Coffee's future lies in fancier ingredients and younger consumers, analysts say, as daily consumption dips

By Bill Peters

'The relative stagnation in coffee volumes suggests the preference for specialty coffee - with its premium ingredients and pricing - is driving sales growth,' BofA analysts say

For many Americans, life doesn't make sense until the day's first cup of coffee. But over the past decade, its popularity has barely budged. And BofA analysts on Monday suggested the drink's future will be a lot more higher-priced and higher-end than the styrofoam cups, powdered creamer and slow-burnt diner fuel of years past.

The analysts made that prediction based on the preferences of Gen Z, which they said tend to lean more toward specialty offerings and the opportunity to customize orders. They also said that generation's prime coffee-drinking days were still ahead of them.

That could be good news for Starbucks Corp. and its less formal peer, Dutch Bros. Inc., whose price target they raised to $49 from $44. Shares of Dutch Bros. (BROS) rallied 5% on Monday, while Starbucks' (SBUX) stock was up only fractionally.

The analysts made the assessment after shares of Starbucks sold off sharply in April following its quarterly results, which executives said were hit by more cautious consumers and steeper competition. Dutch Bros., which reported results several days later, didn't have those problems, but still noted a "continued volatile economic backdrop for the consumer."

Citing data from the National Coffee Association, the analysts said that between 2013 and 2023, the share of the U.S. population that drank coffee daily hovered at around two-thirds. That's far more coffee drinkers than 20 years ago. But between 2019 and 2023, the number of cups consumed daily actually went down, from 3.2 cups in 2019 to 2.75 in 2023, the analysts said.

However, so-called specialty coffee shops - broadly, those that pay more attention to how coffee is made and sourced - have grown faster than other quick-service restaurants over the past decade, they said.

"The relative stagnation in coffee volumes suggests the preference for specialty coffee - with its premium ingredients and pricing - is driving sales growth for LSR coffee specialists," the analysts said, referring to limited-service restaurants, like fast-food chains or cafes.

They added that the share of adults drinking specialty coffee each day has jumped from 15% in 2009 to 45% as of January.

Specialty coffee, they said, was far more popular among younger coffee drinkers - those between 18 and 24 - than those over the age of 60.

"Importantly, this specialty-heavy generation is only just now entering its peak coffee-consuming years," the analysts said. "Each prior generation has increased its total coffee consumption as it has aged. If Gen Z follows that same pattern, the mix shift toward specialty coffee could continue for at least the next two decades."

Starbucks, during its most recent quarter, suffered from falling sales, a drop in visits to its stores in North America and a shaky economic recovery in China. The chain has struggled to retain customers who visit only occasionally, and faced anger and calls for boycotts from supporters of both Israel and Palestine as the war in Gaza drags on.

Executives in April said they would focus on using technology to cut down on wait times at stores, particularly during the morning, roll out new drinks and take more steps to engage occasional customers and shoppers who aren't in the chain's rewards program.

Newer drinks for Dutch Bros., which is far smaller than Starbucks, have also worked for that company. Its protein coffee and boba drinks proved to be popular in the morning and afternoon, and its first-quarter same-store sales were up 10%.

Starbucks' stock is down 15.2% so far this year. Dutch Bros.' stock is up 26.1% year to date.

-Bill Peters

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06-10-24 1553ET

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