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6.28.2021 NAICS CODES: 311920

SIC CODES: 2095, 2099

INDUSTRY PROFILE

Coffee & Tea Manufacturing

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About First Research

Revenue by Product - US Census Bureau

Companies in this industry roast coffee, blend tea, and manufacture coffee and tea concentrates. Major companies include US producers Farmer Brothers, JM Smucker (owner of Folgers), Keurig Dr Pepper, and Kraft Heinz (owner of Maxwell House), as well as ITO EN (Japan), Maxingvest ag (Germany), Nestlé (Switzerland), Tata Consumer Products (India), and Unilever (owner of Lipton; UK).

World coffee production is more than 10 million metric tons per year. Top producers include Brazil, Vietnam, Colombia, and Indonesia. Tea production is about 6 million metric tons. Leading tea producing countries include China, India, Kenya, and Sri Lanka.

The US coffee and tea manufacturing industry includes about 725 establishments (single-location companies and units of multi-location companies) with combined annual revenue of about $14 billion.

Consumer tastes and disposable income drive demand. The profitability of individual companies depends on effectively managing raw ingredient costs, efficient operations, and effective marketing. Large companies have scale advantages in purchasing, distribution, manufacturing, and marketing. Small companies can compete effectively by offering specialized products or serving a local market. The US industry is highly concentrated: the top 50 companies generate about 95% of revenue.

Imports of roasted coffee and tea are about 15% of the US market; exports are about 10% of US production. Part of the international export market is instant coffee. The US is the world's top coffee-consuming nation and the largest importer of green coffee beans. Domestic production is limited — with the exception of Hawaii and Puerto Rico, the US climate can't support coffee trees and tea plants.

Coffee and tea manufacturers face intense competition from other beverage companies, especially soft drink, bottled water, and juice manufacturers.

Major products include roasted coffee (85% of industry revenue); tea (10%); and coffee concentrates (5%). Roasted coffee includes both whole and ground beans. Tea includes tea bags as well as loose and instant tea. Coffee concentrates include freeze-dried, frozen, or liquid concentrates, along with coffee substitutes. Companies in the commercial sector may provide wholesale customers coffee brewing and grinding equipment to maintain product quality, and some own and operate retail coffee shops. Specialty coffees and teas are generally high- quality, premium-priced products.

Industry Overview

Competitive Landscape

Products, Operations & Technology

Coffee production starts with the harvest of coffee cherries, either by hand or machine. Suppliers remove the coffee bean from the cherry and dry the beans to produce green coffee. Blending multiple types of green coffee results in different flavors.

Green coffee beans are agricultural commodities. Most beans are imports from countries with tropical climates conducive to growing coffee trees. Companies may use brokers to buy coffee on the open market. Manufacturers may also have direct agreements with farms, estates, exporters, and cooperative groups, especially if the company produces specialty coffee. Companies may hold futures contracts and options to protect against price changes.

The two main varieties of green coffee are arabica and robusta. Manufacturers typically use high-quality arabica beans in specialty coffees, and robusta beans in commercial or instant coffee. Arabica beans generally command a premium price, although blending allows companies to mix in less expensive robusta beans and still produce high- quality coffee.

Types of tea include green, oolong, and black. Most Americans drink iced tea brewed from black tea. Herbal teas aren't actually tea, but a combination of leaves, bark, roots, and flowers of other plants. Orange pekoe is the classification for the largest leaves, followed by pekoe, and pekoe souchong. Companies sell loose tea for multiple servings. Restaurants and food service vendors often use tea concentrates and extracts to produce mass servings. Instant sweet tea typically consists of sugar, additives, and a very small amount of tea. Companies typically establish contracts to buy tea from importers or growers; large companies may own tea estates.

Common packaging includes bags (paper, plastic, or foil), cans (plastic or metal), and single-serving pods meant for use with proprietary brewing appliances. Companies in the commercial segment may provide private label products for businesses, and offer custom packaging bearing the institution’s name. Companies typically have a network of distribution centers or warehouses to store products prior to delivery. Many specialty products require fast delivery to maintain flavor and freshness.

Technology

Roasting machines heat beans through a process known as pyrolysis, producing the coffee's flavor and aroma, and air or water is used to cool the roasted beans. During roasting, the caffeol (oil inside the beans) emerges and the beans turn brown. Roasted beans fall into color categories — light, medium, medium-dark, and dark. Electronic sorters remove defective or discolored coffee beans by scanning for particular colors. Some roasters use infrared technology to generate heat.

To produce decaffeinated coffee, companies or processors use water, chemicals, or carbon dioxide to extract caffeine. Swiss Water decaffeination is a chemical-free patented process. To produce instant coffee, extraction equipment converts specially ground-roasted coffee into a coffee concentrate. Next, dehydration through freeze- or spray-drying removes moisture from the concentrate to produce dry instant coffee granules. Manufacturers must add back aroma, as instant coffee loses much aroma during processing.

