New opportunities flourish in the coffee-and-tea segment

Coffee Beans around Iced Coffee with Milk, Marshmallows, and Cinnamon Flakes in Drink

By Morag McKenzie

As restaurants opened to full capacity and the tourism industry rebounded, total year-over-year (YOY) coffee and tea consumption grew 11 per cent in 2022-2023. This impressive growth is primarily driven by an increased demand for cold specialty coffee and tea, and varies significantly by daypart and demographic. It’s also driven by consumers seeking unique flavours, health benefits and beverage convenience.

Tim Hortons continues to dominate the coffee market, reporting strong revenue growth in 2022. Canadian operations grew 13 per cent to reach $6.03 billion in sales. “We rebounded strongly in 2022 with comparable sales up 11 per cent in the fourth quarter, benefitting from strong sales momentum,” says José Cil, CEO of parent company, Restaurant Brands International.

Brewed Coffee Dominates the Market

A Technomic January 2023 report states coffee-beverage purchases in 2022-2023 more closely resemble pre-pandemic behaviour. “While overall volume has decreased, hot brewed coffee continues to make up the largest share of the coffee market (65 per cent) followed by hot specialty (15 per cent) and cold specialty (20 per cent) coffee. The tea market is similar with hot (57 per cent) followed by hot specialty (14 per cent) and iced at 29 per cent,” explains Vince Sgabellone, a foodservice industry analyst, at Circana.

He adds, “While hot brewed coffee (55 per cent) and tea (37 per cent) continues to dominate the morning market, the fastest-growing daypart for both coffee (24 per cent) and tea (28 per cent) sales is afternoon/snack. This has mainly been driven by the shift to remote work as people look for a ‘mid-day re-energizer break’.”

With 29 per cent of all coffee purchased through a drive-thru, this segment continues to be very important to QSR operators, particularly in the morning daypart. “Drive-thru continues to be dominated by Tim’s (60 to 70 per cent) and McDonalds as Canadians’ morning coffee purchase decision are driven by convenience,” explains Robert Carter, president of Coffee Association of Canada.

Cold coffee and tea are hot sellers

The fastest-growing coffee category is cold coffee, which includes frozen, slushie-based, iced or cold-brew coffee beverages. “Cold coffee consumption is up 33 per cent over the last five years, including double-digit growth in the last year. While the large QSR chains have played a very large role in this growth, the real innovation comes from the independents, explains Carter. “Unique flavourings, toppings, colourings and even milk alternatives are where the growth opportunity is,” he adds.

A great deal of this growth is spurred by Gen Zs who are starting to drink coffee and tea at a much younger age. It’s this demographic that is dramatically affecting change in the cold coffee and tea category as they offer a very good vehicle for the innovative flavours they crave. “Gen Z grew up with bold flavours, so they’re looking for those in their LTOs and cold brews. Flavour preferences vary by demographic, including maple pumpkin, florals and herbal, with growing interest in coconut and global spices. Another great growth opportunity is combining syrups to create a blend that is unique to their operation,” explains Carrie Gillespie, Field Sales Marketing manager at Monin, adding she also sees growing interest in zero-sugar syrups.

Second Cup Canada has responded to this growing trend, adding a complete line of specialty hot and cold coffees and teas to its traditional premium brewed coffee. “We infuse the flavour into the beans versus adding a flavoured syrup to our beverages. Cold-brew coffee includes a fresh shot of our signature expresso. Top sellers include Ice Mixes (Expresso or Mocca Frappé) and Cold Infusions (Vanilla Bean or Oatmilk Mocca),” explains Deena Nezirevic, senior manager, Category & Innovation for Second Cup. She adds, “Second Cup has also successfully introduced many seasonal LTOs.”

Functional Health Benefits Fuel Tea Growth

Tea consumption in foodservice operations continues to see steady growth of 10 per cent, primarily fuelled by growth in herbal and Macha teas, which grew 19 per cent, while specialty-tea revenues, which includes London Fog, Chai et cetera, remains flat.
“While Boomers gravitate to traditional blends, millennials and Gen Z want more variety, including unique flavours and recipes. The big QSR chains have brought a lot of innovation in this area, making London Fog, Chai Latte and unique flavour blends such as Pumpkin Spice almost mainstream,” explains Shabnam Weber, president of Tea and Herbal Association of Canada (THAC).

While 60 per cent of tea served in foodservice operations is hot, the greatest growth opportunity remains in iced and herbal teas that offer additional wellness benefits. “Post COVID, teas that aid functional health, emotional relief or are organic have seen significant growth. This includes unique floral, citrus and spice combinations,” adds Weber.

“Global flavours are also seeing significant growth as people are looking for flavours from back home,” adds Sgabellone of Circana.
Second Cup has seen signif-icant growth from this trend, introducing its ‘Bloom Botanicals’ to its summer line up. “We have seen a growing interest in all the floral and fruit flavours, including lavender, hibiscus and lemony pear, many topped with a flavoured foam and garnish. A real advantage is many of the same ingredients can be used in multiple beverages,” explains Sam Wadera, VP Brands for Second Cup.

Revenue and Growth Opportunities

Currently, specialty cold beverage revenues are dominated by QSR’s. “Full-service restaurants have an enormous opportunity to grow revenue through the introduction of a greater variety of unique specialty cold beverages,” states Sgabellone. Tea and coffee are also increasingly being used as the base for alcoholic (i.e. Expresso Martini) and low alcohol or non-alcoholic cocktails, another growth opportunity for foodservice operators.

Other opportunities to grow revenue are expanding coffee and tea food pairings. “We need to go beyond coffee-and-muffin pairings to offer creative food pairings and offer customers a unique experience,” states Kathy Perrotta, VP, Market Strategy at IPOS. She adds, “The functional and emotional health benefits of many specialty beverages also provide operators with an opportunity to talk about the important holistic and natural energy they provide.”

There is also opportunity for QSR’s and full-service operations to grow coffee and tea revenues by daypart. “The morning daypart continues to be the fastest growing, offering an excellent opportunity to expand cold specialty offerings during this time,” states Sgabellone.

As coffee and tea are habitual purchases, they also lend themselves very well to digital online marketing and loyalty programs.

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