SIC 2095
ROASTED COFFEE



This category covers establishments primarily engaged in roasting coffee and in manufacturing coffee concentrates and extracts in powdered, liquid, or frozen form, including freeze-dried. Coffee roasting by wholesale grocers is covered in SIC 5149: Groceries and Related Products, Not Elsewhere Classified.

NAICS Code(s)

311920 (Coffee and Tea Manufacturing)

Industry Snapshot

Beginning in the early 1990s, small and large coffee roasters enjoyed strong markets. Coffee consumption also was brisk, with coffee shops maintaining their presence throughout the country. Thus companies like Star-bucks achieved positive growth and other players entered the specialty coffee market. For example, in the mid-1990s, Procter & Gamble acquired Millstone Coffee, a privately held firm that roasts and distributes gourmet, whole-bean coffee products to supermarkets.

Coffee has not always enjoyed its recent level of popularity. Between 1970 and 1980, U.S. per capita consumption of coffee in gallons had dropped from 33.4 to 26.7, although it held steady at that approximate rate throughout the 1980s. At an estimated 1.75 cups, daily per capita consumption of coffee in 1991 was a far cry from that of the all-time high of 3.1 cups reached in 1962. The advent of specialty coffees seemed to signal a turnaround in the coffee industry. Having in past decades exported a taste for instant coffee, the United States began importing a demand for specialty coffees. By the early 2000s, both daily and occasional consumption of specialty coffee was increasing, according to the Specialty Coffee Association of America (SCAA). However, while specialty coffees were a high-growth segment of the industry during the 1990s and early 2000s, Fortune reported that per capita consumption of the instant and regular types of coffee sold by leading packaged goods companies like Kraft decreased—even though these firms were making record profits from the sale of coffee, masking the slip in consumption.

In 2001, the SCAA reported that 52 percent of adults were daily coffee drinkers. Some 13 percent of adults were specialty coffee drinkers. Although weak economic conditions in 2002 were likely to affect expansion, coffeehouses continued to experience growth in the early 2000s, with more than 25 percent indicating plans in 2001 to add locations.

By early 2003, the fate of the world's coffee growers arguably was the most pressing and widely discussed coffee-related issue, both within and outside the industry. Prices continued to fall, and many farmers were becoming impoverished as production costs exceeded earnings. This situation was widely covered in leading newspapers and magazines and was a major agenda item for a number of environmental groups.

Organization and Structure

Due to a climate that cannot support coffee trees in areas other than Hawaii and Puerto Rico, U. S. production of coffee beans has been negligible. Instead the United States has become the largest importer of the beans, purchased from producing nations through traders. For this reason traders play an important role in the U.S. coffee industry, albeit one constrained by their obligation to serve the requirements of roasters. Thus the National Coffee Association (NCA), formed in the early 1970s, is dominated by the roasters.

Processing of coffee beans is performed by manufacturers that roast the beans for packaging. Also, roasters often further process the beans to be sold for brewing and instant coffee. At least until the mid-1980s, coffee produced in the United States was thought to be inferior to that of other countries. Some industry observers attributed this to the dominance of multinational conglomerates within the industry, which were preoccupied with profits and quantity instead of quality processing.

Background and Development

The U.S. coffee industry can be traced back to the seventeenth century, when coffeehouses, already quite popular in Europe, began to open in the colonies. Indeed, Revolutionary War strategy was often plotted in these establishments. At that time, only whole coffee beans were available, and these were sold from a barrel to be blended and ground in the home for boiling.

This method of preparing coffee proved its inconvenience during the Civil War, when transporting beans and grinders was quickly found to be unwieldy. As an alternative, coffee was made into a sort of concentrate by grinding it into a pulp that was shaped into bricks and allowed to harden. This preparation allowed soldiers to slice off an appropriate amount for boiling. In the meantime, however, entrepreneurs saw an opportunity. By roasting, blending, grinding, and packaging the coffee for sale, they offered consumers a welcome convenience.

