Iced coffee market gains ground

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Despite early failures and low interest from beverage analysts, iced coffee products are finally starting to gain shelf space in retail outlets usually occupied by carbonated soft drinks.

"It's a category we've all looked at over a decade to try to figure out a way to break through," said Michael Bellas, CEO of consultancy Beverage Marketing, who noted that iced coffee has long been popular overseas. The category is poised to "be a big one."

Coffee in all forms was the No. 3 beverage in average per capita consumption in 1999, behind soft drinks and beer, according to Beverage Marketing. The total coffee category, including ground coffee, is double that of the $1.5 billion ready-to-drink tea market, although iced coffee has been slower to catch on.

"Iced tea and ready-to-drink teas are far more ingrained in the American palate and market," said Mr. Bellas.

POTENTIALLY HUGE

That hasn't discouraged marketers, who are waking up and smelling a potentially huge category. According to Packaged Facts, in 1998, the overall U.S. retail ground coffee market sold through mass and specialty outlets was $6.76 billion, and is projected to rise to $7.7 billion by 2003. Hot and cold coffees have also benefited from a coffee house boom. In 1991 there were fewer than 450 units in the U.S. Now, there are more than 7,500, not including carts and kiosks, according to a spokesman for the National Coffee Association. Coffee "is a social phenomenon that went from a staple beverage to a gourmet social beverage," he said.

Measurement figures for the ready-to-drink coffee segment, however, vary. According to Beverage Marketing, the 1999 wholesale market for ready-to-drink coffee was $204 million. Of that, category leader Starbucks Coffee Co.'s Frappuccino (distributed in a joint venture with PepsiCo) controls 85% to 90% of the market, Mr. Bellas said.

Beverage Digest estimates Frappuccino sales at $200 million, but Starbucks sees that as merely a beginning. "One day we see this product as being a billion dollar business by itself worldwide," said a spokesman.

Rivals want a piece of its success. One of them, Havana Cappuccino Co.'s Havana iced cappuccino, is a brand that seems to have appeared out of nowhere. North American Beverage Corp. owns Havana and distributes the brand through 100 independent distributors nationwide. Havana's 15-ounce, bullet-shaped bottles feature an eye-catching graphic wrap to help differentiate the brand on store shelves.

The company markets Havana in four flavors, ranging in price from $1.29 to $1.39, as well as chocolate milk and energy shakes. Sales of its coffee alone exceeded $2 million last year, according to John Imbesi, president. "I cannot believe the word-of-mouth advertising we're getting from people telling their friends," he said.

Unlike its competitors, which typically use guerrilla marketing tactics, Havana uses print ads that started this summer in women's magazines including Allure, Elle, Cosmopolitan, and also Playboy. The marketing strategy is to reach adults looking for upscale coffee as a treat, and creative is handled by a free-lance designer. Print media planning and buying is handled through Active International, Pearl River, N.Y.

Frequently sharing shelf space with Havana is Blue Luna. Introduced in February 1999 by Ferolito, Vultaggio & Sons, the unadvertised Blue Luna Cafe uses dramatic packaging to stand out on crowded store shelves. The sister brand of Arizona iced teas comes in 12.5 ounce, double-handled cobalt blue jugs that resemble primitive olive oil vessels.

One brand on the East Coast, PJ Bean Co.'s Planet Java, last month began shipping through Coca-Cola Bottling of New York, to retailers in New York and New Jersey. The unadvertised line comes in three flavors already sold in Texas, Ohio, and Guam at a suggested retail price between 99› and $1.19.

A RIVAL FOR STARBUCKS?

If any company can challenge Starbucks, however, it's Coca-Cola Co. Coke markets Georgia, a very popular ready-to-drink coffee brand in Japan, but so far has not shown any signs of moving it to the U.S. But the beverage giant did confirm it is testing a frozen coffee beverage called Cafielle in four U.S. markets. Described by executives familiar with the test as a brand with a smoothie texture vs. an icy texture, the product is being tested in a variety of fountain outlets.

Coke wouldn't discuss Cafielle or identify an agency for the brand. A likely choice, however, may be Berlin, Cameron & Partners, New York, which handles the marketer's highly successful Georgia iced coffee brand in Japan.

