hot beverages market update 2015

Hot Beverages

Market Update 2015

9th Edition July 2015

ISBN 978-1-78304-312-5

Hot Beverages

© Key Note Limited. Key Note is the trading name of Key Note Limited. Registered in England and Wales - No.6751403 VAT No.942 935 989

Contents

Introduction & Definition 1 .................................................................................................................................................................. REPORT COVERAGE 1 ................................................................................................................................................................ MARKET SECTORS 1 ...................................................................................................................................................................

Executive Summary 2 ..........................................................................................................................................................................

What’s KEY in the Market? 4 ............................................................................................................................................................... KEY DRIVERS 4 ............................................................................................................................................................................. MARKET TRENDS 4 ......................................................................................................................................................................

Coffee Pods 4 .......................................................................................................................................................................... Premiumisation 5 ..................................................................................................................................................................... Fruit, Herbal and Green Teas 5 ...............................................................................................................................................

ECONOMIC TRENDS 5 ................................................................................................................................................................. MARKET POSITION 7 ................................................................................................................................................................... HOW ROBUST IS THE MARKET? 9 .............................................................................................................................................

Market Size, Segmentation & Forecasts 10 ....................................................................................................................................... MARKET SIZE & SEGMENTATION 10 .........................................................................................................................................

The Total Market 10 ................................................................................................................................................................. Market Sectors 11 ....................................................................................................................................................................

FORECASTS 24 ............................................................................................................................................................................. Future Trends 24 ..................................................................................................................................................................... Future Economic Trends 25 .................................................................................................................................................... Forecast Total Market 26 .........................................................................................................................................................

MARKET GROWTH 29 .................................................................................................................................................................. Overseas Trade 31 ...............................................................................................................................................................................

GENERAL OVERVIEW 31 ............................................................................................................................................................. Coffee 33 ................................................................................................................................................................................. Tea 35 ......................................................................................................................................................................................

Strengths, Weaknesses, Opportunities & Threats 38 ....................................................................................................................... STRENGTHS 38 ............................................................................................................................................................................. WEAKNESSES 38 ......................................................................................................................................................................... OPPORTUNITIES 38 ...................................................................................................................................................................... THREATS 39 ..................................................................................................................................................................................

PEST 40 ................................................................................................................................................................................................. POLITICAL 40 ................................................................................................................................................................................

European Food Safety Authority Investigates Caffeine Safety 40 ........................................................................................... ECONOMIC 41 ...............................................................................................................................................................................

Coffee Prices 41 ...................................................................................................................................................................... Mondelez-Douwe Egberts Merger 42 ......................................................................................................................................

SOCIAL 42 ..................................................................................................................................................................................... New Code for Indian Tea Industry 42 ...................................................................................................................................... Biodegradable and Compostable Coffee Pods 43 ................................................................................................................... Black Tea Decline 43 ...............................................................................................................................................................

TECHNOLOGICAL 44 .................................................................................................................................................................... Coffee Pod Market 44 ..............................................................................................................................................................

Company Financials 46 .......................................................................................................................................................................

Further Sources 47 .............................................................................................................................................................................. Publications 47 .............................................................................................................................................................................. Government Publications 47 ....................................................................................................................................................... Other Sources 48 ..........................................................................................................................................................................

Understanding Consumer Survey Data 49 ........................................................................................................................................ Number, Profile, Penetration 49 .................................................................................................................................................. Social Grade 49 ............................................................................................................................................................................. Standard Region 50 ......................................................................................................................................................................

Key Note Research 51 .........................................................................................................................................................................

Hot Beverages 1


Introduction & Definition

REPORT COVERAGE

This Key Note Market Update analyses the UK hot beverages market, covering all hotdrinks sold via physical and online retail outlets. Hot beverages distributed throughbars, pubs, coffee shops, restaurants, teashops and similar establishments areexcluded from the scope of the report.

The UK hot beverages market is well-established, with a wide and varied range ofproducts on offer across the four main market sectors covered within the report: instantand ground coffee; black and green leaf teas; hot chocolate and malted drinks; and fruitand herbal teas.

The market benefits significantly from a long and well-established history of hotbeverage consumption in the UK. This is particularly true of black tea, which continuesto represent an iconic aspect of British culture. With an estimated 165 million cups oftea and 70 million cups of coffee consumed each day in Britain, according to the UKTea Council, hot beverages continue to represent a vital aspect of daily life.

MARKET SECTORS

The hot beverages market can be segmented into four key sectors, based on the typeof beverage:

Instant and ground coffee — covers instant coffee (including granulated, freeze-driedand powdered) and ground coffee. Instant products remain dominant in this sector,although the ground variant has seen strong growth in recent years, largely as a resultof its perceived quality over instant.Black and green leaf teas — black tea remains by far the leading product in this sector,although green tea is currently exhibiting strong growth at the expense of black tea,primarily as a result of its purported health benefits.Hot chocolate and malted drinks — includes hot chocolate powders, malted drinkpowders and cocoa drinks, and flavoured varieties of these products, such as mint orwhite chocolate.Fruit and herbal teas — covers all teas produced using an infusion or blend of plantsand fruits. Such products remain fairly niche, although growth in the choice of flavoursand the positive health claims surrounding these products has resulted in significantincreases in demand in recent years.

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Executive Summary

The UK hot beverages market remains significant, with an estimated 165 million cups oftea and 70 million cups of coffee consumed every day. In the year ending 23rd May2015, total sales of hot beverages grew by 1% year-on-year; however, this follows adecline in 2014, which is attributable to an extended period of hot summer conditions.Despite this, the hot beverages market has performed strongly since the UK’s exit fromthe recession in 2009.

The market, as analysed in this report, is divided between four key sectors; in terms ofvalue, the instant and ground coffee sector remains the largest sector, followed byblack and green teas, hot chocolate and malted drinks, and fruit and herbal teas.

In the UK, tea consumption is strongly rooted in both a historical and cultural context,with Britain identified around the world as a nation of tea drinkers. While the UKremains a leading global consumer of black tea, its consumption recorded consistentannual declines between May 2011 and 2015 in terms of value sales. Owing to thegrowth of the coffee shop culture in the UK and the expansion in the range of availablefruit, green and herbal teas — and improving awareness of the purported healthbenefits of such teas — UK consumers are increasing choosing alternative hotbeverages over traditional black tea. Furthermore, in the coffee market, consumers arerejecting the convenience offered by instant coffee, instead electing to spend more onsuper-premium instant or ground coffee products, with flavour and quality rapidlybecoming the key consideration.

This increased demand for better flavours and improved quality has seen the coffee‘pod’ market take off. These pods, which are compatible with single-serve hot beveragesystems, can provide consumers with barista-quality coffee in the home, at a relativelyaffordable cost. As a result, over the last decade or so virtually all of the major coffeecompanies have developed and launched their own versions of these single-servebeverage machines. Alongside this, they have utilised their coffee brands — or enteredinto partnership with other popular brands — to produce the pods that are used in thesesystems. As a result of increased availability of both the machines and the pods, andthe quality of the beverages these systems can produce, demand has skyrocketed inrecent years. While these systems are largely aimed at the coffee market at present,tea pods and hot chocolate pods are also becoming increasingly common.

These ‘pod’ products, growing demand for premium instant and ground coffee productsand rising sales of fruit, herbal and green teas are expected to drive future growth in thehot beverages market. Over the next few years, growth could be limited by declines inthe higher value black tea and instant coffee markets, combined with a period ofreduced sales in the recent hot summer conditions in 2015. From around 2018/2019,

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with ongoing economic growth and improved consumer expenditure, growth is likely tobe more significant.

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What’s KEY in the Market?