Coffee beans are mainly categorized into two major varieties: arabica and robusta. Arabica beans are the most flavorful, and gourmet coffees are made with this type. Robusta beans are used in commercially packaged and instant coffees. Roasters store the purchased beans in silos until they are blended, which occurs immediately prior to roasting. Control of the blending process is usually done electronically, with preset percentages of the different varieties going into the blend. In addition to the type of bean used in a blend, roasting plays an important role in the resulting coffee's taste. Roasting eliminates the moisture from the bean, releasing the flavor. The color of the roasted beans determines the flavor, and consistency of color throughout a bean produces a high-quality brew. The beans should be dark enough to give the maximum amount of flavor, though not so dark that the coffee tastes scorched.

Until the end of World War II, robusta beans commanded a significantly lower price than arabica because they are less flavorful and can be harvested more easily. Thereafter, the price differential was reduced by two developments: demand for robusta was boosted by coffee-consuming nations' shift toward blends that combined both kinds of beans and, on an even larger scale, the introduction and great success of soluble coffee (or "instant" as it would later be known) derived largely, though not exclusively, from robusta.

The percentage of robusta beans used in coffee production increased significantly from the 1940s to the 1970s, as did the market for soluble coffee. Key points in the rapid development of the U.S. coffee industry during the decades after World War II included the pioneering of a soluble process by Hills Brothers in 1953, Nestle's introduction in the same year of decaffeinated instant coffee, the emergence of freeze-dried coffee in 1965, and the creation of continuous freeze-drying systems in 1975.

The increasing demand for robusta had a sharp impact on the coffee-producing nations. Central and South America, where much of the world's arabica is grown, dominated coffee production before the 1950s. By the late 1980s, however, more than a third of world coffee production took place in the robusta-growing countries of Africa and Southeast Asia.

Latin America also suffered when the coffee boom, occurring from 1955 to 1962, was followed by a slump in prices triggered by over-production, a crisis that led in 1962 to the first of several International Coffee Agreements intended to stabilize prices through the use of export quotas, which were imposed on nations producing coffee. Some industry observers felt that the swift and concerted response by the U.S. coffee industry to the slump-induced crisis in Latin America reflected the political climate of the time (fear of Communist inroads into countries with deteriorating economies) as well as concern about the possible overall disruption of world coffee production and an attachment to neighbors and long-term trading partners.

Despite numerous reports linking various health problems with coffee consumption, the results of such studies have been inconclusive and ambiguous. There is no definitive proof that coffee drinkers are at higher risk for high cholesterol, heart disease, birth defects, cancer of the bladder or pancreas, or high blood pressure. Though the drop in coffee consumption through the 1960s and 1970s may have reflected anxiety induced by the sheer number of these reports, it may also have been prompted in part by dissatisfaction with the quality of the product.

The increasing demand for specialty coffees suggested that consumers were attracted to higher quality brews, especially when accompanied by lower levels of caffeine—arabica beans are not only less bitter than robusta but also contain about half as much caffeine, the component of coffee most frequently cited in connection with potentially harmful side effects.

Coffee shops continued to enjoy prominence throughout American society during the mid-1990s, with Starbucks the unchallenged leader. Numerous smaller roasters, however, had also entered the market, enjoying measured success on a less dominant basis.

The industry looked strong in early 1997, with coffee markets showing record levels as roasters took advantage of favorable prices and rising inventories. However, speculation about the amount of coffee that Brazil, the world's leading producer, would harvest in late spring, 1997, indicated some uncertainty about whether these strong levels could be maintained.

The growing supply of coffee—about 107 million bags in the 1998-99 season, up 9 percent over 1997-98 production levels—caused prices to spiral down, leaving the value of coffee exports 10 percent lower, to $11 billion in 1998-99. While robusta beans increased about 5 percent in price, primarily due to drought conditions in Asia, arabica beans saw prices plunge around 30 percent in 1999. Prices at the wholesale level affected prices at the U.S. retail level; instant coffee prices in 1999 were slightly higher than in 1998 and 1999 roasted coffee prices were about 10 to 15 percent below the 1998 level.

