Is Coffee Losing Steam Among the Next Generation?

By JANET MORRISSEY

Monday, Nov. 15, 2010

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When 24-year-old Alex Stein is looking for a morning pick-me-up, he doesn't reach for a cup of cappuccino as his parents Len and Berdie did daily while he was growing up in Westchester County, New York — he grabs an energy drink. Coffee just doesn't cut it with him. "The taste is just so bitter — I couldn't have more than a couple of sips of it without needing to wash it down with water," he says.

A recent report from Mintel, a market-research firm, predicts that Stein's generation may become coffee-resistant unless marketers find ways to make coffee drinks relevant for kids under the age of 25. Demand for coffee remains robust among people aged 45 and over thanks to older customers, who will likely drive coffee's sales growth over the next five years, the report said.

However, the habits of the younger demographic make the industry's longer-term outlook murkier. According to the report, only 27% of people in the 18-to-24 age group consume coffee daily, with many citing taste, health concerns and a penchant for sweet energy drinks as factors keeping them away from coffee. By contrast, 75% of those ages 45 to 54 and 80% of those 55 to 64 have a daily cup of joe. Only 28% of the younger group said they liked the taste of coffee on its own, compared with 53% of 45-to-64-year-olds and 61% of those 65 and older. And members of the younger demographic who do drink coffee tend to visit cafés, where they can find sweeter-tasting blends like frappuccinos for their caffeine fix.

Stein discovered energy drinks at the University of Cincinnati after he spotted a blue-and-silver Mini with a giant Red Bull can on its hatch trolling around campus, offering free samples. After trying Red Bull, an energy drink that contains taurine and caffeine, and other such beverages, he's never looked back. Today, as a working architect in Manhattan, Stein says he still reaches for energy drinks — never coffee.

Matt Yemma, a 26-year-old public-relations consultant, started swigging energy drinks while in college. "I believe the aggressive marketing of energy drinks such as Red Bull to the younger generation, mixed with the lousy taste and feeling that coffee gives me, is why I, and the younger generation, is gravitating away from drinking coffee," he says. "Even nowadays, if I'm really flagging in the afternoon, I'll just rip a Red Bull."

Should the coffee industry get anxious about these findings? "The concern is real," says Bill Patterson, a senior analyst at Mintel. He dismisses suggestions that the trend is a youth fad that kids will outgrow. "The older generations that now drink coffee were brought up on coffee, they always drank coffee, and they've taken that coffee-drinking habit all the way through their life," says Patterson. "I do not see the younger generation reaching middle age — late 30s and beyond — and going, 'Oh, I'm going to start drinking coffee now.' The mold has been broken."

Patterson suggests that coffee companies consider expanding into the energy-drink sector similar to the way Coca-Cola successfully moved into bottled water and noncarbonated drinks when competition began diluting sales of Coke. Industry experts speculate that coffee companies could turn the tide if they start launching aggressive marketing campaigns targeting younger people through social networks, coffee bars and high-profile ads that tout coffee's energy and mental-stimulation benefits.

Coffee is the alpha energy drink, and yet it's not being promoted that way, says John Glass, a managing director at Morgan Stanley. "Over the last five to 10 years, you've seen the explosion of Red Bull and other energy drinks because they've become so big and so aligned with action sports and stuff that's popular with the younger 20-something generation," says Yemma. "You don't see much marketing in the coffee sector."

Analysts say the coffee industry also needs to focus its marketing on specialty and gourmet coffees. "Starbucks paved the way" for this trend by introducing espresso-based drinks enriched and sweetened with cream, steamed milk, caramel syrup and other additives, says Mitchell Pinheiro, an analyst at Janney Montgomery Scott LLC. "They upscaled the coffee," says Harry Balzer, a senior executive at NDP Group, a market-research firm. Demand for common coffees is waning, says Pinheiro.

Coffee has to party more too. Irma Zandl, president of Zandl Group, a New York consumer-research group, notes that it was Red Bull's introduction into the bar scene, where people would order the drink with vodka, that first attracted consumers to it. (And exposed the company to criticism.) Likewise, "the best way to get them to consider buying a coffee machine and buying coffee is if they've had that experience in a fabulous coffee bar," she says. Zandl cites the Stumptown café in the Ace Hotel in New York City as an example.

Young people will dictate the coffee industry's long-term survival. "The baby boomers are getting older now," and the generation of 18-to-24-year-olds will likely be larger than the boomers as they grow up, says Glass. "Any long-term vision of any consumer business probably has to figure out how to appeal to that group." That could keep some coffee marketers awake at night, even if they're drinking decaf.