Writing in the Wells Fargo equity research newsletter about the recent National Association of Convenience Stores (NACS) conference in Chicago, Wells Fargo Securities senior analyst Bonnie Herzog stated: “Overall, we saw a lot of new innovation in RTD coffee – not surprising given it has been the fastest growing non-alcoholic beverage segment over the past 5 years.
“We think the biggest winner will be [Coca-Cola] (having resolved production issues with Dunkin, and rolling out McCafé Frappe next year), and to a lesser extent [Monster Beverages], which has solid innovation, but has lost shelf space/credibility with some retailers and may often lose the battle for cooler space to [Coca-Cola]’s brands distributed by Coke bottlers.
“We think the clear share loser will be [PepsiCo]’s Starbucks lines, which has a dominant share, but will likely cede considerable share to [Coca-Cola and Monster].”
Double-digit growth
The RTD coffee category has been growing by double digits annually since 2011 (up an eye-watering 102% from 2011-16) and was worth $2.87 billion in 2016, according to a report from Euromonitor International. The category is expected to hit $3.26 billion by the end of 2017, which would represent annual growth of almost 13%.
Coca-Cola has been systematically building its RTD coffee portfolio, which includes brands such as Gold Peak, Dunkin’ Donuts-branded iced coffee beverages, illy issimo, and Java Monster (a hybrid coffee-energy drink produced by Monster and distributed by Coca-Cola bottlers). In September, the company announced it is expanding its McCafé coffee drinks to the beverage aisle next year with three new RTD McCafé Frappes.
For Monster, the Java product has faced significant production issues over the past year, but appears to be back on track, stated Herzog. In addition, the company will launch Caffé Monster in February 2018 targeting females and Gen X consumers, while its Espresso Monster product will launch next week in two flavors, targeting affluent Millennials, she added.
“While overall, we think [Monster’s] products are on trend, we do have concerns about its ability to gain incremental cooler space in the RTD Coffee section given the focus that [Coca-Cola] is also placing on innovation in RTD coffee –we would expect at the margin Coke’s bottlers/distributors will give preference to [Coca-Cola’s] products over Monster’s,” wrote Herzog.
For PepsiCo, while Herzog and her Wells Fargo colleagues, “liked some of the new innovation from Starbucks, including Cold Brew and Almond Milk Fraps”, they expect Starbucks and therefore PepsiCo to lose market share “given the massive innovation pipeline forthcoming from both [Coca-Cola and Monster].”