Processing defines different types of tea, as all tea originates from the same species of plant. After harvest, withering removes moisture from tea leaves, then roller machines break leaves and release key enzymes. Oxidation exposes tea to air to produce different flavors and colors. Screens sort leaves by size. After processing, manufacturers blend tea to produce a desired flavor and may add or spray on additional flavors, like cinnamon or vanilla. Automated bagging machines produce tea bags for individual servings.

Because fast delivery and product freshness are important, many companies have computerized ordering and inventory management systems.

Typical customers in the consumer segment include grocery stores, grocery wholesalers, mass merchandisers, warehouse clubs, drugstores, and specialty food stores. Customers in the commercial segment include food distributors, institutional food service operators, office coffee services, hotels, restaurants, hospitals, and convenience stores.

Marketing and promotional vehicles in the consumer segment include TV, print, and radio advertising, coupons, direct mail, and sampling. Brand names, like Maxwell House, Folgers, Lipton, and Starbucks, are very important. Trade promotions, through in-store ads or price reductions, are common. Companies may offer products through multiple retail channels to maximize brand awareness.

Large companies use an in-house sales force. Medium and small companies may rely on food brokers, who, because they typically represent many other products, are incentivized using commissions. In the commercial segment, trade shows are especially important, as is superior service, since commercial customers view coffee as a commodity.

Some companies, mainly specialty product manufacturers, sell products through mail order or internet operations to reach consumers beyond a local market area. Websites also allow companies to sell higher priced premium products that don't meet volume requirements for large retailers. Some websites offer automatic reordering and ship

Sales & Marketing

Regulation

products to consumers on a fixed schedule.

Specialty coffee is generally more expensive than traditional; commercial blend is the least expensive. Retail prices can be unstable due to volatile pricing of green coffee beans. Manufacturers may raise and lower wholesale prices as ingredient costs change, resulting in comparable retail price fluctuations.

The industry is capital-intensive: average annual revenue per worker is about $625,000. Companies may require capital to expand or upgrade machinery. Revenue may be seasonal, based on demand for cold-weather and warm- weather drinks.

The US industry's average working capital turnover ratio is about 10%. Raw materials account for about 50% of inventory; finished goods, about 40%. The cost of materials is 60% to 65% of the wholesale price. Most companies use contracts, futures, and options for raw ingredient purchases to protect against price changes. Overall, inventories represent about 7.5% of sales and turn about nine times per year. Specialty coffee manufacturers tend to hold lower inventories to maintain freshness.

Working Capital Turnover by Company Size The working capital turnover ratio, also known as working capital to sales, is a measure of how efficiently a company uses its capital to generate sales. Companies should be compared to others in their industry.

The USDA and FDA regulate the US coffee and tea industries. The International Coffee Organization (ICO) is the main trade association that governs the worldwide coffee market to protect the welfare of growers. The Fair Trade Certified label on coffee and tea means growers receive a minimum price to maintain operations and profitability. The National Organic Standards Board (NOSB), part of the USDA, defines the criteria for organically grown foods.

World coffee production is about 10 million metric tons per year. Top producers include Brazil, Vietnam, Columbia, and Indonesia. Tea production is about 6 million metric tons. Leading tea producing countries include China, India, Kenya, and Sri Lanka. Major companies based outside the US include ITO EN (Japan), Maxingvest AG (Germany), Nestlé (Switzerland), Tata Global Beverages (India), and Unilever.

Finance & Regulation

Financial industry data provided by MicroBilt Corporation collected from 32 different data sources and represents financial performance of over 4.5 million privately held businesses and detailed industry financial benchmarks of companies in over 900 industries (SIC and NAICS). More data available at www.microbilt.com.

International Insights

Global Coffee Exports (by Volume) - International Coffee Organization (2018)

Change in Dollar Value of US Trade - US International Trade Commission

Many coffee-producing countries are small, developing nations where coffee can account for more than 75% of exports, according to the International Coffee Organization. Demand for coffee is strongest in mature markets like the US and Europe. Tea is most popular in China and India. In Japan, however, coffee consumption is projected to be twice as large as tea consumption by 2022, according to Euromonitor International.

Worldwide coffee consumption volume is increasing at a rate of about 2% per year, according to the ICO. However, growth in emerging markets such as Brazil, Russia, and China is showing signs of slowing down, and coffee manufacturers are tightening supply chains and making operations more efficient to help maintain margins. Germany, because it does not have a dominant coffee format, may present an opportunity for innovation and new brands, according to Euromonitor. Brazil, the US, Indonesia, Germany, and Japan account for 50% of total global volume sales.

