Living the American coffee dream: Coffee spending rises as the US economy slumps

The US economy continues to suffer from the worst downturn since the great depression. However, coffee spending in the United States is actually getting richer. Scott Duke Harris reports on the ‚Äúaffordable luxury‚Äù from Los Angeles, California.','none',' Globe-trotting executives may know Los Angeles’s La Cienega Boulevard for its Restaurant Row, a grande smorgasbord priced with expense accounts in mind. Journey a few miles south, however,  and you’ll find Angelenos crowding fast-food joints and stores that cater to the financially challenged. Across the street from a pawnbroker, La Cienega Plaza is anchored by a clothing chain called Ross Dress for Less. Another shop goes by the tell-tale initials WIC. The poor know what many rich Americans don’t: WIC stands for Women, Infants and Children, a federal program that provides nutritional support for needy families. Yet amid these signs of want, there is evidence of how mainstream America’s quest for a better cup of coffee keeps marching forward despite a treacherous economy. Side-by-side in one building an outlet for the Coffee Bean & Tea Leaf (CBTL) is facing off against a McDonalds franchise, which a few years ago dropped the bright Happy Meal colour scheme for the muted earth tones of the McCafé concept now found in locations across the globe. “McDonalds has really improved the quality of its coffee. They’ve darkened the roast and strengthened the brew,” says Tim Castle, Author of the Perfect Cup (Perseus) and an Industry Marketing Consultant in Santa Monica, California. McDonalds, which used to boast about the billions of burgers it served, rolled out its McCafé drinks nationwide in 2009 and has been hitting the airwaves with a heavy dose of TV advertisements promoting iced coffee as an afternoon pick-me-up. McDonalds’ coffee initiative accelerated after Starbucks introduced its breakfast sandwiches – a battle of behemoths that seem bent on global domination. So has McDonalds’ improved bargain brew cut into the specialty-coffee brands? Not on La Cienega, where both cafés appear to be doing a brisk business. And that locale, some say, may be an apt microcosm for a wider trend: rather than peel customers away from the likes of Starbucks, Caribou, Peet’s and CBTL, industry insiders say McDonalds’ new brews are benefiting the coffee industry at large – especially the premium ‘specialty’ sector. “We’ve seen sales increase related to the McCafé phenomenon,” said Jay Isais, Senior Director of Coffee and Manufacturing at CBTL, whose headquarters is a few blocks further south on La Cienega. McDonalds, he explained, has introduced new customers, particularly teenagers, to the appeal of a caffeine beverage that isn’t a soda. “They’re bringing new consumers into the category. And as they do, people are going up market to try other brands.” And as coffee lovers refine their palates, many are also increasingly moving beyond the branded ‘fast coffee’ experience to more rarefied specialty brews, say micro-lot buyers such as Jeff Taylor of PT’s Coffee, a wholesale roaster based in Kansas, and Martin Diedrich of Kean Coffee, which has two cafés and a wholesale business in Orange County, California. “I mean no disrespect to the fast coffee chains. It’s really just supply and demand,” Taylor says. “The larger the café chain, the larger volumes of coffee they have to buy. The larger volumes of coffee are rarely the best lots of coffee.” PT Coffee, Taylor says, competes less with Starbucks and Caribou than with other specialty roasters such as Intelligentsia, Stumptown and Counter Culture. “I believe we are all expanding as sales have been strong through this down economy,” he says. “I can’t speak for them other than what I’ve read in news reports. But our sales have been strong for the past three to five years and we are in moderate but cautious growth mode.” All of this may help explain why data collected and crunched by the Specialty Coffee Association of America suggests that premium ‘specialty’ coffee now composes about 30 per cent of the American market – up from scant traces three decades ago. Improving the quality is one of SCAA’s central missions – one reason why it offers week-long cupping classes to enhance the skills of coffee professionals. Better quality overall figures to grow the coffee pie larger, SCAA Executive Director Ric Rhinehart explains, while helping the specialty category further cut into the market share of commercial stalwarts such as Folgers, part of Smuckers, and Maxwell House, part of Kraft Foods. Better blends introduced by these commercial giants suffer a credibility problem, Isais says, for the same reason that consumers won’t buy a high-premium wine from Gallo. Coffee’s upward mobility in a down economy has been illustrated in various ways. A subtle example: In-N-Out Burger, a Western chain with a passionate following, recently altered the drive-thru menu that once offered generic coffee to tout its “New Kona Blend”. A big example: The rousing response that Wall Street investors gave Dunkin Brands, pushing the value of its shares up 46.6 per cent on its July 27 debut on the Nasdaq exchange. Dunkin Donuts, which has long prided itself on the quality of its coffee and coffee drinks, is ranked among Americas’ top coffee purveyors even though it doesn’t have any stores in java-loving California, Washington and Oregon. Dunkin’s signature blend, however, is now competing on grocery shelves across the nation. While many investors clearly sense a long-term growth opportunity in Dunkin, they also place bets on public players such as Starbucks, Peet’s, Caribou, Green Mountain Coffee Roasters, Farmer Brothers and Coffee Holding Company – not to mention McDonalds. “Resilient” is the word Rhinehart chooses to describes coffee’s performance during the most perilous financial period since the Great Depression. What had seemed like a garden-variety slump was redubbed  “the Great Recession” after the financial industry meltdown in September 2008, which would prompt an massive, emergency bank bailout from taxpayers. Millions of Americans lost jobs and foreclosures soared to record levels as homeowners struggled to pay mortgages. The recovery, so-called, has