A Datassential study commissioned by S&D Coffee & Tea, Inc.

A Datassential study commissioned by S&D Coffee & Tea, Inc.

A Datassential study commissioned by S&D Coffee & Tea, Inc.

A Datassential study commissioned by S&D Coffee & Tea, Inc.

A Datassential study commissioned by S&D Coffee & Tea, Inc.

This study endeavors to examine today’s young coffee drinkers. Specifically, we will focus on coffee-drinking Millennials (aged 18 to 34). Why are they so important? For one, the sheer size of this generation marks it as one representative of a vast array of untapped opportunities. Secondly, coffee has the potential to become an integral part of lifelong consumption patterns, deeply ingrained in daily routines and heavily associated with multiple consumption occasions, both in and out of the home.

So ignoring them is ill advised; disinterested tweens, teens, and early twenty-somethings will eventually become disinterested forty- and fifty-somethings, which would be hugely detrimental for coffee sales down the road. Though these concerns are neither new nor unique to the coffee industry, this report attempts to take a slightly different approach by encouraging readers to step back and perhaps unlearn what we think we know about both coffee and the Millennial consumer in order to reacquaint ourselves with coffee through their eyes. Copyright 2014. Trivinity, Inc. dba Datassential Research.

All rights reserved. This document is proprietary and confidential and may not be disclosed in any manner, in whole or in part, to any third party without the express written consent of Datassential Research.

A Datassential study commissioned by S&D Coffee & Tea, Inc.

1 APPEALING TO YOUNG COFFEE DRINKERS ALONG THEIR MATURITY PATH In a word…yes. However, further examination will confirm that the situation is just slightly more complicated than this one-word answer might suggest. For comparative purposes, we have drilled down to study coffee- drinking consumers across three distinct age groups: Young Millennials (aged 18 to 24), Older Millennials (aged 25 to 34), and Generation X (aged 35 to 44). COFFEE CONSUMPTION: WHERE IT BEGINS 87% of our sample started drinking coffee (of any kind) by age 21… Additionally, the age at which new coffee drinkers are entering the market has crept ever lower.

Among Young Millennials today, the average age of coffee initiation is 15, whereas on average, Older Millennials started drinking coffee at age 17. For consumers in Generation X, coffee consumption began even later – around age 19. DOES COFFEE CONSUMPTION REALLYDIFFER BYAGE?

0% 20% 40% 60% 80% 100% 120% Under 14 14 to 16 17 to 18 19 to 21 Over 21 StartedDrinkingCoffee at Age… 1

A Datassential study commissioned by S&D Coffee & Tea, Inc.

2 A DATASSENTIAL STUDY COMMISSIONED BY S&D COFFEE & TEA, INC. So what factors are driving this rising rate of continually earlier coffee trial? First, it’s no secret that sweet consumables tend to do a better job of attracting young consumers. Consider that the oldest of our consumer groups (members of Generation X aged 35 to 44 today) started drinking coffee before what we’ll call the “coffee house revolution” which is represented by the widespread proliferation of now-ubiquitous chains like Starbucks, Peet’s, Seattle’s Best, and Caribou Coffee.

With these chains came the advent of the sweet coffee drink – and the bevy of dessert-like flavors that accompany them. As such, both Millennial groups (Young and Old) have developed as coffee drinkers as part of a new generation that had all of these sweet drinks and easily accessible sourcing options available to them.

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Young Millenials (18 to 24) Older Millenials (25 to 34) Gen X (35 to 44) Regular hot brewedcoffee Beverage of Choice During the First Few Years of Coffee Consump on Coffee drinks (includes hot, cold, and frozen)

A Datassential study commissioned by S&D Coffee & Tea, Inc.

...47% of all Millennials indicate drinking more regular hot brewed coffee today than they did when they first started drinking coffee 3 APPEALING TO YOUNG COFFEE DRINKERS ALONG THEIR MATURITY PATH COFFEE CONSUMPTION: HOW IT HAS EVOLVED Despite having started off in one camp or the other (between regular hot brewed coffee and coffee drinks), nearly all coffee drinkers (85%) admit that compared to the first few years after starting to drink coffee at all, their preferences in beverage types have changed.

In fact, 47% of all Millennials indicate drinking more regular hot brewed coffee today than they did when they first started drinking coffee (vs. only 37% who say they are drinking more coffee drinks today). This suggests that young coffee drinkers have tended to “mature” over time, gravitating from sweeter drinks to brewed coffee as they age.

Interestingly, just as the average age at which coffee initiation occurs has decreased over time, so has the average length of time it takes for “coffee maturity” to occur compressed over time: Average Length of Time Between Coffee Initiation and Change in Coffee Beverage Preferences Young Millennials (18 to 24 today): 3 years Older Millennials (25 to 34): 5 years Generation X (35 to 44 today): 8 years It is also useful to understand the drivers of this evolution. Across age groups, the top reasons for a shift in beverage type consumption between coffee initiation and today are as follows: #1: My taste preferences changed – I like stronger coffee now #2: I drink more coffee at home now #3: My taste preferences changed – I used to like sweeter beverages These reasons are in line with our premise that the appeal of regular hot brewed coffee grows as coffee drinkers mature.