Growing demand for coffee and tea can put a strain on resources in developing countries. Implementing sustainable agricultural practices could help preserve land and water resources in major producing regions. Research and development of new drought and disease-resistant plant strains may also be important as climate change affects coffee and tea growing seasons.

Even as global demand for coffee remains robust, some farmers in key coffee-producing countries, including Brazil and Costa Rica, have cut back coffee production in favor of more profitable crops. To help stave off price volatility, industry experts suggest more needs to be done to ensure better economic stability for coffee farmers.

Imports of coffee and tea to the US come primarily from Canada, Germany, Switzerland, Brazil, and Mexico. Major export markets for US snack foods include Canada, Mexico, Japan, Australia, and Philippines. 31192 COFFEE AND TEA

In the US, states with the most coffee and tea manufacturing establishments include California, Washington, Oregon, New York, and Texas. Hawaii is the only US state with large-scale commercial coffee growing operations. Because most unprocessed coffee and tea is imported from other countries, many manufacturers own production and distribution facilities near major ports. Large coffee roasting plants are located in Pennsylvania, Nevada, South Carolina, Georgia, and Louisiana. Virginia is home to Unilever's Lipton factory, the largest tea processing facility in the US.

Companies that sell products directly to retail coffee shops and other commercial customers may have localized distribution operations in major metropolitan areas. Seattle, New York City, and San Francisco have the highest per- capita concentrations of coffee shops, according to the National Coffee Association.

Coffee production is highly automated, and most jobs require expertise in roasting and operating machinery. Companies may employ master roasters due to the complexities of the roasting process. Tasters or cuppers evaluate beans and brewed coffee throughout the manufacturing process to ensure a proper roast. The industry injury rate in the US is about 25% higher than the national average.

Regional Highlights

Human Resources

Demand: Driven by consumer spending Need effective marketing and operations management Risk: Volatile raw material costs and consumer spending cuts

Industry Growth Rating

Quarterly Industry Update

6.28.2021

Trend: US Consumers’ Coffee Habits - Since the start of the pandemic, many US consumers have increased their coffee consumption and expressed concern about companies’ social responsibility commitment. Tchibo’s Coffee Consumption Survey showed that nearly 40% of consumers have been drinking more coffee weekly since the pandemic started, while over 70% reported that they have been making their coffee at home. More than 65% of consumers place a high importance on a company’s commitment to environment-friendly and Fair Trade practices. More than half of respondents spend the most money on coffee at the supermarket. When picking a new brand of coffee, the top reasons among consumers were fresher taste (79%) and premium quality (75%). The majority of consumers are more likely to buy ground coffee than whole beans.

Industry Impact - Aside from offering products with a fresher taste and higher quality, coffee brands may want to assess their social responsibility commitment and be more transparent about their efforts to address the change in consumer behavior.

US nondurable goods manufacturers' shipments of food products, an indicator of demand for coffee and tea products, rose 2.4% year-to-date in July 2020 compared to the same period in 2019.

US personal income, which drives consumer demand for coffee and tea, rose 0.5% in April 2021 compared to the same month in 2020.

US retail sales for food services and drinking places, a potential measure of demand for coffee and tea, increased 15.8% in the first four months of 2021 compared to the same period in 2020.

Industry Indicators

Revenue (in current dollars) for US coffee and tea manufacturing is forecast to grow at an annual compounded rate of 3% between 2020 and 2025, based on changes in physical volume and unit prices. Data Published: December 2020

First Research forecasts are based on INFORUM forecasts that are licensed from the Interindustry Economic Research Fund, Inc. (IERF) in College Park, MD. INFORUM's "interindustry-macro" approach to modeling the economy captures the links between industries and the aggregate economy. Forecast FAQs

Industry Forecast

Changes in the economic environment that may positively or negatively affect industry growth.

Data provided by First Research analysts and reviewed annually

Industry Drivers

Energy Prices Change in crude oil and related energy prices

Consumer Spending Change in overall level of consumer spending on goods and services

Commodity Prices Changes in prices for commodities, such as crops, metals, and other raw materials

Highly Volatile Raw Ingredient Costs - The cost of green coffee beans, the primary ingredient in coffee, can fluctuate greatly, depending on the country of origin and the actions of grower organizations. Green coffee prices can change dramatically from year to year, and even vary a significant amount within a year. Trade organizations, like the International Coffee Organization, try to manage supply and control pricing to protect growers. Bad weather, political unrest, and economic issues can affect the price of green coffee.

Heavy Competition in Beverage Market - Coffee competes for customers against other popular beverages such as soda, bottled water, and sports drinks. Coffee consumption has grown in recent years, especially among younger consumers. About 65% of US adults drink coffee daily, according to the National Coffee Association of the USA.

