  • Coffee Bean Tea & Leaf
  • Blue Bottle
• Relatively Big – several dozen stores
  • La Colombe
  • Gregory’s Coffee
  • Compass Coffee
  • Philz
  • Blank Street Coffee
  • Blue Stone
  • Tatte
• Fairly New and Growing Fast (a few are starting to be very big with 100+ stores)
  • The Human Bean
  • 7Brew Drive trough
  • Better Buzz
  • Artly
  • Qargo
  • (low barriers to entry, more to come)
• Small Chains and Independent/Artisanal
  • Many!
• Other 
  • Also cafe, bakeries, McDonalds, etc…all in the coffee game too, an enormously varied and competitive market 

5) Coffee House Economics

• Costs (monthly for independent decent but somewhat struggling coffee house)
  • Rent: $11,000
  • Labor: $22,000
  • Costs of Goods Sold (cups, milk, etc.): $12,000
  • Other: $16,000
  • Tax: $2,500
  • Profit: $7,000 ($84,000 annually – this is decent but can be much more)
• Sales pace (very general, varies significantly depending on location, rent, etc.)
  • Decent: 300-400 tickets per day (one person buying a coffee and a muffin would count as 1 ticket)
  • Healthy: 500-625
  • Note Starbucks is nearly 1,000 per day
• Pace
  • Morning (7-11am): About 1 ticket a minute during rush hour
  • Midday (11am-2pm): About 1 ticket every 2 minutes
  • Afternoon (post 2pm): About 1 ticket every 3 minutes
• Tech
  • Automate
  • Mobile ordering can take 20-30% of orders and make a huge impact on throughput/reducing congestion
• Labor
  • Shops tend to reduce number of staff working over the course of the day (say from 4 first half of the day to 2-3 in the afternoon)
• Non-coffee and tea beverage and food sales help increase margins
  • Food – see next post
  • Non-caffeine beverages: including bottled water, soft drinks, fruit juices, smoothies
• Non-food and beverage sales
  • Merchandise (shirt, hat, mug, etc.)
  • Coffee beans
  • Selling cans (La Colombe to Whole Foods for example)
  • Wholesale selling
  • Corporate Catering
• Other
  • Charging an extra 75 cents for oat milk or almond milk can lead to $32,000 extra revenue per year, per above cost breakdown can make it enormous difference on profit
  • Drive through is generally more profitable (such as for Dunkin)
  • Bigger stores have almost all started regionally for a period of time before expanding
  • Subscriptions have been helping with customer loyalty
• Valuations
  • Aside from titans, the larger chains (100+ chains) have tended to be valued at $500 million to $1 billion
• All time great investments in the world of caffeine
  • Starbucks
  • Monster Energy Drink and Red Bull
  • Coke and Pepsi

6) Food's impact on margins

• High margin food can be a significant margin boost (especially as many costs like rent are fixed and labor is roughly equal whether selling food or not)
• Common foods sold at coffee houses
  • Pastries and baked goods (works great in the morning but people also buy all day, impulse add on)
  • Breakfast sandwiches & breakfast burritos
  • Grab and go salads, sandwiches/wraps, avocado toasts, and grain bowls for lunch crowd
  • High end packaged snacks like nuts or chocolate – near register, easy upsell
  • Chia pudding, overnight oats, yoghurt
  • [non-caffeine beverages, including bottled water, soft drinks, fruit juices, smoothies]
• Ready to go – either immediately ready or can be warmed within a minute or so

7) Plant based milks

• Alternative milk (oat, almond, etc.) has taken over from soy milk and skim milk, with soy milk in particular fading in popularity
• Oat and almond milk are the two main alt milks, all others remain niche
• Oat milk has been eclipsing almond milk – preferred for flavor and sustainability messaging. Oat milk was introduced at Starbucks in 2021, has exploded in popularity, is now required in modern coffee shops as a must have. Jury is still out if it will be a commodity or brand-driven (will consumers ask for ‘oat milk’ or ‘oatly’?)
• Plant based creamers are growing faster than plant based milks

8) Few trend callouts

• Importance of Drink Visuals – drinks that look good on Instagram can help coffee shop popularity considerably, see a few examples here
• Coffee houses have become a core part of city fabric and culture – they make cities more beautiful and nicer to live in, give a third place to spend time outside your home.
• ‘Not your basic muffin’ – homemade or premium baked goods, unique takes, seasonal specials (e.g. pumpkin break in the fall)