However, it is also important to note that reason #2 is less about evolving tastes and more about availability… at-home consumption is dominated by regular brewed coffee (driven largely by convenience and ease of preparation, fewer ingredients and skill needed for brewed as compared to specialty drinks, etc.).

A Datassential study commissioned by S&D Coffee & Tea, Inc.

4 A DATASSENTIAL STUDY COMMISSIONED BY S&D COFFEE & TEA, INC. SO WHAT DOES THIS MEAN? Coffee drinks (sweeter, hot espresso-based and iced or frozen blended coffee beverages) do appear to act as a major entry point or gateway beverage. Also, increased consumption of regular hot brewed coffee does appear to happen over time. However, growth in one doesn’t necessarily directly correlate to diminished consumption or appeal of the other. As can be observed in the chart below, there is still plenty of cross-consumption between age groups and beverage types.

7.1 6.7 5.4 2.9 3.3 4.6 Young Millenials Gen X Old Millenials Regularhot brewedcoffee Coffee Consump onby Beverage Type: Last 10 Cups Coffee drinks (includes hot, cold, andfrozen) So older coffee drinkers are having more regular hot brewed coffee, but the age gap is less pronounced for coffee drinks.

Sweet “gateway” drinks are important because they still play a prominent role even after “coffee maturity” takes effect.

A Datassential study commissioned by S&D Coffee & Tea, Inc.

Thus far, we’ve established that coffee consumption behaviors differ between generations and we’ve further discussed that this is at least somewhat attributable to the variance between what was available at the time of coffee initiation for earlier generations (before the “coffee house revolution”) as compared to today’s younger generation (after the “coffee house revolution”). We posit that this same phenomenon has also led to a shift in the way each age group thinks about the definition of coffee. While “coffee” has traditionally been the word we use to reference regular hot brewed coffee, for Millennials, “coffee” has become an umbrella term which is inclusive of both regular hot brewed coffee and sweet espresso-based or cold coffee drinks (what many of us term “specialty coffee drinks”).

IF COFFEE INCLUDES BOTH BREWED COFFEE AND SPECIALTY COFFEE, WHAT IS “SPECIALTY COFFEE”? When discussing coffee as a subject, it’s convenient and understandable to couch definitions and terminology in ingredients- based thinking (coffee = regular hot brewed coffee and specialty coffee = espresso-based coffee drinks). However, when selling coffee, it’s important to establish universally clear communications based on how customers are thinking about it. We asked coffee drinkers to help us define the term “specialty coffee beverage” and the following descriptions came to the top: #1: Has a special name (i.e.

cappuccino, latte, mocha, frappe, macchiato, etc.) #2: Is more of a treat/indulgent than regular coffee #3: Includes special additions (i.e. whipped cream, steamed milk, syrups, chocolate pieces, etc.) So while the inclusion or usage of espresso is a common factor across these beverages, it is not in fact the defining factor. This is an important distinction because it represents evidence to strongly suggest that contrary to traditional belief, specialty coffee is not fundamentally about “the bean”…rather, it is all about “the build” (or more specifically, the sum product of multiple components).

WHATIS COFFEE ANYWAY? ...for Millennials, “coffee” has become an umbrella term which is inclusive of both regular hot brewed coffee and sweet espresso-based or cold coffee drinks ...specialty coffee is not fundamentally about “the bean”…rather, it is all about “the build” 5 APPEALING TO YOUNG COFFEE DRINKERS ALONG THEIR MATURITY PATH 2

A Datassential study commissioned by S&D Coffee & Tea, Inc.

Additionally, this has incredibly wide-ranging implications because it helps to inform insights around consumption drivers. Whole marketing platforms have been built around communication about bean type and bean origin. If specialty coffee is first and foremost “a build” in potential customers’ minds, then mustn’t we revisit and reorder traditional coffee attributes against a new measuring stick of potential impact on consumer purchase decisions? To even begin to answer this, it’s necessary to take a closer look at purchase motivations and how they differ between beverage types and across generational lines.

Let’s start by examining a few key differences in occasion fit by beverage temperature: It might not be particularly surprising to know that regular hot black coffee lines up best with “helps you start your day”. Likewise, it’s not much of a stretch to think that cold coffee beverages would be considered a better fit among those looking for refreshment or a standalone snack or dessert item. However, this does bring up a topic we discussed previously. Recall that sweeter coffee drinks often act as a gateway beverage for younger coffee drinkers. Thus, the idea of a coffee beverage as a candy or dessert alternative opens up a far wider breadth of away from home foodservice occasions, especially as it relates to cold (and sweet) coffee beverages, since the temperature already meshes particularly well against these types of occasions (per the chart above).