KEY DRIVERS

The UK market for hot beverages has seen strong growth in recent years, despiterecording a decline in 2013/2014 and experiencing turbulent economic conditions oflate. While the market remains well-established and mature, there are neverthelessvarious ongoing and emerging trends driving sales and consumption patterns:

Consumers are increasingly seeking premium, high-quality hot beverage products,particularly in the coffee sector, leading to healthy growth in the premium, café-styleand super-premium subsectors of the instant coffee sector.This demand has also led to strong, double-digit annual growth in ground coffee salesin recent years — outpacing growth in the traditionally strong instant coffee sector — assuch products tend be of significantly better quality than their instant counterparts.There has been major growth in demand for green, fruit and herbal teas, driven by ahuge proliferation in the volume of brands and variety of flavours available, as well asincreased awareness among consumers of the purported health benefits of regularconsumption of green and herbal teas.With demand for green, fruit and herbal teas and coffee products on the increase, saleof standard black tea products — traditionally the strongest sector in the UK market,given their link to British culture and history — have been in decline, with sales fallingyear-on-year over the last 5 years.The market for single-serve beverage machines and the accompanying ‘pods’ — arelatively new innovation in the marketplace — has expanded rapidly in recent years,with virtually all of the leading players, alongside various other companies, developingeither the machines themselves or the pods that provide the beverage, or both. Thesemachines and pods are capable of providing beverage products with a quality similar tothat found in high-street coffee shops, but in the home and at an affordable price. As aresult, they have proved considerably popular among UK consumers.

MARKET TRENDS

Coffee Pods

The coffee pod — which is used to make hot drinks by means of a single-servebeverage machine — currently represents one of the key drivers of growth in the hotbeverages market. Off the back of the rapid expansion of coffee shops and coffee shopculture across the UK, such products have become remarkably popular, providingconsumers with barista-quality coffee and other hot beverages in the home.

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As such, coffee pod growth has been rapid, with the UK’s leading brand, Tassimo,exhibiting 345.4% growth in coffee pod sales between the years ending 28th May 2011and 23rd May 2015, according to IRI data. Furthermore, pods are beginning to have animpact on sales of other hot beverages, with the value of pod sales for teas and hotchocolates seeing significant growth over the same period.

Premiumisation

The growth in coffee, tea and hot chocolate pods is, in part, a result of greater demandfor quality in hot beverages among consumers in the UK. This trend has also spurredmajor growth in premium products across the hot beverages market, and is mostapparent in the instant coffee sector. Despite total sales of instant coffee declining in2014 and 2015, the super premium and café-style subsectors have continued toexperience strong annual growth. Between the years ending 28th May 2011 and 23rdMay 2015, the super premium instant coffee subsector increased in value from just£4.8m to £67.2m, while the café-style subsector grew in value by 16.1%, according toIRI data. In comparison, virtually all other subsectors have struggled in the instantcoffee sector, particularly over the last 2 years.

Fruit, Herbal and Green Teas

Growth in sales of fruit, herbal and green teas also represents a key driver of valuegrowth in the hot beverages market. In recent years, numerous tea producers, bothsmall and artisan, have invested significantly in the development of an ever-increasingvolume of fruit, herbal and green teas, and in the production of a widening range offlavours and varieties. Greater choice, combined with increased awareness of thefunctional benefits of these products, has led to strong and growing demand for suchteas.

As a result, growth in the fruit, herbal and green teas sector has largely outpaced therest of the hot beverages market. Between the years ending 28th May 2011 and 23rdMay 2015, the value of green tea sales grew by 67.5%, while fruit and herbal salesclimbed by 37.8%. While these sectors continue to represent a relatively smallproportion of total sales in the hot beverages market — at £70.4m for fruit and herbalteas, and £34m for green tea — they are expected to exhibit major growth over thecoming years.

ECONOMIC TRENDS

Between 2010 and 2014, UK gross domestic product (GDP) exhibited year-on-year

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growth, with a particularly strong annual increase recorded in 2014, at 4.6% at currentprices. The annual rate of inflation also improved over the review period, falling from ahigh of 5.2% in 2011 to 2.4% in 2014. Alongside economic growth and falling inflation,unemployment also dropped between 2010 and 2014, reducing by 31.1% from 1.5million to 1.03 million.

Economic growth and falling unemployment should help to boost demand for productsacross the hot beverages market, as consumer expenditure recovers from theeconomic recession in 2009 and the subsequent period of economic uncertainty. Notonly should this help to stimulate demand, but rising consumer expenditure could alsodrive the ongoing trend toward premiumisation in the hot beverages market, asconsumers become more willing to purchase higher priced products.

Table 2.1: UK Economic Trends (000, £m, %, million and £), 2010-2014

2010 2011 2012 2013 2014

Resident PopulationEstimates (000), Mid-Years

Female 31,954 32,188 32,390 32,556 32,747

Male 30,805 31,097 31,315 31,532 31,764

Total population 62,759 63,285 63,705 †64,087 64,511

% change year-on-year 0.8 0.8 0.7 0.6 0.7

Gross DomesticProduct (£m)

Current prices 1,558,365 1,617,677 1,655,384 1,713,122 1,791,490

% change year-on-year - 3.8 2.3 3.5 4.6

Annual chain-linkedGDP

1,591,494 1,617,677 1,628,338 1,655,447 1,702,153


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Rate of Inflation (%)

Inflation 4.6 5.2 3.2 3.0 2.4

Percentage pointchange year-on-year

- 0.6 -2.0 -0.2 -0.6

Actual Number ofUnemployed Personsin the UK (million)

Actual number ofclaimants

1.50 1.53 1.59 1.42 1.03

% change year-on-year - 2.0 3.9 -10.7 -27.5

HouseholdDisposable IncomePer Capita (£)

Household disposableincome

16,776 16,875 17,378 17,623 17,890


† — does not sum due to rounding at source

GDP — gross domestic product

Note: inflation is at retail price index (RPI); inflation data shown are annual averagechanges; claimant count measures the number of people claiming Jobseeker’sAllowance.

Source: Population Estimates for UK, England and Wales, Scotland and Northern Ireland, Mid-2001 to Mid-2010 Revised,December 2013/National Population Projections, 2012-based projections/United Kingdom Economic Accounts, 18th May2015/Consumer Price Inflation, April 2015/Labour Market Statistics, May 2015, National Statistics website © Crown copyrightmaterial is reproduced with the permission of the Controller of HMSO (and the Queen’s Printer for Scotland)

MARKET POSITION

In 2014, total UK household expenditure on all non-alcoholic beverages stood at£11.04bn, representing a slight year-on-year decline of 1.1%. Despite this decline,consumer expenditure has increased significantly between 2010 and 2014, rising by14% from £9.68bn. The contraction in consumer expenditure on non-alcoholicbeverages was, however, due solely to a 2.4% contraction in spending on fruit and

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vegetable juices and other soft drinks.

Over the 5-year review period, hot beverages saw year-on-year increases in consumerexpenditure, growing by a total of 18.2% from £2.39bn in 2010 to £2.83bn in 2014. Thisoutpaced soft drinks’ expenditure growth, which stood at 12.6% over the same period.Nevertheless, hot beverages account for a minority of total spend on non-alcoholicbeverages, at 25.6% in 2014. The market has, however, increased its share from24.7% in 2010.

Table 2.2: Household Expenditure on Hot Beveragesand Soft Drinks at Current Prices (£m and %), 2010-2014

2010 2011 2012 2013 2014

Coffee, tea and cocoa 2,394 2,482 2,712 2,753 2,830

Fruit and vegetable juices and other softdrinks

7,290 8,057 8,167 8,405 8,207

All non-alcoholic beverages 9,684 10,539 10,879 11,158 11,037

Coffee, tea and cocoa as a % of all non-alcoholic beverages

24.7 23.6 24.9 24.7 25.6

Note: data are not seasonally adjusted.

Source: Consumer Trends, Q4 2014, National Statistics website © Crown copyright material is reproduced with the permission ofthe Controller of HMSO (and the Queen’s Printer for Scotland)

Figure 2.1: Household Expenditure on Hot Beveragesand Soft Drinks at Current Prices (£m), 2010-2014

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Note: data are not seasonally adjusted.

HOW ROBUST IS THE MARKET?

Hot beverage consumption in the UK is huge, with the UK Tea Council estimating thataround 165 million cups of tea and 70 million cups of coffee are consumed in the UKevery day. Furthermore, given the UK’s historical and cultural association with teadrinking, and the rapid expansion of coffee shop culture, the UK hot beverages marketcan be considered extremely robust.

