SWOT and Strategy Evaluation Paper

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 90% of revenue.

Imports of roasted coffee and tea are 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.

Revenue by Product - US Census Bureau

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.

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. 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. Blending multiple types of green coffee results in different flavors. 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.

To produce ground coffee, roasted beans go through grinders. 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.

Packaging uses bags (paper, plastic, or foil) or cans (plastic or metal), and in some cases, 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.

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. 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. Orange pekoe is the classification for the largest leaves, followed by pekoe, and pekoe souchong.

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. Companies sell loose tea for multiple servings. Institutions, like restaurants and food service vendors, 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; China, India, Sri Lanka, and Kenya are the world's largest sources of tea. Large companies may own tea estates.

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.

Electronic sorters remove defective or discolored coffee beans by scanning for particular colors. Coffee roasters, which may be retrofitted with computers to control temperature, may use infrared technology to generate heat. 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 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 $750,000. 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 50-60% of the wholesale price. Most companies use contracts, futures, and options for raw ingredient purchases to protect against price changes. Overall, inventories represent about 10% of sales and turn about eight times per year. Specialty coffee manufacturers tend to hold lower inventories because freshness is important.

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 9 million metric tons per year. Top producers include Brazil, Vietnam, Columbia, and Indonesia. Tea production is about 5 million metric tons. Major companies based outside the US include Nestlé (Switzerland), Tata Global Beverages (India), and Unilever (UK).

The top green coffee producing countries are Brazil, Vietnam, Colombia, and Indonesia. Many coffee-producing countries are small, developing nations where coffee can account for more than 75% of exports, according to the International Coffee Organization. Leading tea producing countries include China, India, Kenya, and Sri Lanka.

Global Coffee Exports (by Volume) - International Coffee Organization, 2014

Demand for coffee is strongest in mature markets like the US and Europe. Tea is most popular in China and India; China is forecast to account for half of global growth in tea demand through 2017, according to Rabobank. Demand for coffee is growing throughout the world, especially in emerging markets like Brazil, India, Russia, and China. Between 2015 and 2020, worldwide coffee consumption is expected to increase 25%, according to the International Coffee Organization. However, the rapid growth in Brazil, Russia, and China is showing signs of slowing down. In light of slowing growth in emerging markets, coffee manufacturers may focus on tightening supply chains and making operations more efficient to help maintain margins.

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. Coffee production in Costa Rica has fallen 35 percent in the last decade even as global coffee demand has grown substantially. To help stave off price volatility, industry experts suggest more needs to be done to ensure better economic stability for coffee farmers.

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

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 the same as the national average.

Critical Issues

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 held steady or grown during the past decade. About 85% of US consumers report having had coffee in the previous year, according to the National Coffee Association of the USA.

Industry Forecast

Revenue (in current dollars) for US coffee and tea manufacturing is forecast to grow at an annual compounded rate of 3% between 2016 and 2020, based on changes in physical volume and unit prices. Data Published: February 2016