been sluggish and jobless, with unemployment hovering above 9 per cent. At time of writing, fear abounds that America is lurching into the second recession, pushed over the edge by political crisis in Washington that resulted in a historic downgrade of the U.S. credit rating from AAA to AA+ by Standard and Poor’s. America’s troubles, of course, have further shaken the global economy. Resilient does not mean unscathed. Hundreds of coffee outlets were shut-down, and many thousands of people put out of work. CBTL, for example, closed dozens of stores and also trimmed dozens of administrative positions, while also tightening the budgets for travel and research and development. “We definitely had to do more with less,” Isaias says. A more familiar tale is the way that Starbucks retrenched after its head Howard Schultz recognised that company’s aggressive expansion had damaged the quality of its coffee and consumer experience. Schultz, who as chairman had been concentrating on expansion in China, returned to the helm as CEO and in 2008 ordered the closure of 600 stores, the layoff of 12,000 employees and the retraining of baristas. Many of Starbucks problems, Schultz has acknowledged, were self-inflicted: the company overextended itself to the point of parody. The Onion, a popular satirical newspaper, published a report about the Manhattan opening of a new Starbucks inside the restroom of an existing Starbucks. Not surprisingly, many smaller outfits did not survive the contraction. The SCAA’s Rhinehart said he expects mom-and-pop openings will be depressed for many years to come. With real estate values low, would-be entrepreneurs now have a tough time securing home equity loans; gone too are much of the retirement savings that might have been ploughed into a small business. Compounding the industry’s problems over the last two years has been the rocketing price of the raw material, only some of which was passed on to consumers. The U.S. Department of Labor reported in May that the cost of a one-pound can of ground coffee had risen to US$5.10, up 40 per cent from a year earlier. Profit margins were squeezed, and some enterprises, Castle says, were smart to create blends that replaced inferior Arabicas with high-quality Robustas that cost much less: “I’ve also felt the best Robustas are better than the worst Arabicas.” Coffeehouses typically added a dime here, two dimes there, helping to preserve coffee’s appeal as – all together now – “an affordable luxury.” That industry mantra came up time and again in the reporting of this story. Indeed, an argument could be made that a good coffee tastes even better in tough times. Even young parents who lose a job and suddenly learn what WIC stands have even more reason to savour and find solace in their favourite brew. Rather than give up coffee, the unemployed and under-employed are apt to save money by brewing the cup at home – a common bit of financial advice. If they visit a café, they may skip the latte and just add milk and sugar for free. They will shun the muffin but never the coffee. Such were the patterns at CBTL, Isaias says: traffic showed no decline in tough times, although customers typically spent less on their visits. At PT Coffee’s lone retail café in Topeka, Taylor says, sales fell after the crash in 2008 but soon rebounded. “We’ve seen more and more customers forgoing the latte or cappuccino for a pound of coffee and picking up a drip coffee while they are in the store,” he says. “So our bulk sales have risen dramatically, our milk-based drink sales have dipped slightly by about 3 per cent, and our drip coffee – single origin sales have gone up slightly. Overall sales are up, just in different categories.” So there is confidence that a double-dip recession won’t seriously impair consumers’ relationship with their daily brew. Long-term demographic trends, many suggest, also bode well for the specialty coffee sector. A decade has now passed, Rhinehart says, since Starbucks eclipsed Folgers in brand recognition. Older consumers who favour old, familiar brands are less likely to change their habits; now younger consumers that are now developing habits that favour the specialty trend – thanks in part to McDonalds. Not so long ago, the phrase ‘McDonalds coffee’ had a neutral or even negative  connotation. It was little more than a caffeine-delivery system that, if one wasn’t careful, might scald one’s tongue. Even now, if you type ‘McDonalds coffee’ into your favourite search engine the algorithms suspect you are looking up the notorious 1994 lawsuit concerning an elderly woman who was hospitalised with severe burns after spilling a full, 49-cent cup in her lap. Jurors were so offended by what they perceived as McDonalds’ callous response to her complaint that they hammered the giant with a US$2.86 million judgment that the trial judge reduced to US$640,000 before McDonalds and the plaintiffs settled on a confidential amount before an appeal was decided. While the case is often cited as litigation run amok, it’s also fair to assume that some jurors knew from personal experience just how hot that coffee and precarious that cup could be. Funny to think that the teenager enticed by McCafé may soon wander over to CBTL and, a few years later, frequent a place like Kean Coffee in Newport Beach. Kean owner Martin Diedrich is best known as the founder of Diedrich Coffee, now part of highly successful Green Mountain Coffee Roasters, which has lately been doing gang busters business with the Keurig single-cup brewing systems and their K-Cups. The corporate life, Diedrich says, never suited him. On one recent day Diedrich stood with a colleague at a booth inside Kean carefully practicing the art of cupping as customers filled every seat and others took orders to go. The two men independently jotted down their notes and compare their findings later. More than 1,400 customers pass through the store on a typical day, Diedrich says. Some take time to read Diedrich’s prose describing the character and quality of various beans selected from throughout the world. One ode begins like this: “If coffee were a tribe, Yemen Mocca would definitely be a shaman.” Turning customers into connoisseurs, Diedrich says, is a nice way to make a living.  GCR