While consumption habits are changing, with the traditionally strong black tea andinstant coffee sectors struggling in recent years, there has been major growth in salesof alternative products. Premium products, such as super-premium instant coffee andground coffee, have seen strong growth, while the functional nature and increasedvariety of fruit, herbal and green teas have helped to spur growth in the marketplace.Innovation has also driven sales in the market, with the development andcommercialisation of at-home single-serve beverage machines and coffee pods, whichoffer barista-quality products to consumers, stimulating significant growth over the last 5years or so.

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Market Size, Segmentation & Forecasts

MARKET SIZE & SEGMENTATION

The Total Market

Between the years ending 28th May 2011 and 23rd May 2015, the UK hot beveragesmarket grew in value by 9.1%, rising from £1.58bn to £1.72bn. The market largelyremained strong throughout this period, with significant year-on-year growth in 2012, at7%, followed by a 3.7% increase in 2013. In the year ending 24th May 2014 the marketdeclined in value by 2.7%, as virtually all sectors — barring that of fruit and herbal teas— saw sales fall, a factor perhaps attributable to the extended period of hot weather insummer 2013 compared with the summer of 2012. In 2015, the sector returned togrowth, albeit at a relatively low rate of just 1%. Again, it is likely that hot summerconditions restricted significant growth in the market.

Table 3.1: The Total UK Market for Hot Beverages by Sector by Value atCurrent Prices (£m at rsp), 2011-2015

2011 2012 2013 2014 2015

Instant and ground coffee 821.7 933.2 980.8 971.1 993.8

Black and green leaf teas 573.1 565.6 563.0 526.1 513.9

Hot chocolate and malted drinks 131.0 135.7 146.5 141.5 141.8

Fruit and herbal teas 51.1 52.7 59.7 64.9 70.4

Total 1,577.0 1,687.2 1,750.0 1,703.5 1,720.0

% change year-on-year - 7.0 3.7 -2.7 1.0

rsp — retail selling prices

Note: years ending 28th May 2011; 26th May 2012; 25th May 2013; 24th May 2014;23rd May 2015; totals may not sum due to rounding.

Source: IRI/Key Note

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Figure 3.1: The Total UK Market for Hot Beverages by Sector by Value atCurrent Prices (£m at rsp), 2011-2015


Note: years ending 28th May 2011; 26th May 2012; 25th May 2013; 24th May 2014;and 23rd May 2015.

Market Sectors

Instant and Ground Coffee

Between the years ending 28th May 2011 and 23rd May 2015, the instant and groundcoffee sector grew in value by more than a fifth (20.9%), rising from £821.7m to£993.8m. Growth in instant and ground coffee sales was comparatively strong in 2012and 2013 as the economy recovered from the recession, with annual increases of13.6% and 5.1%, respectively. However, in the year ending 24th May 2014, the coffeemarket exhibited a slight year-on-year decline of 1%, before returning to relativelyhealthy growth of 2.3% in 2015.

One of the key trends in the coffee market is the rising consumer demand for betterquality, better tasting coffee products, as a result of greater exposure of quality coffeeproducts following the proliferation of coffee shops over the last few decades. As aresult, the instant coffee subsector — which is generally of a lower quality than ground— exhibited year-on-year declines in 2014 and 2015, dropping by 4.4% and 1.8%,respectively, to reach £712.2m. Despite this, the instant coffee subsector saw 10.1%

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growth over the 5-year period as a whole, following strong annual growth in 2012(12.9%).

The aforementioned trend towards premiumisation has, however, helped to drive salesof premium instant coffee products, with sales of super premium products growingsignificantly over the 5-year period, from just £4.8m in 2011 to £67.2m by 2015.Similarly café-style instant coffee products saw strong growth, at 16.1% over the sameperiod, to reach £80m.

In comparison to instant coffee, the ground coffee subsector saw strong year-on-yeargrowth in value between 2011 and 2015, rising by a total of 61.1%, from £174.8m to£281.6m. Annual growth remained significant throughout this period, with double-digitincreases in 2012 (16.1%), 2014 (10.6%), and 2015 (14.4%), alongside a 9.7% rise in2013.

Table 3.2: The UK Instant and Ground Coffee Sector by Product Type by Value atCurrent Prices (£m at rsp), 2011-2015

2011 2012 2013 2014 2015

Instant Coffee

Premium 239.0 257.4 261.3 245.4 244.1

Regular 200.9 231.8 234.6 209.1 191.2

Café style 68.9 69.2 73.1 78.7 80.0

Super premium 4.8 22.8 40.5 55.2 67.2

Decaf 62.7 69.4 71.3 66.3 61.7

Specialist 45.6 49.8 48.4 42.4 39.2

Other 25.0 29.7 29.0 28.0 28.7

Total instant coffee 646.9 730.2 758.2 725.1 712.2

% change year-on-year - 12.9 3.8 -4.4 -1.8

Ground coffee 174.8 203.0 222.6 246.1 281.6


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Total 821.7 933.2 980.8 971.1 993.8





Figure 3.2: The UK Instant and Ground Coffee Sector by Product Type by Value atCurrent Prices (£m at rsp), 2011-2015



Market Share by Brand

Nescafé, a Nestlé brand, remains the leading instant coffee brand by some margin inthe UK, accounting for more than half of instant coffee sales across its various varieties.In 2015, Nescafé accounted for a 53.3% share of the instant coffee subsector, a slightreduction on the 53.8% share it held in 2014, and the 55% share captured in 2011.Other leading brands include Kenco and Douwe Egberts — both owned by JacobsDouwe Egberts GB — with market shares of 18.3% and 8.9%, respectively, in 2015.

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Table 3.3: Instant Coffee Brands in the UK by Market Share by Value at Current Prices (%),2011-2015

2011 2012 2013 2014 2015

Nescafé 55.0 52.2 53.1 53.8 53.3

Kenco 18.5 18.7 17.6 18.5 18.3

Douwe Egberts 6.0 6.7 7.1 6.8 8.9

Carte Noir 4.4 5.1 5.7 6.0 5.5

Tesco 4.4 4.8 4.4 3.7 3.3

Sainsbury’s 2.3 2.4 2.4 2.4 2.3

ASDA 1.7 2.2 2.3 2.1 1.7

Morrisons 1.0 1.1 1.1 1.1 1.1

Maxwell House 1.2 1.3 1.1 0.9 0.9

Others 5.5 5.5 5.0 4.7 4.6

Total 100.0 100.0 100.0 100.0 100.0



Tassimo — owned by Jacobs Douwe Egberts GB — was the leading ground coffeebrand, with various ground products provided for its eponymous hot beverage systemaccounting for just over a fifth of the market (20.9%), following strong growth from ashare of just 7.5% in 2011 and 2012. Nestlé’s Nescafé brand and the Bettys & Taylorsof Harrogate brand Taylors also held significant market shares in 2015, at 17.1% and14.3%, respectively. Nescafé ground coffee, like the Tassimo brand, saw strong growthover the 5-year period, rising from 7.5%, while Taylors lost share. Supermarket coffeebrands have also apparently struggled in recent years, with Sainsbury’s, Tesco andWaitrose all losing market share on a year-by-year basis.

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Table 3.4: Ground Coffee Brands in the UK by Market Share by Value at Current Prices (%),2011-2015

2011 2012 2013 2014 2015

Tassimo 7.5 7.5 10.7 16.5 20.9

Nescafé 7.5 8.9 10.6 13.3 17.1

Taylors 14.9 16.2 17.3 16.3 14.3

Lavazza 10.5 11.5 11.6 10.8 10.3

Sainsbury’s 12.2 11.1 9.6 8.0 7.0

Tesco 9.4 9.2 7.5 6.4 5.7

Waitrose 5.0 4.9 4.8 4.6 3.9

Douwe Egberts 9.5 7.7 6.0 4.9 3.7

Others 23.6 23.0 22.0 19.1 17.1

Total 100.0 100.0 100.0 100.0 100.0



Black and Green Leaf Teas

The value of the UK black and green leaf teas sector — excluding fruit and herbalproducts — has declined year-on-year, with the sector exhibiting an overall contractionof 10.3% between 2011 and 2015, from £573.1m to £513.9m. Decline in the sector hasbeen fairly steady, with sales dropping by 1.3% in 2012 and by 0.5% in 2013, before amore significant 6.6% reduction in 2014. This downward trend continued in 2015, at aslightly slower pace, with a 2.3% contraction.

