Heading into 2020, plant-based offerings, including non-dairy milk alternatives and functional ingredients, were key trends impacting the coffee and tea segment, notes Sophie Mir, associate editor at Technomic. However, the pandemic has caused shifts that altered the course of these trends.
“With operators turning their focus to core offerings to stay afloat, the fast-paced momentum of the plant-based trend we saw earlier in the year was forced to slow down,” Mir explains. “However, it’s recently picked back up again as more operations have re-opened. As the year progresses, we expect to see operators continuing to diversify their plant-based selections with even more unique twists,” she says, pointing to Starbucks’ launch of non-dairy cold foams in June.
Many major players within this space have added plant-based milks to their lineup within the last year. Even Tim Hortons, which has been slow to adopt milk alternatives, began offering Silk Almond Beverage (as well as skim milk) across Canada in June. This addition allows customers to customize their hot beverages, iced coffee and Iced Capps with non-dairy milk. “Hearing and acting on guest feedback is really important to help us provide the best possible experience. We’re happy to be offering more choices to guests,” Hope Bagozzi, CMO, Tim Hortons, said of the launch.
According to Statistics Canada, Canadians are consuming about 20-per-cent less dairy milk than they were a decade ago. And, oat beverage has recently emerged as a fast-growing dairy alternative. Between 2018 and 2019, oat-beverage sales spiked by 244 per cent nationwide, according to data from The Nielsen Company. By comparison, during the same period, soy- (down one per cent), coconut- (down three per cent) and rice (down 48 per cent) milk sales declined.
“In May, Second Cup became the first national coffee chain in Canada to introduce oat milk to its menu,” shares Steven Pelton, CEO of Aegis Brands. “Demand for oat milk has surged in recent years, thanks in large part to its sustainable footprint and superior taste.” As he explains, the production of oat milk requires 80-per-cent less land and 20-times less water than traditional dairy milk, while “its creamy taste and smooth texture make it a perfect pairing with coffee.”
Starbucks, which has been offering non-dairy options since 2004, also introduced oat beverage in Canada this summer — representing the fourth dairy alternative to join Starbucks Canada’s menu, which includes soy beverage, almond beverage and coconut beverage.
The company has committed to including more plant-based options on its menu as part of its global sustainability commitments and, in 2020, has already introduced a number of non-dairy beverages. New offerings include Cold Brew with Cinnamon Almond Foam, the Almond Honey Flat White, the Coconut Latte and several new Iced Coconut Drinks.
Facing New Challenges
As social and economic circumstances shifted drastically due to pandemic-related restrictions, many companies have had to focus their efforts on survival and recovery. Pandemic-related shutdowns, as well as the new behaviours of consumers that suddenly found themselves working from home, hit cafés and coffee shops hard.
“Across all areas of foodservice, operators are experiencing economic struggles and the coffee/café segment is no exception to this,” states Mir. “From a financial standpoint, brands will experience economic losses, with the remainder of the year focusing on recovery — or even survival — for smaller emerging chains or independent restaurants.”
An example that clearly highlights the economic hardship faced within the industry, Montreal-based DAVIDsTEA Inc. filed for bankruptcy protection and began implementing a re-structuring plan in order to stem the losses from its retail stores and accelerate its transition to an online retailer and wholesaler.
“The transformation of our business model is necessary to position the company for a return to profitability,” explains Frank Zitella, CFO and COO of DAVIDsTEA. “DAVIDsTEA has experienced a multi-year decline in brick-and-mortar sales and the post-COVID-19 retail environment creates significant challenges for our unique in-store customer experience.” He adds the chain “may terminate a significant number of our 222 leases as we seek to right-size our retail footprint.”
In June, Starbucks also announced plans to close up to 200 company-operated locations in Canada over the next two years as part of “portfolio-optimization” efforts. This strategy coincides with plans to reposition many U.S. stores and will see some Canadian locations be repositioned as well.
Starbucks is working to accelerate the U.S. expansion of convenience-led formats, such as drive-thru, mobile-order-only Starbucks Pickup locations, walk-up windows and curbside pickup, over the next 18 months to meet changing customer behaviours. The transformation will also encompass renovations to select store layouts, including the addition of a separate counter for mobile orders.
Strategy shakeups are likely to be the norm as the industry navigates the current environment. While the major players within the segment have been prioritizing the development of digital channels in recent years, COVID-19 has served to accelerate this process — as it has with a number of key trends within the foodservice industry.
“The COVID-19 pandemic forced chains to become more innovative in serving their customers, with a huge emphasis on off-premise opportunities, while in-store operations were closed,” says Mir. “Even as stores open, customers are still wary of coming on-premise, so off-premise service will be huge for the remainder of the year. For example, some chains launched curbside pickup, while others [offered] online ordering for retail items.”
Tim Hortons’ parent company, Restaurant Brands International (RBI), also indicated the importance of digital innovation to its recovery efforts. “Our teams have re-written code for our apps; re-imagined service opportunities such as curbside pickup; and expanded delivery services into thousands of new restaurants. The outcome has been a significant increase in digital sales in North America and we believe this trend shift to digital is what guests will continue to demand,” Jose, Cil, CEO, RBI, shared in a company update.
On the retail front, Pelton points to the launch of Second Cup’s e-commerce platform, which took place in April, as the brand’s “biggest new development” to take place since COVID-19 hit. This saw the brand offer home delivery for its products for the first time. Aegis’ other café brand, Bridgehead (acquired in January), has also seen growth through retail channels during this period. “Following the closure of its coffeehouses due to COVID-19, Bridgehead has seen 10-times growth in its online sales,” says Pelton.
As coffee shops progressed down the path to re-opening, Mir notes one bright spot. “According to Technomic’s Canadian consumer-survey data, 51 per cent are buying from local restaurants as a way to support the community. It’s undeniable this is a hard time for everyone, but in true Canadian spirit, it looks like consumers are ready to take out their wallets to help their neighbourhood restaurants stay afloat.”
Aegis Brands has been seeing the impact of this behaviour first hand. “What’s amazing to see is just how quickly our operations are bouncing back — much quicker than anticipated and far surpassing our post-COVID expectations,” shares Pelton. “Second Cup cafés in Alberta and the Eastern provinces, for example, have been delivering year-over-year same-store-sales results of approximately 75 per cent, despite the significant distancing regulations that are still in place…It’s clear that there’s a strong desire [from customers] to return to the comforts of their coffee routine as quickly as possible.”
With many Canadians working from home, foodservice spending has taken a huge hit and, according to a recent study by The Agri-Food Analytics Lab at Dalhousie University, in partnership with Caddle, many Canadians intend to continue working from home for the long term.
Given the strong link between morning foodservice occasions — which account for a large portion of out-of-home coffee sales — and the workday commute, this is expected to pose a challenge for coffee-focused operations. According to The NPD Group, in 2019, hot coffee was included in 30 per cent of all foodservice meal or snacks purchases. But, during the first three months of the pandemic, that figure fell to 23 per cent.
Further, the Dalhousie report suggests workday foodservice visits will continue to be impacted post-pandemic. Prior to the pandemic 36.8 per cent of survey respondents were going to a restaurant or ordering out for a meal/coffee break during the workday at least twice a week. That number goes down to 23.3 per cent when asked about plans after the pandemic is over.
Unsurprisingly, as out-of-home coffee occasions decreased, retail sales of coffee, as well as coffee equipment, increased. However, this has not made up for demand losses.