Big Coffee Awakening Retail Spaces

By Kevin McCarthy

Convenience and daily indulgence needs helped Big Coffee retailers (Starbucks (SBUX), Dunkin’, and McDonald’s (MCD)) power through the early days of COVID, driving the mix of young coffee drinkers to all-time highs. The industry’s early adoption of loyalty programs, digital preordering, and densified suburban locales all helped drive share gains.

However, with every step of reopening, the number of younger drinkers ticks lower despite their growing appetite for caffeinated lifestyles. In 2016, Millennial and Gen Z consumers accounted for 45.4% of coffee traffic; this grew steadily over the subsequent four years, peaking in early 2020 at 47.0%. Since then, the youth share has fallen to 46%. To be fair, some of the decline likely reflects a recovery in broader employment trends and a return to daily routines, but the question remains, why are younger demographics not participating to the same extent?

Big Coffee has a long track record with innovating consumer experiences – both locally and nationally. This is, in part, because the offering naturally sits at an intersection of convenience and connection. From this vantage point, participants have been quick adopters and embracers of changing customer behaviors. Two examples include cold beverages and drive-throughs.

Caffeinated cold beverages gained a more than 10-percentage-point share in the two-year period from mid-2019 to mid-2021 to about 75% of domestic beverage sales. At its core, cold beverage growth is menu innovation. But more acutely the appeal of this platform is its ability to customize and personalize the individual experience – a message that resonates well with youthful customers.

Drive-throughs are another cornerstone of modern coffee culture. A decade ago, they were primarily for food and dessert, but shifts in convenience behavior created a new crop of beverage-led competitors to enter the drive-thru category. Adding to this, legacy operators once content with simply offering a “third place” now incorporate drive-throughs in more than 70% of new store formats.

Next, the retail space question. The elephant in the room, so to speak, is how Big Coffee decides to innovate around underutilized retail space following what appear to be permanent shifts in consumer behavior (hybrid lifestyles). We believe decisions in this vertical may offer answers more broadly for the retail category. The journey is still just beginning, but over the next several months we anticipate revitalization efforts to begin. Higher wages and automation are likely to be part of the solution, but reframing connection needs to be part of the long-term solution. In our view, history is on Big Coffee’s side.

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