Black tea has been the main cause of this decline, with consumers increasingly turningaway from the traditionally popular beverage towards green, herbal and fruit teas, andtowards quality coffee products. In total, the black leaf tea subsector fell in value by13.2% between 2011 and 2015, from £552.8m to £479.9m. Virtually all product types —

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including tea bags, loose tea and instant tea — contributed to this decline, with only thenewer tea pods experiencing growth.

In comparison, the green tea subsector saw strong, year-on-year growth. Between2011 and 2015, the value of the UK green tea subsector rose by more than two-thirds(67.5%), from £20.3m to £34m. Following a 3.9% increase in 2012, annual growth inthe market has been significant, with increases of 16.6% in 2013, 18.3% in 2014 and16.8% in 2015.

Table 3.5: The UK Black and Green Leaf Teas Sector by Product Type by Value atCurrent Prices (£m at rsp), 2011-2015

2011 2012 2013 2014 2015

Black Leaf Teas

Tea bags 529.8 522.9 517.1 476.3 459.9

Loose 14.9 13.8 13.6 12.9 12.7

Instant 7.5 7.3 6.9 6.6 6.2

Pods 0.6 0.5 0.8 1.2 1.2

Total black leaf teas 552.8 544.5 538.4 497.0 †479.9

% change year-on-year - -1.5 -1.1 -7.7 -3.4

Green tea 20.3 21.1 24.6 29.1 34.0


Total 573.1 565.6 563.0 526.1 513.9



† — does not sum due to rounding

Note: years ending 28th May 2011; 26th May 2012; 25th May 2013; 24th May 2014;23rd May 2015.

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Figure 3.3: The UK Black and Green Leaf Teas Sector by Product Type by Valueat Current Prices (£m at rsp), 2011-2015




Unilever’s PG Tips was the leading tea brand throughout the review period, with a29.5% share of the black tea subsector in 2015, down slightly from 30% in 2011. Tetley— a Tata Group brand — and the Bettys & Taylors of Harrogate brand Yorkshire Teafollowed, with 18.9% and 16.1% shares of the total market, respectively, in 2015.

Table 3.6: Black Tea Brands in the UK by Market Share by Value at Current Prices (%), 2011-2015

2011 2012 2013 2014 2015

PG Tips 30.0 29.4 29.8 29.9 29.5

Tetley 24.2 23.7 22.0 20.6 18.9

Yorkshire Tea 10.4 11.9 13.0 14.8 16.1

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Private-label brands 16.0 15.6 14.6 13.2 13.4

Twinings 9.6 9.7 10.2 11.1 11.6

Typhoo 3.9 3.6 4.2 4.1 4.1

Clipper 1.0 1.1 1.2 1.4 1.4

Others 5.1 4.9 5.0 5.1 5.0

Totals 100.0 100.0 100.0 100.0 100.0



Twinings — an Associated British Foods (ABF) brand — is by far the leading green teabrand in the UK, accounting for a share of more than half (53.3%) of the total market in2015, following strong growth from a 39.8% share in 2011. Tetley and Clipper Tearepresented the only other brands to have accounted for a large portion of the market,at 15.5% and 12.7%, respectively, in 2015.

Table 3.7: Green Tea Brands in the UK by Market Share by Value at Current Prices (%), 2011-2015

2011 2012 2013 2014 2015

Twinings 39.8 42.1 46.4 51.3 53.3

Tetley 20.3 22.8 19.2 16.7 15.5

Clipper Tea 18.8 19.2 20.0 16.5 12.7


Sainsbury’s 3.0 2.3 2.3 3.0 2.8

Tesco 1.8 1.6 1.9 2.8 2.4

PG Tips 3.5 2.0 0.5 0.8 2.2

Pukka neg. neg. 0.5 0.7 2.0

Teapigs neg. neg. 0.4 1.5 2.0

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Others 8.3 5.6 4.1 3.1 3.3

Totals 100.0 100.0 100.0 100.0 100.0

neg. — negligible



Hot Chocolate and Malted Drinks

Between 2011 and 2015, the UK hot chocolate and malted drinks sector grew in valueby 8.2%, rising from £131m to £141.8m. In 2012 and 2013, the sector saw strongannual growth, rising by 3.6% and 8%, respectively. However, like much of the hotbeverages market, the sector saw sales decline in 2014, with a 3.4% contraction,followed by a fairly negligible increase in 2015.

The hot chocolate subsector was the key driver of growth in the sector, recording an18.2% increase over the 5-year period to reach a value of £110.2m. In comparison, themalted drinks subsector — which has suffered from the perception of being ‘old-fashioned’ — saw annual contractions in sales between 2011 and 2015, declining by atotal of 16.4% to £31.6m.

By product type, pods saw the largest rate of growth over the review period — as arelatively new innovation — with sales rising nearly threefold from £2.9m in 2011 to£11.4m in 2015. Milk hot chocolate products also saw strong growth, with a 32.1%increase to £28m. Growth in such products may have come as a result of greaterdemand for quality products in the hot beverages market, as milk hot chocolate drinkstend to have an improved flavour over many alternatives. In the malted drinkssubsector, chocolate drinks saw the sharpest decline, of 32.5%, between 2011 and2015; sales of malted drinks also fell in value over the same period, dropping by 12.1%.

Table 3.8: The UK Hot Chocolate and Malted Drinks Sector by Product Type byValue at Current Prices (£m at rsp), 2011-2015

2011 2012 2013 2014 2015

Hot Chocolate

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Milk 21.2 23.7 27.6 26.6 28.0

Instant 25.5 24.2 26.3 27.7 26.8

Diet 27.0 28.2 31.0 27.5 25.2

Cocoa 12.5 15.5 18.1 17.8 15.7

Pods 2.9 3.5 4.3 6.8 11.4

Luxury 4.1 3.7 4.0 3.2 3.1

Total hot chocolate 93.2 98.8 111.3 109.5 110.2


Malted Drinks

White 29.8 28.6 27.2 26.2 26.2

Chocolate 8.0 8.3 8.0 5.8 5.4

Total malted drinks 37.8 37.0 35.2 32.0 31.6


Total 131.0 135.7 146.5 141.5 141.8





Figure 3.4: The UK Hot Chocolate and Malted Drinks Sector by Product Type byValue at Current Prices (£m at rsp), 2011-2015

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Cadbury is by the far the most popular brand of hot chocolate in the UK, with a marketshare of 44.6% in 2015, up slightly from 44.3% in 2011, but down on its peak of 48.2%in 2014. Options, a brand owned by Twinings, also held a significant market share of11.6% in 2015, although this fell steadily throughout the review period, from 15.4% in2012.

Table 3.9: Hot Chocolate Brands in the UK by Market Share by Value at Current Prices (%),2011-2015

2011 2012 2013 2014 2015

Cadbury 44.3 45.0 47.8 48.2 44.6

Options 15.4 15.1 13.6 12.0 11.6

Nestlé 6.5 6.6 5.6 5.7 7.2

Galaxy 7.2 6.5 6.8 6.3 6.4

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Tassimo 1.6 1.7 1.6 2.9 5.7


Tesco 5.5 6.0 5.6 4.9 3.9

Green & Black’s 3.4 3.6 3.8 3.8 3.6

Sainsbury’s 2.6 2.0 2.2 3.2 3.6

Others 8.6 7.5 7.7 8.1 9.6

Total 100.0 100.0 100.0 100.0 100.0



There are relatively few malted drinks brands in the UK, with the GlaxoSmithKlinebrand Horlicks and Nestlé’s Ovaltine accounting for the vast majority of the market, withshares of 56.8% and 34.7%, respectively, in 2015. Nestlé’s Milo brand also held anoticeable share, at 4.5%, followed by the various private-label brands at 4.1%. Marketshare across all other brands fell over the review period to a negligible percentage by2014.

Table 3.10: Malted Drink Brands in the UK by Market Share by Value at Current Prices (%),2011-2015

2011 2012 2013 2014 2015

Horlicks 64.0 61.0 58.4 56.4 56.8

Ovaltine 31.2 32.0 33.6 35.0 34.7

Milo 1.8 3.7 4.8 4.9 4.5


Others 1.3 1.2 0.4 neg. neg.