A driving impetus of the No. 1 carbonated soft-drink marketer's interest in coffee stems from lessons learned in the foreign markets where CEO Doug Daft witnessed the power of these drinks, said Bevmark President Tom Pirko. Combine that experience with an overall decline in cola consumption, and the move toward waters and nutraceutical fruit and tea-based drinks marketed by much smaller companies, and Coca-Cola has some catching up to do.

"They [Coca-Cola] want to be the total refreshment beverage company," said Mr. Bellas. He noted that Coca-Cola's decision to test coffee through fountain channels is not typical for the company, that it has used the take-home distribution channel more in the past. "This is being built more like a New Age drink using on-premise [sales] to build wider distribution."

Perhaps one reason why ready-to-drink coffees haven't grown faster is that while Starbucks is credited with creating the category with Frappuccino, it has yet to invest major advertising dollars in the brand. The brand was supported with $4.1 million in measured media last year, according to Competitive Media Reporting, in mainly print and spot radio. Compare that to the experience of Philip Morris Cos.' Kraft Foods, which introduced its failed Cappio bottled cappuccino brand in the early '90s. By 1996, the brand was supported with $8.3 million in measured media.

"We don't have plans for a TV campaign," said the Starbucks spokesman, who noted the company's overall advertising strategy has always been to focus more on training employees and using in-store promotions to drive awareness. "We've been able to build the brand without a large traditional ad campaign."

It does advertise, however. Starbucks typically uses print or out-of home advertising; current billboards feature a row of Frappuccino bottles getting progressively more empty. Copy states, "So cold, so creamy, so empty." Fallon, Minneapolis, handles.

Quality issues have also plagued the category in its earliest stages. In fact, experts blame the slow adoption of ready-to-drink coffees on products like Cappio, which analysts faulted for poor flavor and limited appeal.

Other major coffee companies have made forays into the category and pulled out. Nestle USA dumped its Nescafe Blended iced coffee line last year, citing poor sales. Late last year, P&G completed testing its iced coffee brand Jakada in Visalia, Calif., supported with an ad campaign by N.W. Ayer & Partners, New York, themed "Gotta get Jakada." A P&G spokeswoman wouldn't confirm or deny any future plans for the brand.

"Many people who made [ready-to-drink] cappuccino and coffee have made bad product," said John Calabrese, CEO of East Coast Beverage Co. "Now people are tweaking them and making great product."

Earlier, "most of the canned coffees tasted like canned watered-down milked coffees," said Mr. Pirko, noting that young "trendies" who purchase iced cappuccinos and mocha freezes now drive the business.

"The idea of cold coffee boggles me," admitted Ron Nota, VP-marketing, Coca-Cola Bottling Chicago. He credits the trend to people under 30 who were brought up with cold drinks vs. hot drinks in the morning.

THE FLAVOR FACTOR

New competitors believe they have mastered the flavor factor and speak with confidence about their ability to surpass Frappuccino.

"We firmly believe we will exceed Starbucks' Frappuccino in next year to two," said Mr. Calabrese. His East Coast Beverage Co. has recently gained distribution contracts for a number of retailers, including Costco, Wal-Mart Stores, Sam's Clubs, and military accounts. The company is currently negotiating with convenience chain AM/PM in Japan.

His bravado is reflected in U.S. billboard ads that challenge, "If you like this" above a bottle of the Starbucks product, "We think you'll love this" above a four-pack of the company's Coffee House product. Pixels, Pompano, Fla. handles creative. The company is currently in the process of launching an agency review for an estimated $7 million creative and media budget. The review, led by an undisclosed consultant, is expected to be resolved shortly.

"The key to our product is different flavors, sort of like coffee of the month," added Mr. Calabrese. Taste, however, may be the test. "A lot of people are getting into the ready-to-drink coffee business, but you have to be more than a pretty bottle," said Planet Java President Larry Trachtenbroit. "There are so many one-hit wonders out there." He projects his brand to be in more than 15,000 outlets this month and expects to be national by 2001. Like most small brands, Planet Java is promoted using the Internet, product sampling and event sponsorships.

Mr. Pirko believes the industry has a significant advertising challenge regardless of the product innovations. "They have to be properly introduced with real fanfare and people have to commit to the category in reaching young trendies who buy on the street but haven't had any loyalty to package-good products," he said. "Ads will be critical in telling young consumers that this goes beyond coffee-flavored milkshakes."

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