Critical Issues

Dependence on Economy - Coffee and tea manufacturers depend on a healthy economy and strong consumer spending to drive sales, as consumer spending drives demand for higher-priced specialty products. Companies in the commercial segment depend on the economic health of businesses, like restaurants and hotels, to drive out-of- home consumption. Economic downturns affect both segments, as consumers dine out less frequently and limit spending on pricier goods during tough times.

Dependence on Imports for Raw Ingredients - The majority of green coffee and tea is imported, as coffee and tea plants require specific climate and altitude conditions, and can grow only in certain parts of the world. Companies that produce specialty products may rely on a single estate for supply. The politically unstable environment of some grower countries, like Uganda and the Democratic Republic of Congo, jeopardizes consistent supply of key raw ingredients.

Industry Concentration - The industry is highly concentrated: the top 50 companies account for about 95% of sales. Large companies like Starbucks, JM Smucker, Kraft Heinz, and Nestlé dominate. Small companies face increasing pressure as large companies gain share in the specialty category. The rising popularity of cold-brew coffee is driving significant growth in the premium ready-to-drink and food service segments, and some manufacturers have launched lines of cold brew that consumers can prepare at home.

Influence of Weather - Availability of green coffee and tea depends on the weather in grower countries. Weather extremes can reduce or destroy a crop and limit supply, driving up prices for raw ingredients. Excessive rains in Colombia in recent years led to conditions for a disease called coffee rust to thrive. Coffee and tea consumption increases during cold weather; unseasonably warm temperatures or mild winters can reduce demand.

Health Concerns - Increasing public scrutiny of caffeine's effect on health can affect sales. Coffee contains a significant amount of caffeine, and tea contains moderate amounts. Numerous studies on caffeine suggest excessive consumption contributes to health problems. A highly publicized negative study can reduce demand both temporarily and long-term, affecting company sales. Some countries ban the sale of caffeine to children. As a result of consumer desire for healthier products, sales of decaffeinated coffee are growing.

Dependence on Small Farms - More coffee manufacturers are relying on smaller farms for specialty coffee beans. Relying on smaller farms may leave the coffee manufacturer at a disadvantage if the farms are struck by bad weather or if a relationship with the farmer dissolves. Sourcing products from small farms may also result in a more limited number of suppliers and more variable inventories.

Business Challenges

Growth in Specialty Coffee, Tea - Specialty coffee represents about 60% of the coffee consumed in the US, according to the National Coffee Association, with 2017 marking the first year that percentage has been more than half of daily consumption. Growth in the coffee business generally is being driven by an increase in coffee consumption outside the home and appreciation for the craft, though coffee drinkers under the age of 35 are more likely than older consumers to visit coffee shops. Nearly half of coffee was consumed outside the home in 2017. Interest in specialty tea also continues to grow.

Single-Serving Pod Sales Slow - The growth of the caffeine-inducing beverage category is largely being driven by single-serve, ready-to-drink (RTD) and single-cup coffee, according to Beverage Industry reports. Single-serve coffee pods reached nearly $4.5 billion in sales according to Information Resources Inc. (IRI) data for the 52 weeks ending May 17, 2020. The maturation of the market and problems with a new model of the popular Keurig system have brought growth back to single-digit rates. Concern about waste from packaging is another factor. However, the category is expected to remain the fastest-growing for coffee and other hot drinks through 2021. While private-label brands still are in the top spot for sales in the single-cup coffee category, Folgers' single-cup segment grew more than 100% in the 52 weeks ending May 17, according to IRI's data.

Growing Decaf Coffee Market - About 10% of US coffee drinkers choose decaffeinated coffee, according to the National Coffee Association. People often switch to decaf for health reasons as they get older, but it is becoming increasingly popular among younger consumers: 18- to 24-year-olds are now the top decaf drinkers in the US. By providing decaffeinated versions, companies can prevent some consumers from switching to alternative beverages and preserve brand loyalty.

Increased US Coffee, Tea Production - Interest in US-grown tea and coffee may be growing among consumers, prompting producers to invest in crops and manufacturing of their products. In California, farmers are taking advantage of former avocado groves to grow coffee bushes. As tropical climates experience instability, the temperate climate of the US may provide suitable conditions for expanding coffee-growing operations. More US tea growers also are handpicking and hand-processing leaves to create organic, small-batch tea, which may compete with large- scale manufacturers in China, India, and Sri Lanka.

New Tea Varieties - As more consumers opt for healthier alternatives to sugary sodas and juices, new flavors and varieties of tea may be appealing. According to Research and Markets, the global packaged tea market is expected to reach $65 billion in 2024, with international tea trends helping to drive that growth. Calming matcha tea is popular in China and Japan, while energy-boosting moringa tea originates in India. Turmeric is becoming a popular additive to tea, and some brands are experimenting with adding vegetables to blends. Meanwhile, Polish tea brand Green Hills offers an alternative to alcohol with its rum-and-honey flavored rooibos tea.