Total 100.0 100.0 100.0 100.0 100.0

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Fruit and Herbal Teas

Like the green tea subsector, the fruit and herbal teas sector has proved particularlystrong in recent years, recording year-on-year growth. Between 2011 and 2015, themarket grew by 37.8%, rising from a value of £51.1m to £70.4m. There was particularlystrong rise in 2013, with a double-digit upturn of 13.3%, followed by significantincreases in 2014 and 2015, at 8.7% and 8.5%, respectively. The sector, nevertheless,remains fairly small and undeveloped, with growth over the review period largely drivenby the rapid increase in the range of brands and flavours, and increased visibility in themarketplace.

Table 3.11: The UK Fruit and Herbal Teas Sector by Product Type by Value atCurrent Prices (£m at rsp), 2011-2015

2011 2012 2013 2014 2015

Value (£m) 51.1 52.7 59.7 64.9 70.4





Figure 3.5: The UK Fruit and Herbal Teas Sector by Product Type by Value atCurrent Prices (£m at rsp), 2011-2015

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FORECASTS

Future Trends

Ground Coffee Consumption

Owing to the proliferation of coffee shops throughout the UK in recent decades, and theresulting exposure of quality coffee drinks, consumers are increasingly turning awayfrom the convenience of instant coffee products in favour of the fuller flavours offeredby ground coffee. While sales of instant coffee currently remain significantly higher thanground, should this trend continue, it is possible that — like virtually all other Europeanmarkets — ground coffee could become the dominant format in the coffee market overthe next decade or so.

Health Claims

The recent trend towards falling demand in the black tea market and growing sales offruit, herbal and green teas can, in part, be attributable to increased awareness of thepurported health benefits of these products. Significant volumes of research have been

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conducted over the years, with tea and coffee found to help reduce the risk of certaincancers, diabetes and Alzheimer’s. As concerns are rising among consumers regardinghealthy lifestyles and the market for functional foods is booming, such health claims arebecoming an increasingly important marketing tool. Such activity is particularlyimportant for green and herbal teas — as these products contain higher concentrationsof the beneficial tea polyphenol antioxidants that other beverages — and has alreadyhelped to drive considerable annual growth in these sectors.

Future Economic Trends

The UK economy is forecast to record consistent annual growth between 2015 and2019, with increases of between 2.3% and 2.5% expected throughout this period.Employment is also expected to improve each year over the forecast period, withunemployment levels forecast to fall by 11%, from 820,000 in 2015 to 730,000 in 2019.Inflation, however, is expected to rise over the forecast period, albeit from the relativelylow rate of 1.2% to reach a high of 3.2% in 2018.

Rising gross domestic product (GDP) growth and falling unemployment are firmindicators of improving consumer expenditure. Rising consumer expenditure shouldhelp to boost sales across the hot beverages market, and could help to further the trendtoward premiumisation.

Table 3.12: Economic Forecasts (000, % and million) 2015-2019

2015 2016 2017 2018 2019

.

UK resident population (000) 64,938 65,386 65,825 66,266 66,697

GDP growth (%) 2.5 2.5 2.3 2.5 2.4

Inflation† (%) 1.2 2.5 3.1 3.2 3.0

Unemployment‡ (million) 0.82 0.72 0.72 0.75 0.73

GDP — gross domestic product

† — at retail price index (RPI)

‡ — actual number of claimants; claimant count measures the number of peopleclaiming Jobseeker’s Allowance

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Source: National Population Projections, 2012-based projections, National Statistics website/Forecasts for the UK Economy: acomparison of independent forecasts, May 2015, HM Treasury © Crown copyright material is reproduced with the permission of theController of HMSO (and the Queen’s Printer for Scotland)

Forecast Total Market

Between the years ending May 2016 and 2020, Key Note forecasts that the UK hotbeverages market will grow by 7.4%, from a value of £1.72bn to £1.86bn. Annualgrowth is likely to be stronger towards the end of the review period, with increasingdemand for ‘pods’ and for fruit, herbal and green teas, alongside premiumisation in thecoffee sector, expected to be the main drivers.

Growth of 10.9% is forecast in the coffee sector, with value sales rising from £1bn to£1.12bn between the years ending May 2016 and 2020. The ground coffee subsectorwill be the main driver of growth — as consumers seek better quality coffee products —with strong year-on-year increases projected throughout the forecast period. Over the5-year period as a whole, ground coffee sales are forecast to rise by 43.2%, from£309.8m in 2016 to £443.7m in 2020. The instant coffee subsector, in comparison, isprojected to contract by 3.5% over the same period, from £698m to £673.8m. Thepremium, regular, decaf and specialist product types are all forecast to exhibit somedegree of decline between 2016 and 2020, driving the overall value reduction in thesector. The super premium and café-style categories are, however, expected to provideareas of growth, with projected increases of 22% and 3.2%, respectively.

In the tea sector, a decline of 2.1% is forecast between 2016 and 2020, from a value of£501.5m to £491m. Falling sales of black teas will be the driver of decline in the sector,owing to the continuation of the trend towards increased consumption of green, fruitand herbal teas in favour of black tea. In total, over the 5-year period, the black teasubsector is projected to drop in value by 7.4% to £424.7m by May 2020. The green teasubsector is, however, expected to see strong growth, with a 59.8% increase forecastfrom £39.8m in 2016 to £63.6m in 2020.

For hot chocolate and malted drinks, Key Note forecasts a slight increase over the next5 years, with sales rising by 2.4% from £141.9m to £145.3m. This growth is attributableto a projected increase in hot chocolate sales, with a 4.3% increase forecast between2016 and 2020, while the malted drinks segment is expected to see a decline of 4.5%.The hot chocolate pods category will be the key driver of growth in the hot chocolatesector, with growth of 38% expected for this type of product.

The market for fruit and herbal teas is expected to benefit from continued growth inconsumption over the next 5 years, as traditional black tea drinkers turn towards fruit,herbal and green tea products as a result of increased choice and the functional natureof such products. Growth in the fruit and herbal teas sector is forecast at 33.6%between 2016 and 2020, rising from £76.2m to £101.8m.

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Table 3.13: The Forecast UK Total Hot Beverages Market by Sector byProduct Type by Value at Current Prices (£m at rsp), 2016-2020

2016 2017 2018 2019 2020

Instant and Ground Coffee

Instant Coffee

Premium 242.9 241.3 241.0 239.9 239.9

Regular 173.8 161.0 152.0 148.8 145.4

Super premium 76.8 82.9 88.2 91.2 93.7

Café style 81.0 81.6 82.1 83.1 83.6

Decaf 58.6 55.5 53.6 52.7 51.9

Specialist 37.0 35.0 33.1 32.4 31.7

Other 27.9 28.1 28.5 27.7 27.6

Total instant coffee 698.0 685.4 678.5 675.8 673.8

Ground coffee 309.8 339.2 370.4 405.2 443.7

Total instant and ground coffee 1,007.8 1,024.6 1,048.9 1,081.0 1,117.5


Black and Green Leaf Teas

Black Leaf Teas

Tea bags 442.4 429.0 419.9 412.8 406.4

Loose 12.0 11.6 11.0 10.8 10.3

Pods 1.8 1.8 3.1 4.3 6.4

Instant 5.5 5.4 4.8 4.3 4.3

Total black leaf teas 461.7 447.8 438.8 432.2 427.4

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Green tea 39.8 46.4 51.4 57.1 63.6

Total black and green leaf teas 501.5 494.2 490.2 489.3 491.0

% change year-on-year -2.4 -1.5 -0.8 -0.2 0.3

Hot Chocolate and Malted Drinks

Hot Chocolate

Milk 29.0 29.6 30.1 30.5 31.2

Instant 26.4 26.2 26.0 25.9 25.6

Diet 23.3 22.2 21.5 21.2 21.0

Cocoa 15.6 15.6 15.8 16.0 16.2

Pods 13.7 15.3 16.9 17.8 18.9

Luxury 3.1 3.0 2.9 3.0 3.0

Total hot chocolate 111.1 111.9 113.2 114.4 115.9

Malted Drinks

White 25.8 25.6 25.6 25.5 25.2

Chocolate 5.0 4.9 4.6 4.3 4.2

Total malted drinks 30.8 30.5 30.2 29.8 29.4

Total hot chocolate and malteddrinks

141.9 142.4 143.4 144.2 145.3


Fruit and herbal teas 76.2 82.7 88.5 94.9 101.8


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Total 1,727.4 1,743.9 1,771.0 1,809.4 1,855.6



Note: years ending May.

