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Hot beverages is a strange category. While both tea and coffee are dominated by standard variants, it is the smaller, niche sectors that are driving all the value growth.
The macro trends driving other categories are also in evidence here. Health, indulgence and convenience are having an influence across the whole sector.
There is good news for manufacturers. The migration of consumers out of hot beverages into non-alcoholic soft drinks appears to have slowed: the £530m tea market saw value growth of 4% last year after several years of flat or declining sales.
Much growth has been down to the performance of green, speciality, fruit and herbal tea, but also reflects an element of price inflation in mainstream bags. The standard sector has benefited from the Kenyan tea drought, which forced prices up, while higher value decaffeinated, premium, organic and Fairtrade teas are performing well.
In 2005 Twinings launched its Everyday tea to revive the mainstream tea segment - two years down the line, it seems to be having a positive effect. "There are a lot of people out there who want a premium everyday tea," says Claire Harvey, trade marketing manager at Twinings.
Health has had a big role to play in both tea and coffee.
"Normal tea is healthy," says Simon Attfield, customer marketing controller at Tetley. "Tea gets an unhealthy label because it's tied up with caffeine, but it's just not true. It's full of anti-oxidants so it has added health benefits."
The teas that are growing are all linked to this health trend: green tea is particularly rich in antioxidants, as is rooibos (redbush) and herbal tea.
"Tea is perceived by consumers as being healthy," says Adrian Adams, category strategy manager, Unilever UK. "Consumers say they drink tea to relax and don't perceive it as being as high as coffee in terms of caffeine levels - which it isn't."
That said, Adams adds that decaffeinated tea is growing because "there is a group of consumers who want to do as much as they can about their health and vitality". Manufacturers have been working hard to improve the taste of their decaf products, a sector that is worth £26.7m and is showing 11.7% growth [ACNielsen, May 07].
"If you take caffeine out of tea you are never going to get the same flavour," says Harvey. "But we think our range tastes as close to the original product as possible."
It is a similar situation in coffee. One of the recent trends has been the introduction of 'reduced caffeine' variants. "This is for people who want to cut down on caffeine but don't want to lose that all-important kick," says Graeme Walker, Nestlé UK trade communications manager. "We've also launched a range within our cappuccinos and lattes made with less than half the fat."
There has also been the growth of what's known as 'benefit blends' - a sector that is growing at 72 % YOY [ACNielsen, May 07]. Twinings holds the largest chunk of this market, with a 32% share, and has recently extended its range with two SKUs - Morning Detox and Recover.
While health is growing, the indulgence trend is evident within coffee. "Indulgence is where you can start to drive value through premium offerings including connoisseur coffees such as Alta Rica, and through what we call 'coffee on demand'," says Walker. This sector is currently worth £14.5m and is growing at 63% YOY. Nestlé recently launched a coffee on demand machine called Dolce Gusto. "It's all about consumers' desire for a high-quality coffee at home while experiencing the café-culture experience," explains Walker. "It's essentially a 'posh kettle'," he says. "It boils the water, you place a capsule into the machine, press a button and it dispenses your coffee in a cup."
There's no doubt that the take-home market has benefited from the rise of the café culture. Ground coffee has been the real beneficiary, but speciality instants - lattes, cappuccinos etc - have also seen dramatic growth.
Douwe Egberts' Senseo 'pod' machine - and Kenco's Tassimo 'discs'- are effectively single-serve brewing systems which help deliver the taste of 'real' coffee in a convenient format, adding value to the sector and fuelling growth.
Lavazza is not a player in the pods sector, but Dave Rogers, sales and marketing director of the roast and ground specialist, believes people who buy into roast and ground are looking for better quality and taste, "a product they can trust and a brand that they know at a reasonable price".
While technology is driving value growth, the coffee market is still dominated by instant, with brands such as Nestlé's Nescafé range and Kraft's Kenco holding a big share of the sector. "Some 532 cups of instant coffee are sold every second in the UK," says Walker. "That makes the category worth more than £500m and the sixth largest category in ambient grocery."
Instant is broken into six sub-sectors: regular, premium, speciality, reduced caffeine, connoisseur and powders. Within these areas, Walker says the sectors that are driving growth link directly to the macro trends within hot beverages: premium, speciality and connoisseur. Earlier this year, Nestlé unveiled a £2.7m campaign for Nescafé Collection, its range of connoisseur coffees that includes Alta Rica, Cap Colombie and Alta Rica Decaff.
Suppliers agree that, in the main, retailers have got it right when it comes to merchandising and organising the hot beverages fixture.
Tetley's Attfield says: "We've been too successful in making tea easy to buy. It's been a good thing, because it doesn't annoy consumers when they're in store, but they can go in and do their tea shopping without really thinking.
"One of the challenges for us and retailers is to get some excitement into the aisle."n
CATEGORY INSIGHT: Fairtrade
Tea and coffee is one area where consumers who want to buy more ethically have really been engaged
The ethical hot beverage sector is starting to gather pace. Beacon brands such as Café Direct, with its Fairtrade credentials, have been joined by retailer own brands keen to show off their sustainability and ethical buying.
Other ethical schemes have become more prominent as consumers look for greater choice.
Unilever, for example, has partnered its PG Tips brand with the Rainforest Alliance. "We will be looking for all our teas sold in Western Europe to be certified by 2010," says Adrian Adams, category strategy manager, Unilever UK. He believes shoppers are prepared to pay for teas that are aligned to their concerns.
Since 1997, Tetley has been members of the Ethical Tea Partnership (ETP), an international non-competitive alliance of major tea packers who have a common interest in ensuring the tea they source is ethically produced. "The ETP is about bringing the whole industry up to a level. It's about making sure people understand there are a lot of manufacturers out there and we want to make sure that all tea is ethically sourced," says Simon Attfield, customer marketing controller at Tetley.
As a brand that bases its entire proposition on Fairtrade, Café Direct believes the entry of bigger brands into the sector will be good, making the ethical arena one consumers will embrace.
"What is important for consumers is not whether it's Fairtrade, but whether they enjoy the product," says Sylvie Barr, head of marketing at Café Direct. "There's no point having a Fairtrade coffee if the product tastes awful."
"Taste is something we work on first and foremost," says Barr. "Once you explain to consumers that we re-invest a higher proportion of our profits into programmes that help growers, it's a no-brainer for them."
While a growing number of products gives the ethical area greater shelf presence, Barr believes that, to grow the whole Fairtrade sector, products should be placed on the standard fixture.
"Retailers have learnt a lot from organic, and realise that when you put all the organic products in one area, you only attract people interested in organic products," she says.
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