COFFEE DRIVERS, OCCASIONS AND MOTIVATIONS 0% 10% 20% 30% 40% 50% 60% 70% Tohelp you start your day For refreshment Onits own as a snack or dessert Hot Brewed Coffee Beverage Desireability by Occasion Type Hot Specialty Coffee Iced Coffee Frozen/Blended Coffee 3 6 A DATASSENTIAL STUDY COMMISSIONED BY S&D COFFEE & TEA, INC.

A Datassential study commissioned by S&D Coffee & Tea, Inc.

7 APPEALING TO YOUNG COFFEE DRINKERS ALONG THEIR MATURITY PATH Additionally, insofar as we are discussing the scope of appropriate consumption occasions by drink type and age, another important distinction to note is how even the attitudes around just regular brewed hot coffee vary by age.

Older coffee drinkers tend to associate brewed coffee with a narrower, more traditional set of occasions (to help you start your day, to warm you up, to go with bakery breakfast goods, etc.) while younger coffee drinkers are more open to including coffee in their beverage consideration set across a far broader swath of occasions.

0% 10% 20% 30% 40% 50% 60% 70% 80% Tohelp you start your day For refreshment Toquench thirst tofood Accompaniment Onits own dessert as a snackor Tofill you up / sa sfyhunger Brewed Coffee: Desireability by Occasion Type Gen X (35 to 44) Millennials (18 to 34) In other words, to older consumers who are more likely to have developed their coffee drinking habits via self-brewing in the home, regular hot brewed coffee has gotten lodged under the domain of “mundane ritual drink” with immediate top-of-mind associations being limited primarily to the morning day part. Meanwhile, younger coffee drinkers (who also define “coffee” through a broader lens which includes all formats - hot and cold, brewed and specialty) have become accustomed to its constant presence infiltrating many different day parts and eating occasions.

As such, for the Millennial consumer, coffee (in all of its many forms) has actually come to compete more directly against other beverage types (like juice, water, carbonated soft drinks, etc.)…which is even more reason to target this group.

A Datassential study commissioned by S&D Coffee & Tea, Inc.

8 A DATASSENTIAL STUDY COMMISSIONED BY S&D COFFEE & TEA, INC. Our goal for this report is to offer up the context for a new framework or lens through which to think about the coffee industry such that readers are enabled to begin exploring the multitude of ways in which this new perspective might lend itself to updated approaches to sales strategies or marketing communications. There are still many important questions outstanding…For instance, though we’ve seen how Millennials have evolved thus far, how might they continue to develop as they progress along their coffee-drinking curve? We’ve also seen how these same consumers have basically redefined previously established industry guidelines and terminology in a very short time, but what else might they come to redefine over the coming years?

Understanding how coffee consumption patterns vary by age and developing customized strategies against them is critical. As such, the findings outlined in the preceding pages are meant as an attempt to help prepare the industry to grow with young coffee drinkers as they speed along into the next phase of coffee discovery and maturity. SONOW WHAT? 4

9 APPEALING TO YOUNG COFFEE DRINKERS ALONG THEIR MATURITY PATH Research Overview Study Purpose The broad purpose of this study is to better understand coffee usage and attitudes among Millennials and further, to identify key whitespace growth opportunities for coffee operators therein.

Under commission of the S&D Coffee& Tea, Datassential presents Appealing to Young Coffee Drinkers Along Their Maturity Path. This study incorporates consumer and industry research to address five key objectives: 1. Determine differences in both general coffee attitudes and consumption behavior between Millennials and older coffee consumers (represented in this study by members of Gen X) 2. Understand perceptions and expectations of key attributes such as quality and price for both beverage and venue selection 3. Identify terms and labels that best define premium and/or specialty coffee 4. Quantify motivations for coffee consumption by beverage type These five objectives comprise the foundation for the research presented herein and provide context and insight for the various findings uncovered in the study.

Methodology 1. Consumer quantitative survey research: Online survey of 1,388 consumers 2. Participation requirements: • This study was designed to capture a statistically significant sample of Young Millennials (18 to 24), Older Millennials (25 to 34), and members of Generation X (35 to 44). As such, all respondents were qualified as being between the ages of 18 and 44 as of the date of their participation. • All respondents were also qualified as away-from-home coffee drinkers (including coffee beverages of any type) at a frequency of “once per month” or more often. 3. Survey fielded: March 2014 4.

Resources outside of this survey utilized: Datassential MenuTrends™, Datassential BUZZ™ Coffee & Tea Tracker General Data Sampling Beyond the participation requirements outlined above, consumer study respondents were sampled to approximate the national US population based on core demographic criteria including: gender, household income, ethnicity, household size, and geographic region. A Note on Statistical Reliability: The 1,388 sample level corresponds with a maximum margin of error of +/- 2.6% at the 95% significance level; this means that in 95% of cases, any statistic reported for the full study sample of 1,388 respondents should deviate no more than 2.6% from those exhibited by the general consumer population.

When cross- tabs are applied to the data, smaller sample sizes correspond with greater statistical error margins. Note that throughout this report, statistical significance is calculated at the 95% significance level for each question where statistical significance highlighting is shown.

For Inquiries contact Emily Tang 312-642-2573 emily.tang@datassential.com

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