Americans drank an estimated
517 million cups of coffee daily in 2022, spending
almost $110 billion on the beverage that year. Cold brews, espresso-based
beverages, and perfectly roasted beans are among the
top drinks for today's coffee aficionados trying
to get their caffeine fix. But one segment of the US
market has given up grounds. Instant coffee, the kind
that dissolves in hot water, has seen consumption fall
to just 4% of American coffee drinkers. By
comparison, instant coffee accounts for about 25% of
the coffee consumed globally. A lot of American coffee
drinkers really look down on instant, and that's been
the category's key problem for a long time. The challenges of instant
coffee has always been a challenge of of quality, I
would say. Instant coffee has been
seen many, many years and not only in the US, but in
other places as an inferior quality of coffee. But I think with Nescafe
and what we do, we definitely have the means
to explain more to the consumers. What is soluble
coffee. But overseas it's a
different story. Nescafe, Swiss-based food
giant Nestlé's largest coffee segment, is one of
the world's biggest coffee brands. With 25 factories
globally, Nescafe is sold in 180 countries. Worldwide 1 in 7 cups of
coffee consumed is a Nescafé. The misnomer is that people
often think that people have stopped drinking instant
coffee, because we have so much specialty coffee in
abundance today. However, it actually has
been steadily growing for the last 20 years. If you look at global
consumption, it rises every year. So arguably this is
the best year ever for instant coffee, and next
year will probably be a better one than that. But the Nescafé brand faces
headwinds, including the stigma over its taste, as
well as competition from at home brewing devices. There are several challenges
of coffee growing, and if you look back, let's say
for a generation ago, it is harder to grow coffee
today. Known for its affordability
and convenience, instant coffee has long been known
as the black sheep of the coffee world. So how did
the Nescafé brand grow so big? And what is the future
of instant coffee? To find out, CNBC traveled
to Vietnam, the world's second largest exporter of
coffee behind Brazil, to get a look at Nescafe's
operation there. Nescafé got its start
around 1929, when a group of Brazilian bankers asked
Nestlé to find a solution to the country's coffee
surplus problem. Nescafé launched in the mid
30s in Switzerland and by 1940 was sold in 30
countries. During World War Two,
instant coffee was included in emergency rations for US
soldiers. Following the war, soluble
coffee was added to care packages for vulnerable
populations in Europe and Japan. So then when everybody came
back home, suddenly, that was the instant coffee boom
was in the 1940s and 50s. 1965 saw the launch of
Nescafé gold. But it was the rise of
brewed coffee and the introduction of coffee
houses to Main Street America that may have had
the biggest impact. Starbucks launched in
Seattle in 1971, And Starbucks, the first impact
was taking people out of their home to drink coffee. And that was that was a big
change, getting them to leave their house and drink
coffee someplace else. So that maybe had the most
significant impact on instant coffee. Nestlé launched the first
Nespresso coffee machine in 1986. By 2019, 42% of
American households owned a single cup brewing system. A lot of people became
coffee snobs in the last couple of decades, became
very, you know, interested in different kinds of
coffee, different brewing methods, different origins. And throughout all that,
it's been bad for instant. Our consumers are generally
younger. We overindex with younger
consumers, we overindex with people who are just
beginning their careers. So a little bit lower on
the income scale. There is a very strong,
loyal consumer base in the US that consumes soluble
coffee. And one of these subsets of
this consumer base is the Latin American immigrants,
mainly Mexicans, that are really, really hooked to
Nescafé. Instant coffee sales in the
US reach $945 million in 2023, 15% higher than 2018. A little over 1.3 billion
cups of Nescafe were consumed in the US in 2023. Nescafe is about 40%, a
little closer to 41% of the instant business in the US,
and the instant business in the US is a very positive
business in that it is about 10% of the category cups
and it's 8% of the category dollars. It's growing two
times faster than the category itself. Nestlé has roughly a dozen
products in the US that fall under its Nescafé brands,
Classico and Taster's Choice. Nescafé also has a
ready to drink business and a capsule system available
in certain overseas markets. Other instant brands in the
US space include Maxwell House, Folgers, Starbucks,
and Chock Full of Nuts. While instant coffee
consumption has fallen to the single digits in the
US. Abroad, it's a very different story. So how big instant coffee is
very much depends where we're talking about. It's a
category that has very different things happening
in different countries. In some places it is, you
know, going up, doing really well. In some places it is,
you know, in terminal decline. And these are
happening simultaneously globally. Globally, about 6,100 cups
of Nescafe are consumed every second. The most popular and the
most important country for us when it comes to Nescafé