Source: Key Note

Figure 3.6: The Forecast UK Total Hot Beverages Market by Sector by Valueat Current Prices (£m at rsp), 2016-2020


Note: years ending May.

MARKET GROWTH

Between the years ending 28th May 2011 and May 2020, the UK hot beverages marketis projected to grow by 17.7%, from a value of £1.58bn to £1.86bn.

Figure 3.7: Growth in the UK Total Hot Beverages Market by Value atCurrent Prices (£m at rsp), 2011-2020

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Note: years ending 28th May 2011; 26th May 2012; 25th May 2013; 24th May 2014;23rd May 2015; data for 2016 to 2020 are Key Note estimates for the years endingMay.

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Overseas Trade

GENERAL OVERVIEW

Between 2010 and 2014, the UK balance of trade improved somewhat, falling from adeficit of £337.4m to £273.1m. This was attributable to a rapid decline in the value ofUK imports in 2012 and 2013 — by 9.7% and 17.8%, respectively — combined withstrong growth in the value of exports throughout the review period. Despite this decline,the value of UK coffee imports grew over the period, rising by 14.4% from £442.3m in2010 to £505.9m in 2014. Growth in the value of UK coffee exports, however,massively outpaced that of imports, with exports more than doubling over the 5-yearreview period, with a rise of 121.9% from £104.9m to £232.8m. Nevertheless, the UK is,and will remain, dependent on imports in the coffee sector.

Table 4.1: UK Balance of Trade for Coffee by Value (£m), 2010-2014

2010 2011 2012 2013 2014

Exports 104.9 135.0 147.8 213.0 232.8

Less imports 442.3 596.2 538.6 442.6 505.9

Trade balance -337.4 -461.2 -390.8 -229.6 -273.1

Note: includes roasted and non-roasted, decaffeinated, coffee husks and skins, andcoffee substitutes containing coffee in any proportion.

Source: Overseas Trade Statistics, HM Revenue & Customs © Crown copyright material is reproduced with the permission of theController of HMSO (and the Queen’s Printer for Scotland)

Figure 4.1: UK Balance of Trade for Coffee by Value (£m), 2010-2014

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Similarly, the UK is reliant on imports of tea, although the trade deficit in tea remainslower than that of coffee. The UK’s trade deficit in tea has increased in recent years,however, rising from £60.2m in 2010 to £133.6m. Both import and export values for teafell over the 5-year review period. Exports saw the sharpest decline, dropping by morethan half (56%) from £212m in 2010 to £93.3m in 2014, while the value of imports fellby 16.7%, from £272.2m to £226.8m over the same period.

Table 4.2: UK Balance of Trade for Tea by Value (£m), 2010-2014

2010 2011 2012 2013 2014

Exports 212.0 163.7 123.9 119.2 93.3

Less imports 272.2 288.2 277.6 270.5 226.8

Trade balance -60.2 -124.5 -153.7 -151.3 †-133.6

† — does not sum due to rounding

Note: includes teas, whether flavoured or not; totals may not sum due to rounding.


Figure 4.2: UK Balance of Trade for Tea by Value (£m), 2010-2014

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Note: includes teas, whether flavoured or not.

Coffee

Of the total £232.8m worth of UK coffee exports in 2014, just under two-thirds (66%)were bound for the EU-27, at a value of £153.6m. In terms of tonnage, 69.4% (18,800tonnes) of the total 27,100 tonnes of coffee exports was destined for the EU-27. Asiaand Oceania saw the second-largest share of UK exports, at 13.6% of the total by valueand 12.2% by volume. North America followed, with a 5.2% and 4.1% share in terms ofvalue and volume, respectively, in 2014.

Table 4.3: UK Exports of Coffee by Volume and Value by Region (£m and 000tonnes), 2014

Value (£m) Volume (000 tonnes)

EU-27 153.6 18.8

Asia and Oceania 31.6 3.3

North America 12.0 1.1

Latin America and the Caribbean 11.9 1.1

Middle East and North Africa 8.2 1.2

Western Europe† 7.9 0.9

Eastern Europe 6.5 0.6

Sub-Saharan Africa 1.0 0.2

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Total 232.8 27.1

† — excluding EU-27

Note: includes roasted and non-roasted, decaffeinated, coffee husks and skins, andcoffee substitutes containing coffee in any proportion; totals may not sum due torounding.


The EU-27 also accounted for a largest share of coffee imports in terms of value, at£210.3m (41.6% of the 2014 total). However, in terms of volume, the EU-27represented the third-largest importer of coffee to the UK, accounting for just under onefifth (19.8%) of the total, at 36,200 tonnes. By volume, Latin America was the largestimporter of coffee into the UK — at 86,900 tonnes and accounting for 47.5% of the total182,800 tonnes — but remained behind the EU-27 in terms of value, at £184.9m(36.5%). The Asia and Oceania region also imported more coffee by volume into theUK, at 45,900 tonnes (25.1%) in 2014. Nevertheless, in terms of value, Asia andOceania was the third-largest importer, accounting for 13.9% of the total.

Table 4.4: UK Imports of Coffee by Volume and Valueby Region (£m and 000 tonnes), 2014


EU-27 210.3 36.2







Eastern Europe 0.0 0.0

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Total 505.9 182.8




Tea

In the tea sector, the EU-27 again represented the largest market for exports,accounting for 55.6% of the total by value and 59.6% by volume. North Americafollowed, with UK exports of £24.6m and 5,500 tonnes, representing a 26.4% and25.2% share, respectively. Asia and Oceania was the third-largest market by value,with exports to the region amounting to £8m and accounting for 8.6% of the total; thiswas despite the fact it imported just 1,100 tonnes in exports by volume, behind that ofWestern Europe.

Table 4.5: UK Exports of Tea by Volume and Valueby Region (£m and 000 tonnes), 2014


EU-27 51.9 13.0






Eastern Europe 0.5 neg.


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Total 93.3 21.8


neg. — negligible

Note: includes teas, whether flavoured or not; totals may not sum due to rounding.


For UK imports of tea, Sub-Saharan Africa was the largest region of origin, with a valueof £117.7m and volume of 80,600 tonnes, accounting for respective shares of 51.9%and 62.9%. Asia and Oceania followed, accounting for 27.6% of all imports by valueand 23.7% by volume, at £62.7m and 30,400 tonnes. The EU-27 was the third-largestsource of tea imports, with £31.8m (14%) and 10,200 tonnes (8%) in imports comingfrom the region in 2014.

Table 4.6: UK Imports of Tea by Volume and Valueby Region (£m and 000 tonnes), 2014




EU-27 31.8 10.2





Eastern Europe 0.1 neg.

Total 226.8 128.1


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neg. — negligible

Note: includes teas, whether flavoured or not.


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Strengths, Weaknesses, Opportunities & Threats

STRENGTHS

Tea consumption in the UK is significant, with an estimated 165 million cups consumedeach day.Coffee consumption is also huge, with an estimated 70 million cups consumed daily inthe UK.Given the UK’s long history of heavy tea consumption, it is strongly associated withBritish culture around the world.The regular consumption of certain hot beverages — particularly green and herbal tea— has proven health benefits.The proliferation of coffee shops, and the coffee shop culture, in the UK has resulted inconsiderable growth in sales of premium instant coffee and ground coffee products, asconsumers have been increasingly exposed to high-quality coffee products.

WEAKNESSES

The UK is dependent on tea and coffee imports and, as such, is subject to fluctuationsin global prices.Global tea and coffee prices can be affected significantly by weather conditions, suchas droughts, and diseases that affect plantations.Owing to rising demand for fruit, herbal and green teas, the market for black teas —traditionally one of the strongest categories within the hot beverages market — hasentered decline.

