Americans drank an estimated 517 million cups of coffee
daily in 2022, spending almost $110 billion on the
beverage that year.
Cold brews, espresso-based beverages, and perfectly
roasted beans are among the top drinks for today's
coffee aficionados trying to get their caffeine fix.
But one segment of the US market has given up grounds.
Instant coffee, the kind that dissolves in hot water,
has seen consumption fall to just 4% of American
coffee drinkers. By comparison, instant coffee
accounts for about 25% of the coffee consumed
globally.
A lot of American coffee drinkers really look down on
instant, and that's been the category's key problem
for a long time.
The challenges of instant coffee has always been a
challenge of of quality, I would say.
Instant coffee has been seen many, many years and
not only in the US, but in other places as an inferior
quality of coffee.
But I think with Nescafe and what we do, we
definitely have the means to explain more to the
consumers. What is soluble coffee.
But overseas it's a different story.
Nescafe, Swiss-based food giant Nestlé's largest
coffee segment, is one of the world's biggest coffee
brands. With 25 factories globally, Nescafe is sold in
180 countries.
Worldwide 1 in 7 cups of coffee consumed is a
Nescafé.
The misnomer is that people often think that people have
stopped drinking instant coffee, because we have so
much specialty coffee in abundance today.
However, it actually has been steadily growing for
the last 20 years.
If you look at global consumption, it rises every
year. So arguably this is the best year ever for
instant coffee, and next year will probably be a
better one than that.
But the Nescafé brand faces headwinds, including the
stigma over its taste, as well as competition from at
home brewing devices.
There are several challenges of coffee growing, and if
you look back, let's say for a generation ago, it is
harder to grow coffee today.
Known for its affordability and convenience, instant
coffee has long been known as the black sheep of the
coffee world. So how did the Nescafé brand grow so
big? And what is the future of instant coffee?
To find out, CNBC traveled to Vietnam, the world's
second largest exporter of coffee behind Brazil, to get
a look at Nescafe's operation there.
Nescafé got its start around 1929, when a group of
Brazilian bankers asked Nestlé to find a solution to
the country's coffee surplus problem.
Nescafé launched in the mid 30s in Switzerland and by
1940 was sold in 30 countries.
During World War Two, instant coffee was included
in emergency rations for US soldiers.
Following the war, soluble coffee was added to care
packages for vulnerable populations in Europe and
Japan.
So then when everybody came back home, suddenly, that
was the instant coffee boom was in the 1940s and 50s.
1965 saw the launch of Nescafé gold.
But it was the rise of brewed coffee and the
introduction of coffee houses to Main Street
America that may have had the biggest impact.
Starbucks launched in Seattle in 1971, And
Starbucks, the first impact was taking people out of
their home to drink coffee.
And that was that was a big change, getting them to
leave their house and drink coffee someplace else.
So that maybe had the most significant impact on
instant coffee.
Nestlé launched the first Nespresso coffee machine in
1986. By 2019, 42% of American households owned a
single cup brewing system.
A lot of people became coffee snobs in the last
couple of decades, became very, you know, interested
in different kinds of coffee, different brewing
methods, different origins.
And throughout all that, it's been bad for instant.
Our consumers are generally younger.
We overindex with younger consumers, we overindex with
people who are just beginning their careers.
So a little bit lower on the income scale.
There is a very strong, loyal consumer base in the
US that consumes soluble coffee.
And one of these subsets of this consumer base is the
Latin American immigrants, mainly Mexicans, that are
really, really hooked to Nescafé.
Instant coffee sales in the US reach $945 million in
2023, 15% higher than 2018.
A little over 1.3 billion cups of Nescafe were
consumed in the US in 2023.
Nescafe is about 40%, a little closer to 41% of the
instant business in the US, and the instant business in
the US is a very positive business in that it is about
10% of the category cups and it's 8% of the category
dollars. It's growing two times faster than the
category itself.
Nestlé has roughly a dozen products in the US that fall
under its Nescafé brands, Classico and Taster's
Choice. Nescafé also has a ready to drink business and
a capsule system available in certain overseas markets.
Other instant brands in the US space include Maxwell
House, Folgers, Starbucks, and Chock Full of Nuts.
While instant coffee consumption has fallen to
the single digits in the US. Abroad, it's a very
different story.
So how big instant coffee is very much depends where
we're talking about. It's a category that has very
different things happening in different countries.
In some places it is, you know, going up, doing really
well. In some places it is, you know, in terminal
decline. And these are happening simultaneously
globally.
Globally, about 6,100 cups of Nescafe are consumed
every second.