Business Trends

Fair Trade Certification - Production of Fair Trade Certified coffee and tea has grown significantly in recent years. The US and Canada imported more than 140 million pounds of Fair Trade coffee and 3 million pounds of Fair Trade tea in 2016 — increases of 35% and 100% since 2010, according to Fair Trade USA. Companies buy Fair Trade coffee at a set price, regardless of market conditions, to ensure a sustainable business for small growers. Companies may also provide credit and technical help to growers.

Organic Products - Consumer interest in health has driven sales for organic coffee and tea. Organic coffee sales have been rising steadily as a growing number of consumers look to organic products as an alternative to conventionally grown foods. Some organic coffees and teas are also Fair Trade Certified.

Young Adults Drinking More Coffee - The percentage of adults 18 to 24 who drink coffee daily has grown in recent years. Coffee consumption among young adults is an important consideration for the industry, as consumers form many life-long drinking habits in early adulthood. As consumers mature, some start to favor coffee over soft drinks, making the young adult demographic extremely important to coffee manufacturers.

Restaurant Industry Growth - The US restaurant industry, an important customer of roasted coffee products, generates about $800 billion in annual sales, according to the National Restaurant Association. Many coffee and tea manufacturers employ sales representatives to consult with food service customers and recommend updates to their beverage selections based on current consumer trends. Companies may ship products to restaurants or distribute through direct store delivery (DSD) networks.

Ready-to-Drink Coffee - The ready-to-drink (RTD) coffee category is one of the fastest-growing global soft drink

Industry Opportunities

segments, and coffee and other beverage manufacturers continue to introduce more premium RTD coffee products and expand them into new markets. Worldwide retail sales of RTD coffee exceed $20 billion annually, led by Japan, which accounts for more than half of that total, according to Euromonitor International. Refrigerated cold brew coffee sales are forecast to grow 67% from 2017 to 2022, according to Mintel. Major soda makers are making big investments to tap into the category's growth as core carbonated soft drink sales continue to drop, which could increase competition among manufacturers.

Coffee Byproducts - Coffee producers can benefit by making use of one of coffee's biggest byproducts: cascara. Often wasted, cascara is the leftover coffee fruit once green coffee beans are harvested. Consumers who are seeking to be more environmentally conscious may lean toward new cascara products offered by popular coffee manufacturers such as Starbucks, which offers beverages sweetened with cascara syrup. Teas and carbonated drinks also can be made from cascara, and startup Nomad Trading Company is working to make a sustainable energy drink.

Growing Sales in a Competitive Market Competition among coffee manufacturers is intense, as large companies battle for market share. To grow sales, companies may introduce specialty and nontraditional products, or enter new distribution channels. Coffee-flavored products, like ice creams and liqueurs, leverage existing brands and generate incremental revenue. Ready-to-drink products allow access to retail outlets without brewing equipment.

Nurturing Grower Relationships Supply and pricing of green coffee is highly volatile. The International Coffee Organization may increase commodity prices by directing member growers to limit production. Companies often establish direct relationships with growers to guarantee supply and lock in pricing. Some coffee manufacturers work with single estates to offer specialty coffees at a premium price.

Managing Highly Volatile Raw Material Costs Green coffee prices can fluctuate greatly, depending on the country of origin and the actions of grower organizations, and significantly affect operating margins. To protect pricing, most companies use contracts, futures, and options; to reduce costs, they may blend in less expensive coffee beans.

Managing Seasonal Cash Flow Coffee consumption peaks during winter months due to cold weather. Companies may offer products suited for off- season or year-round consumption to balance cash flows. Chilled drink mixes and ready-to-drink products drive consumption and sales during off-peak periods.

Increasing Supply Chain Efficiency Coffee manufacturers seek to reduce the cycle time between roasting and consumption because coffee quality starts to degrade after roasting. Many companies use computer systems to automate inventory management and improve the efficiency of distribution networks. Some also allow retail customers to order over the internet.

Leveraging the Internet Since large companies hold most of the coffee market, small companies must find alternative ways to reach consumers. Many small companies use retail websites to generate sales beyond local markets. The internet lets specialty companies offer a large selection of high-priced products that may not generate the volume retailers require. Websites also allow products to be described in greater detail.

Executive Insight

Chief Executive Officer - CEO

Chief Financial Officer - CFO

Chief Information Officer - CIO

Human Resources - HR

Recruiting Roasters Roasting coffee is a complex process that is both art and science. Most companies need experienced roasters to oversee the manufacturing process, since improper roasting can spoil production. By looking for certified Master Roasters, companies know they're hiring qualified, experienced roasters. The Coffee Roasters Guild offers accreditation and apprentice programs for Master Roasters.

