Coffee, which accounts for 3% of Kraft's U.S. revenue (excluding Gevalia), is a tough category. In addition to the normal competition in the marketplace, specifically from Procter & Gamble Co.'s Folgers and Millstone brands as well as numerous regional players, it has the added challenge of volatile commodity costs. Right now, for example, coffee prices are at an all-time low. In such an atmosphere, said Prudential Securities analyst John McMillin, differentiating products becomes crucial, especially those value-added products (like Gevalia) that offer opportunity for higher margins.
Kraft's initiative with Gevalia makes sense, according to Credit Suisse First Boston analyst Dave Nelson, because "Kraft has built up some cachet for the Gevalia brand and it has legs." Kraft last year spent $10.8 million in media on Gevalia, from FCBi, New York. A spokesman for the Specialty Coffee Association of America noted that the specialty retail market is "an untapped distribution opportunity" for a national gourmet coffee brand, as only regional players have tested the waters, mostly in local stores.
"We built [the Gevalia] business and will continue to drive it through direct mail, but we are testing improving the accessibility of Gevalia in additional outlets where consumers are seeing other gourmet coffees show up," said Mark Pettie, general manager of Kraft Foods North America's Coffee division.
The Gevalia extension follows other efforts Kraft has made in recent years to augment its coffee portfolio and capture the double-digit growth of super-premium coffees, including licensing the Starbucks brand in grocery as well as expanding the rollout of its Maxwell House Premium Cup line. But the challenge remains that the vast majority of its sales are still in the slow-growing canned coffee business.
"The mainstream roast and ground coffee segment, which is easily two-thirds of our business, has been relatively flat for the last couple of years," Mr. Pettie said. As a result, the company is actually pleased with recent 52-week data it gathered that shows its overall coffee volume up nearly 1% even though actual dollar sales-due to underlying commodity costs, Mr. Pettie said-were down 7.2%. Mr. Pettie attributes the slight upswing in volume (and a slight dollar share gain over P&G) in part to the introduction last year of a convenient E-Z Open lid for Maxwell House cans that it will extend to larger sizes this year. Additional innovation to address the quality of its canned coffee is planned for later this year, he said.