OPPORTUNITIES

Strong growth in the fruit, herbal and green tea subsectors is predicted to continue,given the ongoing expansion in the available varieties and increased awareness of thepurported health benefits.Growth in ground coffee sales is also expected to remain strong, with consumers nowseeking flavour rather than the convenience provided by instant coffee products.While the instant coffee market is struggling, the super premium and café-style productcategories are expected to grow, with demand for a combination of taste andconvenience outweighing concerns surrounding price.The coffee, tea and hot chocolate ‘pod’ markets — for use in single-serve, hotbeverage systems — are exhibiting remarkable annual growth. These systems, and theaccompanying pods, can provide barista-quality drinks within the home and, as such,are seeing great increases in demand.

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THREATS

Malted drinks are increasingly perceived as ‘old-fashioned’ and have lost ground toalternative hot beverage products. The subsector is now in long-term decline, with thistrend forecast to continue.Rising consumption of tea and coffee in producing nations, such as Brazil, India andthe People’s Republic of China (PRC), could lead to rising prices.Extended periods of hot summer conditions can lead to reduced consumption of hotbeverages in favour of cold beverages.

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PEST

POLITICAL

European Food Safety Authority Investigates Caffeine Safety

In May 2015, the European Food Safety Authority (EFSA) Panel on Dietetic Products,Nutrition and Allergies published a scientific opinion on the safety of caffeine, followinga request from the European Commission (EC), to help formulate European-widecaffeine consumption guidelines.

The aim of the review was to provide advice on a daily intake of caffeine from allsources which, when consumed at will throughout the day over long periods of time,does not give rise to concerns regarding harmful effects to health to the population as awhole, and various population subgroups. The study also looked at providing advice onthe dose and timing of caffeine prior to physical activity and when consumed withcertain other food constituents such as alcohol and other energy drink ingredients.

The review found that:

Single doses of caffeine up to 200 milligrams (mg) from all sources do not give rise tosafety concerns for the general healthy adult population (18 to 65). The same dosedoes not give rise to safety concerns when consumed less than 2 hours prior to intensephysical exercise. Single doses of 100mg of caffeine may, however, increase sleeplatency and reduce sleep duration in some individuals. Single doses of 200mg werealso unlikely to have adverse impacts when consumed with other common constituentsof energy drinks, or with a blood alcohol concentration of up to 0.08%.In regard to habitual caffeine consumption, intake from all sources up to 400mg per dayconsumed throughout the day does not give rise to safety concerns for healthy adults,nor does the consumption of other common constituents of energy drinks at this level ofintake.For pregnant women, there were no safety concerns for caffeine intakes from all sourceof up to 200mg per day consumed throughout the day.For children, consumption proportionate to adults for single doses may be consideredsafe at 3mg per kilogram (kg) of body weight per day, given that caffeine clearance inchildren (aged 3 to 10) and adolescents (aged 10 to 18) is at least that of adults. Similarto adults, consumption of around 1.4 mg per kg of body weight may increase sleeplatency and reduce sleep duration. According to the report, however, there are no dataavailable to characterise the rise of single doses of caffeine from all sources for childrenand adolescents.Habitual coffee consumption among children may also be proportionate to that ofadults, at 5.7mg per kg of body weight. However, the report highlights that as only

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limited studies are available on longer-term effects of caffeine on anxiety and behaviourin children and adults, there is substantial uncertainty regarding habitual coffeeconsumption within this age group.

These guidelines were formulated as a result of various Member States’ concernsregarding adverse health effects associated with caffeine, particularly cardiovasculardisease, problems related to the central nervous system — such as anxiety andinterrupted sleep — and a possible rise to adverse effects on foetal health in pregnantwomen.

The report was largely welcomed by the coffee sector, with the European CoffeeFederation (ECF) and the British Coffee Association (BCA) accepting the findings,highlighting the importance of a study that examines coffee consumption and theconsumption of caffeine via other sources. The BCA said the findings support its ownresearch showing that moderate coffee consumption by healthy adults — at 400mg ofcaffeine per day, or between four or five cups — may confer some health benefits.

ECONOMIC

Coffee Prices

According to the International Coffee Organization’s (ICO) Coffee Market Report June2015, the monthly average of the ICO composite indicator — a benchmark for the priceof green coffee of all major origins and type, and a key measure of levels of greencoffee transactions — stood at 124.97 US cents per pound, up by 1.2% in comparisonto May, but down significantly from highs of more than 180 US cents per pound inNovember 2014. According to the report, this is the second-lowest monthly averageover the last 17 months, with prices remaining depressed as a result of depreciation ofthe Brazilian real. While the ICO highlights that prices are not yet at crisis level, long-term low prices could discourage investment in the sector.

Exports were also low, down by 12% in May 2015 — at an estimated 9.3 million bags— in comparison to the same month in 2014. According to the ICO, this representedthe sixth consecutive month in which exports were lower in comparison with the sameperiod in the previous year. The decline in May 2015 against 2014 was largelyattributable to lower shipments from Vietnam, alongside slightly lower volumes fromBrazil and Indonesia. In total, for the coffee year so far, between October 2014 and May2015 exports amounted to 72.8 million bags, down by 4.6% on the same period in2013/2014. Total production for the crop year 2014/2015 is estimated at 141.9 millionbags, lower than estimated global consumption in the 2014 calendar year, at149.3 million bags.

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Mondelez-Douwe Egberts Merger

In May 2014, Mondelez International Inc — owner of leading coffee brands such asCarte Noire and Kenco — and leasing coffee company DE Master Blenders 1753 BVannounced their intention to combine their respective coffee operations to form aleading global coffee company, with combined revenues in excess of €5bn.

Upon completion of the proposed transactions, Mondelez will receive approximately$5bn in cash and a 49% stake equity interest in Jacobs Douwe Egberts. AcornHoldings, the parent company of DE Master Blenders, will therefore hold the majorityshare in the proposed company and have a majority of seats on the board.

In December 2014, however, the European Commission announced that it had openedan in-depth investigation into the proposed merger, citing concerns that the proposedtransaction may adversely impact competition for various coffee formats in Austria,France, Denmark and Latvia, and for single-serve beverage systems in numerous EUMember States. In May 2015, the deal was granted approval on the condition thatMondelez disposes of its Carte Noire business in the European Economic Area (EEA)and DE Master Blenders sells its Merrild business in the EEA and licences its Senseobrand in Austria; as a result, the agreement was expected to be finalised over thecourse of 2015.

Shortly after gaining approval, it was announced that Mondelez and Douwe Egbertshad completed their merger agreement, combining their operations into the newcompany Jacobs Douwe Egberts. The merged entity has leading market positions inaround 24 countries, bringing together leading brands across various internationalmarkets, including Jacobs, Carte Noir, Gevalia, Kenco, Tassimo and Millicano fromMondelez; and Douwe Egberts, L’OR, Pilao and Senseo from DE Master Blenders. Thetwo companies have entered into an agreement to combine Mondelez International’swholly owned coffee portfolio outside of France with DE Master Blenders, while AcornHoldings BV has made a binding offer to receive Mondelez International’s coffeebusiness in France. Various international partners of Mondelez engaged in jointventures have also been invited to join the new company.

SOCIAL

New Code for Indian Tea Industry

In April 2014, the Tea Board of India announced a new set of guidelines for Indian teagrowers under a voluntary code, with the aim of improving the quality of tea producedacross the country.

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Entitled the Plant Protection Code, the new guidelines aim to ensure the safe usage ofplant protection products and certain safety standards, and limit the use of pesticides intea growing. The Code is essentially aimed at minimising the use of pesticides,primarily by requiring responsible chemical management, agricultural practices andreducing dependence on chemicals through ‘Integrated Pest Management’ strategies.

The Code, which was introduced in January 2015, was drawn up largely in response torising demand across the world for sustainable products that have little or no adverseimpact on the environment.

Biodegradable and Compostable Coffee Pods

In light of the significant growth in the coffee pod category over the last 5 years or so —examined in detail in the Technological section of this chapter — many consumers andorganisations have raised concerns regarding the level of waste arsing from single-serve hot beverage pod systems, with all such pods currently sent to landfill.

As a result, numerous manufacturers of coffee pod products, across the variousavailable systems, have strived to improve their environmental credentials. Lavazzawas one of the first companies to unveil a patented 100% compostable, whollybiodegradable coffee pod, following 5 years of development with Italian biopolymercompany Movement and the Polytechnic University of Turin.