Training Tasters To ensure a high-quality product, companies must monitor coffee quality throughout the manufacturing process. Tasters or cuppers sample coffee at multiple points during production. Consistent tasting (cupping) helps identify problems early and can prevent a bad roast. The Specialty Coffee Association offers DVDs and books that outline the coffee evaluation process and key product characteristics.

Competing Against Big Brands Small companies have difficulty establishing a consumer base, since large brands like Maxwell House, Folgers, and Starbucks dominate. To compete, small companies must offer a superior, differentiated product and reach consumers through unique retail outlets. By offering premium specialty coffees, like single estate coffees not commonly available, small companies gain a competitive advantage. In addition, partnering with high-end restaurants increases exposure to more discriminating consumers.

Ensuring Commercial Product Quality While proper roasting is essential, brewing is equally important to produce quality coffee. Brewing equipment, water temperature, and brewing time all affect flavor and aroma. Companies in the commercial segment may supply customers with brewing equipment to standardize brewing conditions, and may service equipment or offer customer training to ensure a high-quality end product.

VP Sales/Marketing - Sales

What is the company's strategy to grow sales? To grow sales, companies may introduce specialty and nontraditional products or enter new distribution channels.

How does the company ensure a long-term, consistent supply of quality raw ingredients? Supply and pricing of green coffee is highly volatile. Companies often establish direct relationships with growers to guarantee supply and lock in pricing.

How does the company manage raw ingredient pricing? Most companies use futures, contracts, and options for raw ingredients to protect against pricing changes.

How does the company manage seasonal cash flow? Companies may offer products suited for off-season or year-round consumption to balance cash flows. Chilled drink mixes and ready-to-drink products drive consumption and sales during off-peak periods.

How is the company using information systems to improve supply chain efficiency? Because fast delivery and product freshness are important, many companies have computerized ordering and inventory management systems.

How important is the internet to the company's sales and marketing efforts? Many small companies use retail websites to generate sales beyond local markets. The internet lets specialty companies offer a large selection of high-priced products that may not generate the volume retailers require.

Executive Conversation Starters

Chief Executive Officer - CEO

Chief Financial Officer - CFO

Chief Information Officer - CIO

How does the company recruit Master Roasters? Companies need experienced Master Roasters due to the complexities of the roasting process.

What type of training do tasters require? Tasters or cuppers evaluate beans and brewed coffee throughout the manufacturing process to ensure a proper roast.

How does the company compete against major food manufacturers with well-known brands? To compete, small companies must offer a superior, differentiated product and reach consumers through unique retail outlets.

What services does the company provide to ensure that commercial customers deliver a quality product? Companies in the commercial segment may supply customers with brewing equipment to standardize brewing conditions, and service equipment or offer customer training to ensure a high-quality end product.

Human Resources - HR

VP Sales/Marketing - Sales

How does the company deal with major changes in raw ingredient costs? The cost of green coffee beans, the primary ingredient in coffee, can fluctuate greatly, depending on the country of origin and the actions of grower organizations.

How does the company market its products against other beverages? Coffee competes for customers against other popular beverages such as soda, bottled water, and sports drinks.

How do changes in personal spending and the economy affect the company? Coffee and tea manufacturers depend on a healthy economy and strong consumer spending to drive sales, as consumer spending drives demand for higher-priced specialty products.

What growth has the company seen in demand for Fair Trade Certified coffee or tea? Production of Fair Trade Certified coffee and tea has grown significantly in recent years.

How is the company taking advantage of growing interest in organic products? Consumer interest in health has driven sales for organic coffee and tea.

How might the company benefit from developing products aimed at young adults? The percentage of adults 18 to 24 who drink coffee daily has grown in recent years.

How did the behavior and preference of coffee consumers change since the pandemic began? Since the start of the pandemic, many US consumers have increased their coffee consumption and expressed concern about companies’ social responsibility commitment.

Where does the company buy raw ingredients? Companies import green coffee and tea.

What types of relationships does the company have with suppliers? Companies may buy raw ingredients in the open market or have direct agreements with farms, estates, and cooperative groups.

Call Prep Questions

Conversation Starters

Quarterly Industry Update

Operations, Products, and Facilities

What types of supply problems has the company had? Supply of beans depends on weather and the political and economic conditions of grower countries.

What types of products are most important to the company? Companies may offer roasted coffee (whole bean or ground); tea (bags, loose, or instant); or coffee concentrates (freeze-dried, frozen, liquid, coffee substitutes).

How many types of green coffee or tea does the company use? Most companies blend multiple types of raw ingredients to achieve a desired flavor.