and Nescafé soluble is Mexico by very far and
away. But there is other markets
coming right after Mexico. And we have, for example,
the UK, we have the Philippines, we have Japan
and the US we have as number five. So the US is actually
a very important soluble or Nescafé soluble coffee
market. Predominantly tea drinking
countries have been fertile ground for instant coffee
growth. Instant coffee in the UK is
really what turns the UK back into drinking coffee
as an alternative to tea, and the coffee market in
the UK becomes sort of 90%, 80, 90% is instant really
right up until the 2000. India, above all, is we're
seeing the most growth and one that Nescafé has said
globally is a key focus for them. So we have a really
nice ready to drink business, mainly in Asia. And that's where China
comes into play. So China is a soluble
coffee market, but also we have really established a
ready to drink, you can say business or category
through the Nescafé brand in China. Globally, soluble coffee
sales reached $33.8 billion in 2023, 36% higher than
2018. In 2017, Nestle acquired a
68% stake in high end coffee roaster Blue Bottle and
later launched a line of instant espresso coffees. Three years later, Nestlé
paid $7 billion to sell Starbucks coffee, including
a range of instant coffees in grocery and retail
stores. They launched Nescafe Ice
Roast in China and Mexico in 2023. Nestlé's coffee
business, which includes Nespresso, Blue Bottle
Coffee and Starbucks Coffee at home, was valued at $25
billion, with an Nescafé brand accounting for about
45% of that segment. Nestlé stock price has
continued to climb. Though it doesn't break out
specific numbers, as of November 2023, Nescafé
recorded strong double digit sales growth compared to
the previous year, largely driven by its Clasico
brand. So there is about 4 billion
consumers in the world that drink less than 20 cups a
year in terms of coffee generally, and that is
where soluble coffee is ideally versed to really
convert those consumers into coffee drinkers. While overall innovation to
the instant coffee space has been sluggish, the past
decade has seen a number of changes. One of the things that's
kind of evolving now is we're seeing people put
more emphasis on, let's see if we do put good coffee
into this process can we make a high quality instant
coffee? I believe that many of those
markets that I was describing before that
don't drink a lot of coffee at the moment. They will
actually go into the coffee category, not maybe through
a hot cup of coffee as we know it, but maybe through
a cold white sweet cup of coffee or bottle of can of
coffee. And they will just know
coffee as this. And they will never, never,
never, ever taste a hot cup of coffee as we know it in
other parts of the world or the US, for example. But it might be a wave of
new consumers and changing weather patterns that could
have the biggest impact on the segment. Coffee faces several
challenges. You have issues on the
supply side, be it more or less rainfall, higher or
lower temperatures at different times of the
year, which puts pressure on the supply of coffee. At the same time, you have
a growing in consumption on a yearly basis, and this
tension of supply and demand needs to be resolved. The two main types of
commercial coffee in use today are Robusta and
Arabica. Robusta, predominantly used
in instant coffee, is known for its strong and bitter
taste, higher levels of caffeine, and its tolerance
to temperature fluctuations. Arabica, which makes up
about 60% of the world's coffee production, is known
for its sweeter and softer taste and its cost, which
is roughly twice the amount of robusta. It is also less resilient
to weather shocks, pests, and disease. One of the things I think is
going to be the expansion of robusta. It's a more hearty
crop. It'll probably do better in
the coming decades than arabica will, which
suggests it also means more instant coffee consumption.
Because robusta is historically been used
mostly for instant coffee, so it is a strong
possibility that when the effects climate change does
mean more instant coffee. Coffee consumption is
expected to double from 3 billion cups of coffee a
day to 6 billion by 2050. At the same time, rising
temperatures could reduce the suitable area for
growing coffee by up to 50% by 2050. Nescafe, for its part, buys
more than 800,000 metric tons of green coffee, or
about 13 million bags each year from more than 20
countries. The company said it would
invest over $1 billion to encourage its coffee
farmers like these in Vietnam to use more
sustainable methods, such as incorporating organic
fertilizers and using climate change resistant
trees. But with coffee likely to
be costlier and more bitter in the coming years, what
are the chances Americans will gravitate back to
instant? I mean. The stigma very much still
remains in the US, and I don't think category is
ever going to shake it in the United States. I think
this is a category that's going to continue to
decline, not dramatically, but a steady drop for the
foreseeable future. After Covid and after the
unprecedented inflation that we have seen in the
markets, a lot of people are not able to really afford
going into coffee shops every day as they might
used, used to do. And so soluble coffee or
instant coffee or in home coffee is definitely a much
more cost effective way to drink coffee.
