Instant Convenience, Mermaids, Good Enough

When Robert Falcon Scott set out for the arctic in 1901, he carried a version of instant
coffee, but what was then a powdery extract that clumped in water did not approach
commercial viability until WWI, when the entire production of the G. Washington Coffee
Company went to the troops. Most soldiers despised the coffee while acknowledging and
even praising the practical value of a hot, caffeinated, “cup of George” in the trenches.
After the war, use among civilian consumers remained limited. Serving instant coffee to
your guests in the 1920’s would be akin to serving freeze dried backpacking food to your
guests today.

Innovations by Nestle and others improved the taste of instant coffee but it wasn’t until
the 1950’s and the era of “space age” convenience that consumption began to grow
significantly in the U.S. In 1953, 10% of all cups of coffee in the U.S. were instant. By
1970, that number had grown to 26% and, correspondingly, by 1977 25% of Americans were drinking instant coffee daily. Instant coffee would cling to this market share through
the early 1980’s.

It’s not likely a coincidence that this growth in consumption of instant coffee closely
paralleled a decrease in overall coffee consumption. In 1962, American’s were drinking
3.12 cups of coffee a day per capita. By 1988, that had been cut almost in half, to 1.67
cups a day. Instant coffee did not cause the decrease, but it was a symptom. As daily
consumption of instant coffee hit its peak of 25%, daily consumption of regular coffee
bottomed out in the neighborhood of 38%, where it would remain until the late 1980’s.
Indeed, at 43% in 2008, daily consumption of regular coffee has not moved far from that
neighborhood.

By the early 1970’s, the quality of regular coffee had deteriorated to the point that
instant coffee, with its new “freeze dried” production process, could compete on taste.
In the absence of quality, convenience became a dominant determiner of consumer choice.

It certainly wasn’t price, as instant coffee sells for a premium at retail, one of the
coffee industry’s great ironies. Most coffee producing countries do not allow extremely
low quality coffee to be exported, but these types of regulations do not apply to coffee
that has been processed into instant, or “soluble” coffee. The result is that some of the
world’s lowest quality coffee, and thus cheapest, becomes some of the most expensive and profitable coffee per cup on the grocery store shelf.

Consumption of instant coffee began its nose dive in 1983 when it dropped to 22% and then never looked back. By 1993 daily consumption of instant coffee was at 12% and since 2001 it has held steady at around 7%. In the same way that an increase in consumption of instant coffee paralleled a decrease in the quality and consumption of coffee overall, the subsequent decrease in consumption of instant coffee coincides with the emergence of the specialty coffee industry.

But the road to recovery, or at least double digit consumption, for instant may have
begun on February 18, 2009 when Starbucks introduced instant coffee. The company claims to have been developing an instant product for 20 years and has a patent pending on a process they insist replicates the taste of their brewed coffee. Howard Schultz told the Wall Street Journal that he has been secretly serving the instant coffee to guests in his
home and no one has detected the difference, which could say more about Starbucks’ brewed coffee or the politeness of Schultz’ guests than it does about the instant coffee.

But whether the claims about taste are based on objective testing or the hopes and dreams of the marketing department hardly matters. Even a modest but noticeable improvement in taste over the current offerings in the market could result in a successful product launch and the only significant revenue driving move the company has made since Schultz returned to the helm just in time to navigate a recession. And it is a move that plants a flag firmly in the territory where Starbucks will compete for dominance: coffee that is good enough.

Far from being snarky commentary, the idea that Starbucks has in effect admitted that it
is competing primarily in the arena of coffee that is “good enough” is potentially good
news for the company and its stockholders. It is also good news for the quality-driven
sector of the specialty coffee retail industry, those companies that have stubbornly
stuck to their obsessive pursuit of serving the best coffees in the world.

Coffeehouse customers reveal a surprisingly balanced decision making process not unlike
the mythical rational consumer, or at least they did in August 2007, when Mintel
International Group asked them what they are most interested in when visiting a
coffeehouse. Respondents were allowed to choose as many answers as they found applicable.

The top four answers:
Reasonable prices 62%
Serves me quickly 62%
Has consistently high-quality coffee 61%
Conveniently located to where I live 61%

One must imagine that the percentage of customers who would say “reasonable prices” has increased since August 2007, perhaps dramatically and perhaps at the expense of quality driven decisions. In any case, with the introduction of instant coffee, Starbucks sets
the stage to acquire a larger share of the price and convenience driven coffee purchase
without abandoning completely a commitment to a decent cup and the perception of quality. And no doubt, truly exceptional coffee will still be available from Starbucks through programs like Black Apron selections and the Clover single cup brewing device. But by and large, Starbucks appears to be taking dead aim at intrusions made into their market share by the convenience sector, which has come to understand in recent years the value of coffee that is good enough.

Fast food operators and c-stores, in unison to a degree that seems almost conspiratorial,
have come to understand that they need only increase the quality (and cost) of their
coffee incrementally to capture a larger share of the quality conscience coffee consumer.

At the same time, the quality-driven coffee retail sector could do little to compete on
convenience. To their credit, Starbucks saw this trend and responded with the drive through store, which averages 30% higher revenue annually than a store without a drive through. Once again, Starbucks is pushing back but this time they are introducing in one move a potential increase in revenue and accompanying decrease in costs.

For those coffeehouses where proper preparation of a high quality product are still the
rule of the day, Starbucks’ move by the light of day into the game of good enough makes
it that much easier to differentiate their business and define their niche. The specialty
coffee industry was created in opposition to the poor quality coffee that was prevalent
in 1982, when instant was still 25% of daily consumption and the niche was simply “us”
and “them.” Today, coffee quality exists on a continuum with very poor coffee on one end
and exceptional, very high quality coffee on the other. These exceptional coffees and the
retailers who serve them will have an easier time defining themselves in the minds of
consumers and competing for their customers as Starbucks lays claim to the middle ground.

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