What types of specialty products does the company sell? Specialty coffees and teas are generally high quality, premium-priced products.

How automated is the company's roasting process? Roasting produces a coffee's flavor and aroma. Some companies retrofit roasters with computers to control roasting temperature.

How does the company ensure consistency in the final product? Blending helps achieve a desired flavor. Tasters or cuppers monitor product quality throughout the production process.

How effective is the company's distribution network? Many specialty products require fast delivery to maintain flavor and freshness.

What services does the company provide to ensure that commercial customers deliver a quality product? Companies in the commercial segment may supply customers with brewing equipment, service equipment, or customer training to ensure a high-quality end product.

Who are the company's most important customers in the consumer segment? Customers include grocery stores, grocery wholesalers, mass merchandisers, warehouse clubs, drugstores, and specialty food stores.

Who are the company's most important customers in the commercial segment? Customers include food distributors, institutional food service operators, office coffee services, hotels, restaurants, hospitals, and convenience stores.

What types of marketing and promotional vehicles are most effective? In the consumer segment, companies may use TV, print, radio, and online advertising; coupons; direct mail; and sample offers.

What are the company's most popular brands? Brand names, such as Maxwell House, Folgers, Lipton, and Starbucks, are very important.

How important are trade promotions in driving sales? In-store ads or price reductions are common in the coffee and tea categories.

Does the company sell through food brokers? What incentives are they offered to sell the company's products? Most food brokers represent many other products, and companies typically use commissions as incentive.

What is the company's pricing strategy? Companies may raise and lower wholesale prices as ingredient costs change, resulting in comparable retail price fluctuations.

What import issues has the company faced in securing raw ingredients? The US is the world's largest importer of green coffee beans, and exporting countries may be small, poor, politically unstable, developing nations.

How does the International Coffee Organization (ICO) affect raw ingredient availability and pricing? The ICO governs the worldwide coffee market to protect the welfare of growers.

How has the increasing popularity of Fair Trade products affected the company? Fair Trade Certified coffees and teas guarantee growers a minimum price to maintain operations and profitability.

Customers, Marketing, Pricing, Competition

Regulations, R&D, Imports and Exports

What are the company's export opportunities? Exports are a small, growing part of the US market; the international market for instant coffee is strong.

How is the company challenged in manufacturing organic coffee or tea? The National Organic Standards Board (NOSB), part of the USDA, defines the criteria for organic foods.

How does the company recruit Master Roasters? Companies need experienced Master Roasters due to the complexities of the roasting process.

What type of training do tasters require? Tasters or cuppers evaluate beans and brewed coffee throughout the manufacturing process to ensure a proper roast.

How does the company recruit production workers? Coffee production is highly automated, and many jobs require expertise in operating machinery.

How does the company manage raw ingredient pricing? Most companies use futures, contracts, and options for raw ingredients to protect against pricing changes.

How does the company manage inventory? Inventories of finished goods tend to be higher than those of raw materials. Specialty coffee manufacturers tend to hold lower inventories because freshness is important.

What types of financing does the company use? Companies may require capital to expand or upgrade machinery.

What is the company's strategy to grow sales? To grow sales, companies may introduce specialty and non-traditional products or enter new distribution channels.

How do periodic health scares regarding caffeine affect the company? Numerous studies on caffeine suggest that excessive consumption may contribute to health problems.

What kind of technology does the company use to optimize roasting? Companies may retrofit roasters with computers to more accurately control temperature.

Organization and Management

Financial Analysis

Business and Technology Strategies

Financial Information

COMPANY BENCHMARK TRENDS

Quick Ratio by Company Size The quick ratio, also known as the acid test ratio, measures a company's ability to meet short-term obligations with liquid assets. The higher the ratio, the better; a number below 1 signals financial distress. Use the quick ratio to determine if companies in an industry are typically able to pay off their current liabilities.

Current Liabilities to Net Worth by Company Size The ratio of current liabilities to net worth, also called current liabilities to equity, indicates the amount due creditors within a year as a percentage of stockholders' equity in a company. A high ratio (above 80 percent) can indicate trouble.