Numerous other producers in various national markets, and the majority of leadingglobal producers, have also announced either the upcoming launch of similar productsor confirmed ongoing development in the area of sustainable solutions for the coffeepod products.

Black Tea Decline

In recent years, demand for standard black tea products in the UK has struggledsomewhat, recording falling sales and an ongoing decline in their share of the total hotbeverages market. According to data from IRI, UK retail sales of black leaf teascontracted by 13.2% between the years ending 28th May 2011 and 23rd May 2015,falling to value of £479.9m. Over this period, sales declined consistently each year,dropping by just 1.5% in 2012 and 1.1% in 2013, before more significant annualcontractions were recorded in 2014 and 2015, at 7.7% and 3.4%, respectively.

As a result of this decline, black tea has seen its share of the total market tumblesignificantly over the same period. In 2011, black tea accounted for 35.1% of the totalmarket, second to the instant coffee subsector’s 41% share; black tea’s market share,

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however, fell year-on-year to reach 27.9% by 2015, well behind instant coffee, at41.4%. While it remains the second-largest sector of the market, should this trendcontinue — and should growth in ground coffee, fruit and herbal teas, and green teascontinue — the sector’s market share is likely to rapidly deteriorate.

Given that the UK is among the largest volume consumers of tea globally, and thatconsumption of tea is part of the UK’s cultural heritage — in addition to its economicvalue in terms of the domestic market, and import and exports — this decline is asignificant concern.

However, the emergence of an increasing variety of other tea variants has been one ofthe key drivers of this reduction in demand for black tea, with strong growth recorded ingreen, herbal and fruit tea sales. In recent years, there has been considerable, andrising, demand for such products, driven by improving product awareness and a greaterrecognition of the purported health benefits of such teas, supported by the hugeproliferation of brands and flavours.

Another factor serving to lower sales of black tea is the increased demand for coffeeproducts. Owing to the success of coffee shops throughout the UK in recent years,consumers have been exposed to — and are therefore increasingly demanding — highquality coffee products. This has led to strong growth in demand for ground coffee,single-serve coffee pod machines, and super premium or café-style instant coffeeproducts.

TECHNOLOGICAL

Coffee Pod Market

Over the past decade or so, there has been significant growth in the number of single-serve hot beverage systems, which, through the use of disposable ‘pods’, can provideusers with high-quality coffee, tea, hot chocolate and other hot beverages in the home.Demand for such products has grown considerably, as choice has improved and priceshave fallen for both the beverage systems and the pods.

In terms of coffee, Jacobs Douwe Egberts GB’s Tassimo — the leading UK beveragemachine and coffee pod provider — is now the leading brand in the ground coffeesubsector. In the year ending 23rd May 2015, Tassimo’s sales across all of its brands— including Carte Noire, Costa, Kenco and Starbucks — amounted to £58.7m,representing a 53.3% share of the total ground coffee subsector, according to data fromIRI. Furthermore, annual growth in sales for Tassimo have been remarkable, with a16.2% increase recorded in the year ending 26th May 2012, followed by a rise of 55.7%

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in the year ending 25th May 2013, growth of 70.5% in the year ending 24th May 2014and a rise of 44.3% in the year ending 23rd May 2015.

While the pod market is largely centred around the coffee sector, various other productsare available in pod format, including standard and flavoured teas and hot chocolate.IRI provides data for the total value of the pod categories in the tea and hot chocolatesectors. In both sectors, pods have experienced major growth, with sales of hotchocolate pods growing by 286.6% between 2011 and 2015 (from £2.9m to £11.4m),while pods in the tea market grew in value by 102.1% (from £616,099 to £1.2m).

This growth in both single-serve beverage machines and pod-based products isexpected to continue, with consumers increasingly demanding higher-quality hotbeverages across virtually all product sectors. As these machines aim to replicate café-quality products at an affordable price, it is likely that demand will continue to soar.

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Company Financials

Financial data for the leading companies in this market are listed below; it should benoted that the financial results for certain companies are not restricted to sales of theproducts covered by this report.

Turnover (£000)Pre-Tax Profit

(£000)Year End

Company

Unilever PLC 48,436,000 7,646,000 31/12/2014

Mondelez UK Ltd 1,832,722 51,204 31/12/2013

Nestlé UK Ltd 1,726,280 124,878 31/12/2014

Mars Chocolate UK Ltd 833,489 100,605 28/12/2013

R. Twining & Company Ltd 280,543 43,147 31/08/2014

Tata Global Beverages GB Ltd 161,153 13,653 31/03/2014

Bettys & Taylors of Harrogate Ltd 155,985 11,225 31/10/2014

Typhoo Tea Ltd 70,660 988 31/03/2014

Jacobs Douwe Egberts GB Ltd 51,148 1,514 31/12/2014

Ringtons Ltd 48,985 3,875 30/06/2014

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Further Sources

Publications

• Coffee Market Report June 2015

International Coffee Organization

http://www.ico.org

Government Publications

HM Treasury

https://www.gov.uk/government/organisations/hm-treasury

• Forecasts for the UK Economy: a comparison of independent forecasts, May 2015

National Statistics

http://www.statistics.gov.uk

• Consumer Price Inflation, April 2015

• Consumer Trends, Q4 2014

• Labour Market Statistics, May 2015

• National Population Projections, 2012-based projections

• Population Estimates for UK, England and Wales, Scotland and Northern Ireland,Mid-2001 to Mid-2010 Revised, December 2013

• United Kingdom Economic Accounts, 18th May 2015

Uktradeinfo

HM Revenue & Customs

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https://www.uktradeinfo.com

• Overseas Trade Statistics

Other Sources

IRI

http://www.iriworldwide.co.uk

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Understanding Consumer Survey Data

TGI tables, produced by Kantar Media, are generally based on one of the followinggroups: households — consisting of either one person living alone or a group ofpeople, usually members of one family, who live together and whose food and otherhousehold expenses are managed as one unit; adults — aged 15 or over; housewives— a member of a private household who is solely or mainly responsible for thehousehold duties.

NEMS Market Research is often commissioned by Key Note to conduct exclusiveconsumer surveys among a representative sample of adults aged 16 and over in GreatBritain.

Number, Profile, Penetration

Tables used in Key Note reports may give figures for the Number, Profile, and/orPenetration.

Social Grade

This is normally based on the occupation of the Head of the Household, or if the Headof the Household is retired, their former occupation. If this information is not available,

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social grade is based on environmental factors such as type of dwelling, amenities inthe home, presence of domestic help, etc.

The following table broadly defines the six social grades used. The relationshipbetween social grade and net income of the Head of the Household is a complex oneand readers should note that income is not determinant of social grade.

SocialGrade

Social Status Head of Household’s Occupation

A Upper middle classHigher managerial, administrative orprofessional

B Middle classIntermediate managerial, administrative orprofessional

C1 Lower middle classSupervisory or clerical and juniormanagerial, administrative or professional

C2 Skilled working class Skilled manual workers

D Working class Semi and unskilled workers

EThose at lowest levels ofsubsistence (no other earner)

State pensioners or widows

Standard Region

This is as defined by the Registrar-General.

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Key Note Research

Key Note is a leading supplier of market information, publishing an extensive range ofconsumer, industrial, business-to-business and services titles. With over 30 years’experience, Key Note represents clear, concise, quality market information.

For all reports, Key Note undertakes various types of research:

Online searching is carried out by product code or free search method, and covers theperiod from the last edition of the report to the current day.

Trade sources, such as trade associations, trade journals and specific companycontacts, are invaluable to the Key Note research process.

Secondary data are provided by Kantar Media (TGI) and Nielsen forconsumer/demographic information and advertising expenditure, respectively. Inaddition, various official publications published by National Statistics, etc., are used foressential background data and market trends.

Interviews are undertaken by Key Note for various reports, either face-to-face or bytelephone. This provides qualitative data (‘industry comment’) to enhance the statisticsin reports; questionnaires may also be used.

Field research is commissioned for various consumer reports and market reviews, andis carried out by NEMS Market Research.

Key Note estimates are derived from statistical analysis and trade research carried outby experienced research analysts. Up-to-date figures are inserted where possible,although there will be some instances where a realistic estimate cannot be made orexternal sources request that we do not update their figures.

Key Note Editorial, 2015

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hot beverages market update 2015

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