Current Conditions

In the specialty coffee market, the number of coffee-houses in the United States has continued to grow. The Specialty Coffee Association of America (SCAA) predicts the number of coffeehouses will rise from 12,000 in 1999 to 18,000 in 2015. Before that rise, however, the SCAA feels the industry will consolidate, as companies purchase one another, thereby closing some stores. As a result, the trade group predicts the number of stores to drop to around 10,000, before rebounding to the 2015 figure. This trend was beginning to play out by the early 2000s, as the number of independently operated coffee-houses fell from 61 percent in 1999 to 52 percent in 2001.

As popularity of coffee grows and the coffeehouses add food to their menus, restaurants are beginning to reevaluate what they serve to their customers. Some restaurants are beginning to treat coffee as they would wine, offering their customers a wide range of choices and matching different types to different foods. The SCAA feels this pattern will introduce more people to specialty coffees, leading to greater sales at coffeehouses and at the grocery store. In fact, by late 2002 many of the world's leading packaged goods companies were focusing more heavily on this market segment at the retail level. For example, Kraft was experimenting with the sale of Gevalia, its well-known mail order coffee line, via retail stores. In addition, the company also was licensed to sell Starbucks coffee in grocery stores, along with its line of Maxwell House Premium Cup coffees.

By late 2002, coffee prices were at an all-time low, causing major problems for coffee growers worldwide. As Business Week reported, coffee prices at this time were approximately 50 cents per pound, while production costs were about 80 cents per pound. Amid these conditions, many coffee farmers in areas like Central America and Vietnam were starving. Citing information from the U.S. Agency for International Development, Fortune revealed that in Central America alone, some 600,000 farmers were out of work by the early 2000s. At the same time, Business Week indicated that profits for coffee sellers were skyrocketing, reaching $181 million in 2000—three times that of 1997 levels.

Increased productivity in Brazil, the world's leading coffee producer in 2002, as well as ramped up production in nations like Vietnam, were contributing factors to farmers' woes. In particular, Vietnam benefited from an increased demand for robusta beans, as opposed to the higher-quality arabica beans more widely used in the past. By the early 2000s, roasters had developed ways to remove the harsh taste of robusta beans through steam cleaning and the use of flavor additives. Thus, they were able to sell lower quality coffee and still earn healthy profits.

Concerns for the plight of the world's coffee growers led to an increased call for "fair trade" coffees. Fair trade coffee is made from beans for which growers receive more than the market price. Although many of the leading roasters bought fair trade coffee, it represented a small percentage of their total purchases in the early 2000s. However, the category was experiencing strong growth in the specialty coffee sector, supported by socially conscious consumers who were willing to pay a higher price to support coffee growers.

Industry Leaders

Within the coffee industry, the so-called "Big Four" roasters—Kraft, Nestle, Procter & Gamble, and Sara Lee—play a dominant role on the retail front. In addition to these packaged goods giants, which market a variety of other products besides coffee, companies like Starbucks also are major players.

Because the leaders in the U.S. coffee business imported—in pre-roasted or even ready-soluble form—so much of the coffee they used, much of the coffee processing actually done in this country was performed by smaller concerns, including those companies marketing the increasingly popular specialty coffees.

Among coffee manufacturers, Starbucks Corporation led the way. Starbucks is the leading retailer of specialty coffee in North America. The company opened its first store in Seattle in 1971 and by October 1999 had nearly 2,500 coffee shops throughout the United States in office buildings, shopping centers, airport terminals, cruise ships, and supermarkets. Starbucks has aggressively marketed its whole beans through the Internet, direct marketing, grocery stores, and coffeehouses.

Starbucks went public in 1992, with continued success well into the early 2000s as Americans continued their obsession with gourmet coffee and related products. Starbucks has also introduced coffee-flavored ice cream and beer and launched with Pepsico a cold coffee drink called Frappuccino. The company expanded outside the United States in 1996 with its first international stores in Tokyo and Toronto. By 2002 Starbucks had more than doubled its retail base to nearly 5,900 coffee shops. The company reported revenues of $3.3 billion for fiscal 2002, compared with $1.7 billion for fiscal 1999.