COMPANY BENCHMARK INFORMATION

Data Period: 2019 Last Update April 2021

Table Data Format Mean

Company Size All Large Medium Small

Size by Revenue Over $50M $5M - $50M Under $5M

Company Count 894 42 142 710

Income Statement

Net Sales 100% 100% 100% 100%

Gross Margin 35.4% 35.7% 33.8% 34.0%

Officer Compensation 2.1% 2.1% 2.0% 2.3%

Advertising & Sales 2.3% 2.4% 2.0% 2.1%

Other Operating Expenses 29.8% 30.1% 28.8% 28.8%

Operating Expenses 34.2% 34.5% 32.7% 33.1%

Operating Income 1.1% 1.1% 1.1% 0.9%

Net Income 0.4% 0.3% 0.4% 0.3%

Balance Sheet

Cash 6.2% 5.9% 7.4% 7.0%

Accounts Receivable 19.1% 18.2% 23.2% 22.3%

Inventory 12.1% 11.8% 13.3% 14.2%

Total Current Assets 39.7% 38.1% 46.9% 46.6%

Property, Plant & Equipment 49.0% 50.6% 41.8% 40.8%

Other Non-Current Assets 11.3% 11.2% 11.4% 12.6%

Total Assets 100.0% 100.0% 100.0% 100.0%

Accounts Payable 16.6% 16.1% 18.7% 18.6%

Total Current Liabilities 22.6% 21.9% 25.8% 25.7%

Total Long Term Liabilities 24.3% 22.7% 30.4% 33.6%

Net Worth 53.2% 55.4% 43.9% 40.7%

Financial Ratios

Quick Ratio 1.12 1.11 1.19 1.14

Current Ratio 1.76 1.74 1.82 1.81

Current Liabilities to Net Worth 42.4% 39.4% 58.7% 63.1%

Current Liabilities to Inventory x1.87 x1.86 x1.93 x1.81

NAICS: 311920

Total Debt to Net Worth x0.88 x0.80 x1.28 x1.45

Fixed Assets to Net Worth x0.92 x0.91 x0.95 x1.00

Days Accounts Receivable 37 35 46 44

Inventory Turnover x10.08 x10.36 x9.20 x8.54

Total Assets to Sales 52.6% 52.4% 53.6% 53.9%

Working Capital to Sales 9.0% 8.5% 11.3% 11.3%

Accounts Payable to Sales 8.8% 8.5% 10.1% 10.1%

Pre-Tax Return on Sales 0.6% 0.6% 0.6% 0.4%

Pre-Tax Return on Assets 1.1% 1.1% 1.2% 0.8%

Pre-Tax Return on Net Worth 2.1% 1.9% 2.7% 2.0%

Interest Coverage x1.51 x1.45 x1.75 x1.42

EBITDA to Sales 3.5% 3.3% 4.3% 3.8%

Capital Expenditures to Sales 2.0% 1.8% 2.9% 2.7%

ECONOMIC STATISTICS AND INFORMATION

Index of Industrial Production - Federal Reserve Board

Change in Producer Prices - Bureau of Labor Statistics

Coffee & Tea Manufacturing

Acquisition multiples below are calculated medians using at least 3 US private industry transactions completed

between 1/2008 and 12/2019 and are based on middle-market transactions where the market value of invested

capital (the selling price) was less than $1B. Data updated annually. Last updated: December 2019.

Valuation Multiple MVIC/Net Sales MVIC/Gross Profit MVIC/EBIT MVIC/EBITDA

Median Value 0.5 1.2 4.3 4.2

MVIC (Market Value of Invested Capital) = Also known as the selling price, the MVIC is the total consideration paid to

the seller and includes any cash, notes and/or securities that were used as a form of payment plus any interest-

bearing liabilities assumed by the buyer.

Net Sales = Annual Gross Sales, net of returns and discounts allowed, if any.

Gross Profit = Net Sales - Cost of Goods Sold

EBIT = Operating Profit

EBITDA = Operating Profit + Noncash Charges

VALUATION MULTIPLES

SOURCE: DealStats (formerly Pratt's Stats), 2019 (Portland, OR: Business Valuation Resources, LLC). Used with permission. DealStats is available at https://www.bvresources.com/learn/dealstats

Beverage Daily - Tea and Coffee Tea and coffee consumer trends.

Beverage Industry - Tea and Coffee Ready-to-drink coffee and tea product news.

Coffee Association of Canada (CAC) News, events, and links.

Global Coffee Report (GCR) Magazine International coffee industry news and analysis.

Hawaii Coffee Association (HCA) Industry group for Hawaiian coffee growers and producers.

International Coffee Organization (ICO) Governing trade association for worldwide coffee trade – global trade and pricing statistics.

National Coffee Association (NCA) Trade association – industry news, market research.

National Coffee Association (NCA) Blog Official blog of the National Coffee Association USA.

Specialty Coffee Association (SCA) Trade association for the specialty coffee industry – statistics for specialty categories.

Tea & Coffee Trade Journal Trade journal – trends, interviews with industry experts.

Industry Websites

Tea and Herbal Association of Canada Industry information.

Tea Association of the USA Trade association for tea industry – background and statistics on tea.

World Tea News News, features, and trend analysis for the global tea industry.

ICO - International Coffee Organization

NCA - National Coffee Association

NOSB - National Organic Standards Board

SCA - Specialty Coffee Association

Glossary of Acronyms

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