Impact of Covid-19 on premiumization trend and global coffee demand

Adapting new model of offerings to avoid insolvency

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Premiumization
The coffee industry had been enjoying an on-going shift towards premiumization, with rising income and increasing knowledge among consumers about good coffee driving this trend. However, Covid-19 will put a dent in the premiumization story short-term. Photo - StockSnap from Pixabay

Due to the rapid progression of Covid -19, coffee sales are expected to witness drastic decline globally, with North America and Eastern Europe being the worst-hit regions. With travel bans and large-scale lockdowns worldwide resulting in many working from home, combined with in-store seating bans, there is a substantial impact on out-of-home coffee consumption. Additionally, premiumization, which had gained momentum over the past few years, is likely to suffer as consumers may prefer affordable and private label products over premium brands, says GlobalData.

According to GlobalData’s Covid-19 Impact Market Model, as of 29 May 2020, when comparing the baseline and slowdown scenarios in 2020, coffee and tea shops are likely to witness a 15.5% sales decline globally.

Photo by Nathan Dumlao on Unsplash

Arvind Kaila, practice head of Consumer Beverages at GlobalData, comments, “Although out-of-home coffee consumption is easily replaced by at-home consumption, the losses incurred by on-trade outlets will not be recovered so easily. Consequently, coffee-shops are reformatting their stores towards a takeaway style operating model after months of closure. With the likelihood that various forms of social distancing measures may need to be in place for the rest of the year, foodservice outlets, including coffee shops, are looking to adapt to a new model of offerings to avoid insolvency.”

Costa Coffee in the UK has opened all its stores for customers, either drive-through or takeaway orders. Coffee giant Starbucks opened 150 stores across the UK with a limited menu and has been speeding up plans to build stores with a drive-through in the US after reopening its cafe with new sanitation and safety protocols in the first week of May 2020. Approximately 95% of Starbucks stores in the US have reopened, and the company has been able to support contactless ordering through its digital loyalty program. It also intends to close up to 400 restaurants owned by the company over the next 18 months.

Covid-19 to affect premiumization

Kaila continues, “The coffee industry had been enjoying an on-going shift towards premiumization, with rising income and increasing knowledge among consumers about good coffee driving this trend. However, Covid-19 will put a dent in the premiumization story short-term as consumers cut discretionary spending to save more.”

As per GlobalData’s week 10 Covid-19 tracker consumer survey, published on 3 June 2020, the outbreak has caused consumers to cut out on ‘non-essential’ products like alcohol and opt for lower or mid-priced non-alcoholic beverages. Only 10% of the global respondents bought non-alcoholic beverages at a premium price range, as opposed to 30%, who were buying the low-priced or cut these products from their shopping lists altogether.

“Economies may recover, but consumer confidence is likely to plummet and take longer to restore. With a spike in unemployment and slow wage growth, there is a risk to premiumization trend and lower discretionary impulse purchases if the pandemic is prolonged,” Kalia concludes.

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