Diedrich Coffee, which operates Diedrich coffee-houses and Gloria Jean's Coffee, is the number two specialty coffee retailer in the United States. In 2002 Diedrich Coffee had 380 retail locations, up from 43 in October 1998, due mainly to the acquisition of Coffee People, Inc., a larger competitor. The company's brands also include Coffee Plantation. In 2002 Diedrich reported sales of $62.2 million.

America and the World

Coffee is produced in only a few areas around the world, yet it is consumed by people all over the world. The largest coffee-consuming countries produce very little coffee. Coffee production occurs in warm climates, such as those in South and Central America, the Caribbean, and parts of Africa and Asia. According to Fortune, in 2001 Brazil was the world's leading coffee producer, exporting 1.4 million tons, or 25 percent of the global supply. Vietnam also was a leading producer, with crops increasing from some 20,000 acres in 1975 to 200,000 by 1990. Followed by the United States, France, Germany, and Japan historically have accounted for about one-half of all coffee consumption.

Since coffee accounts for high export earnings in Central America, the weather is a big factor—from freezes, to drought, to too much rain. For example, Hurricane Georges and Tropical Storm Mitch blew through Central America in 1998, causing widespread damage. It was estimated that those storms caused a loss in coffee crops of around one million bags of coffee, with a value of $100 million.

Research and Technology

For several reasons, the leading manufacturers of coffee in the United States, despite their dependence on imported beans, managed to resist any competition from among the coffee-producing nations. One key advantage was patented technology and consequently automated production on a huge (and therefore highly economical) scale. Eliminating much repetitive labor in loading and unloading, the continuous roaster enabled a single person to operate two units continuously producing 5000 kilograms per hour, thereby doubling productivity to the level of 1600 bags per person per day. The developing coffee-producing nations could neither match this technological advantage nor afford to compete with U.S. manufacturers in a field characterized by heavy promotional and advertising costs.

Another obstacle preventing coffee-producing nations from manufacturing coffee for the U.S. market was that the industry leaders had used their technological advantage to shape local tastes to specific blends manufactured with great consistency. A single coffee-producing nation could not possibly draw on a sufficient variety of coffees to match these exact blends.

With the shift in national taste toward specialty coffees, quality of beans became a paramount concern for new producers entering the developing gourmet market. In response, the established American manufacturers began experimenting with refined versions of popular lines and researching possible new products, such as iced coffee. Based on its success in Japan, and given its potential appeal to younger consumers, iced coffee was regarded by a number of analysts as a probable strong seller in the American market during the 1990s. By 2001 and 2002, iced coffees were achieving double-digit growth, according to Brandweek, with consumption strongest among those in the 18-to-29-year-old age bracket. By late 2002 Nestle was preparing to unveil what the publication dubbed as "the first nationally branded line of shelf-stable syrups" for drinkers of iced coffee. In addition, Nestle offered its Nescafe Ice Java coffee product, to which consumers added milk and ice.

Further Reading

"Coffee Exporters Count on Higher Earnings." Agricultural Outlook Magazine, March 1999. Available from http://www.econ.ag.gov .

"Daily Coffee Newsletter." Best Investments, 5 November 1999. Available from http://www.binews.com .

"Fair Trade Coffee Making Market Inroads." Progressive Grocer, 15 September 2002.

Ferguson, Mike. "The Next 15 Years of Retail." Specialty Coffee Association of America, November 1999. Available from http://www.scaa.com .

Homes, Stanley, and Geri Smith. "For Coffee Growers, Not Even a Whiff of Profits." Business Week, 9 September 2002.

"Irvine, Calif.-Based Coffee Retailer Stems Losses with Boost in Sales." The Orange County Register, 4 November 1999.

"Mug Shot; Coffee." The Economist (US), 21 September 2002.

Reyes, Sonia. "Nestle Seeks Starbucks Jolt with Ice Java." Brandweek, 28 October 2002.

Specialty Coffee Association of America. "Market Report."2001. Available from http://www.scaa.com .

Stein, Nicholas; and Doris Burke. "Crisis in a Coffee Cup." Fortune, 9 December 2002.

Thompson, Stephanie. "Kraft Putting Coffee Line within Reach; Test Plan Shifts Mail-Order Brew to Some Store Shelves." Crain's Chicago Business, 16 September 2002.



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