The most popular and the most important country for
us when it comes to Nescafé and Nescafé soluble is
Mexico by very far and away.
But there is other markets coming right after Mexico.
And we have, for example, the UK, we have the
Philippines, we have Japan and the US we have as number
five. So the US is actually a very important soluble or
Nescafé soluble coffee market.
Predominantly tea drinking countries have been fertile
ground for instant coffee growth.
Instant coffee in the UK is really what turns the UK
back into drinking coffee as an alternative to tea,
and the coffee market in the UK becomes sort of 90%,
80, 90% is instant really right up until the 2000.
India, above all, is we're seeing the most growth and
one that Nescafé has said globally is a key focus for
them. So we have a really nice ready to drink
business, mainly in Asia.
And that's where China comes into play.
So China is a soluble coffee market, but also we
have really established a ready to drink, you can say
business or category through the Nescafé brand in
China.
Globally, soluble coffee sales reached $33.8 billion
in 2023, 36% higher than 2018.
In 2017, Nestle acquired a 68% stake in high end coffee
roaster Blue Bottle and later launched a line of
instant espresso coffees.
Three years later, Nestlé paid $7 billion to sell
Starbucks coffee, including a range of instant coffees
in grocery and retail stores.
They launched Nescafe Ice Roast in China and Mexico in
2023. Nestlé's coffee business, which includes
Nespresso, Blue Bottle Coffee and Starbucks Coffee
at home, was valued at $25 billion, with an Nescafé
brand accounting for about 45% of that segment.
Nestlé stock price has continued to climb.
Though it doesn't break out specific numbers, as of
November 2023, Nescafé recorded strong double digit
sales growth compared to the previous year, largely
driven by its Clasico brand.
So there is about 4 billion consumers in the world that
drink less than 20 cups a year in terms of coffee
generally, and that is where soluble coffee is
ideally versed to really convert those consumers into
coffee drinkers.
While overall innovation to the instant coffee space has
been sluggish, the past decade has seen a number of
changes.
One of the things that's kind of evolving now is
we're seeing people put more emphasis on, let's see
if we do put good coffee into this process can we
make a high quality instant coffee?
I believe that many of those markets that I was
describing before that don't drink a lot of coffee
at the moment. They will actually go into the coffee
category, not maybe through a hot cup of coffee as we
know it, but maybe through a cold white sweet cup of
coffee or bottle of can of coffee.
And they will just know coffee as this.
And they will never, never, never, ever taste a hot cup
of coffee as we know it in other parts of the world or
the US, for example.
But it might be a wave of new consumers and changing
weather patterns that could have the biggest impact on
the segment.
Coffee faces several challenges.
You have issues on the supply side, be it more or
less rainfall, higher or lower temperatures at
different times of the year, which puts pressure on
the supply of coffee.
At the same time, you have a growing in consumption on
a yearly basis, and this tension of supply and demand
needs to be resolved.
The two main types of commercial coffee in use
today are Robusta and Arabica.
Robusta, predominantly used in instant coffee, is known
for its strong and bitter taste, higher levels of
caffeine, and its tolerance to temperature fluctuations.
Arabica, which makes up about 60% of the world's
coffee production, is known for its sweeter and softer
taste and its cost, which is roughly twice the amount
of robusta.
It is also less resilient to weather shocks, pests,
and disease.
One of the things I think is going to be the expansion of
robusta. It's a more hearty crop.
It'll probably do better in the coming decades than
arabica will, which suggests it also means more
instant coffee consumption. Because robusta is
historically been used mostly for instant coffee,
so it is a strong possibility that when the
effects climate change does mean more instant coffee.
Coffee consumption is expected to double from 3
billion cups of coffee a day to 6 billion by 2050.
At the same time, rising temperatures could reduce
the suitable area for growing coffee by up to 50%
by 2050.
Nescafe, for its part, buys more than 800,000 metric
tons of green coffee, or about 13 million bags each
year from more than 20 countries.
The company said it would invest over $1 billion to
encourage its coffee farmers like these in
Vietnam to use more sustainable methods, such as
incorporating organic fertilizers and using
climate change resistant trees.
But with coffee likely to be costlier and more bitter
in the coming years, what are the chances Americans
will gravitate back to instant?
I mean.
The stigma very much still remains in the US, and I
don't think category is ever going to shake it in
the United States. I think this is a category that's
going to continue to decline, not dramatically,
but a steady drop for the foreseeable future.
After Covid and after the unprecedented inflation that
we have seen in the markets, a lot of people are
not able to really afford going into coffee shops
every day as they might used, used to do.
And so soluble coffee or instant coffee or in home
coffee is definitely a much more cost effective way to
drink coffee.