Farmer Brothers CEO Mike Keown tells GRC Magazine how the US coffee manufacturer is building for its next phase with sights on growth in the capsule industry
When Mike Keown first went on a corporate site visit to an undeveloped landscape in Texas, he knew he was standing on more than just an empty field.
The CEO of Farmer Brothers could clearly picture the half-million-square-foot office and distribution centre that will be the US company’s new headquarters in 2016.
For Keown, the move couldn’t come at a better time. With annual sales of more than half a billion dollars providing coffee, tea and culinary arts products to over 60,000 food and beverage outlets, the company has well outgrown its current 50-year-old home in California.
The US$40 million facility will certainly be a step up from its original headquarters in the back of a bicycle shop over a hundred years earlier. The new digs will include office space, teaching and roasting facilities and a warehouse.
“[The new headquarters] is going to help us keep providing our customers world class coffee with all the service they expect,” Keown tells GCR. “It’s been our hallmark for the last 100 years.”
While US coffee consumption and the slowing retail coffee capsule market are giving some cause for concern, analysts believe third party manufacturers such as Farmer Brothers may be well positioned for growth.
Humble beginnings
When Roy E. Farmer originally set out to help restaurants serve quality coffee in 1912, it was not the mainstream commodity it is today.
In more than a century of operation through two world wars, a depression and several recessions, the company has grown rich in more than just history. It most recently pulled in US$546.4 million fueling a beverage industry second only to water in popularity.
With some analysts describing the company’s growth history as “Herculean” at times, it now boasts over 1800 employees in more than 115 branches worldwide.
“We wake up a hundred years later and we have a national footprint,” says Keown.
A large part of its success, he says, is due to a history of strong leadership and innovation in a developing market.
“When you look at the leaders we’ve had over that time, they were very much entrepreneurial in terms of understanding a product like coffee.”
Keown says the company’s unwavering commitment to customer service, employee development and innovation have also contributed to its success.
“The company continues to have a strong competitive dynamic and a commitment to grow the industry for all the shareholders.”
It might be that spirit for innovation that prompted the company to get into the coffee capsule sector at the outset. In addition to its early connections with Keurig as a distributor, it also supplies the coffee for TreeHouse Food’s K-cup manufacturing efforts.
“We’ve been part of [the capsule industry] since the inception,” says Keown.
And while there is speculation that the retail coffee pod market is about to cool off, analysts believe there is still a huge opportunity for growth in the exact segment Farmer Brothers already serves.
The future is uncertain
According to US Department of Agriculture, US coffee consumption is expected to drop by 1.1 per cent in 2015-2016. But industry leaders know the only thing drinking less coffee is the kitchen sink.
Keurig Green Mountain’s single serve machines have found their way into nearly one in three American homes, resulting in a lot less waste among coffee drinkers.
“I think it’s really important when you look at consumption trends to factor out what happened in this country,” says Keown. “Quite a bit of coffee went down the drain.”
Keurig’s flagship products have been the major growth driver in the US retail coffee market for the last five years. This was largely due to a period of conversion where people with drip machines upgraded to higher priced ones that offered convenience and choice.
“If you took that out… it would be a flat industry,” says Howard Telford, Senior Beverage Analyst at Euromonitor.
But according to the market intelligence firm’s latest research, the US retail pod market is forecast for a slowdown to single digit growth from here to 2019.
Proof of market saturation may be evident in Keurig’s latest financial results.
Despite the expiration of some of its critical patents, the company is still responsible for most of the sales of coffee capsules in the US, which account for 85 per cent of its revenues.
In a blow to shareholders, Keurig recently reported decreased revenue of 5 per cent on the year to US$969.5 million. Pod sales fell 1 per cent, while brewing machine and accessories fell 26 per cent.
“While we are not pleased with our revenue growth, we delivered earnings at the high end of our previous guidance,” Keurig Chief Executive Brian Kelley said in a statement.
Keurig responded to its grim results by announcing a 5 per cent cut to its workforce and a $1 billion stock buyback program, and its stocks took a dive.
Telford believes the slowdown in Keurig’s pod and machine sales can be attributed to several factors.
“For one, there’s been a lot of dissatisfaction, particularly with Keurig 2.0,” he says. “One of the other drivers is coffee quality, and we’re still seeing tremendous growth for coffee outside of the home. That’s competing too.”
While pod manufacturers have struggled to match that quality found in coffee shops, Telford says another obstacle is price, which has been hard to bring down.
“The cost of a cup is still quite high compared to a standard pot of coffee.”
Poised for growth
While the retail pod market may be reaching maturity, analysts believe there is still large potential with the on-trade market.
“There is still quite a strong opportunity for the institutional channel,” says Telford. He believes third party manufacturers can find tremendous growth by focusing on supplying coffee to offices and enterprises.
It’s exactly the kind of business where Farmer Brothers is looking to expand.
With the office coffee segment already its largest customer for its single serve products, part of the company’s growth plans are banked on feeding a growing demand.\
It recently launched its own line of coffee capsules under its Metropolitan brand, which is compatible with both 1.0 and 2.0 brewing systems.
While not able to disclose pod sales figures, Keown says the initial response to its new line has been very encouraging.
“We’re very excited about the prospects,” he says. “The initial customer response has been positive.”
Keown says the upcoming move to Farmer Brother’s new LEED-certified coffee producing facility will also help it meet consumer demand.
“Our plan in this facility, when we talk about a world class roaster, is to provide the perfect coffee for any occasion. Our ability to do this will only increase in the new facility,” he says.
“Assuming pods continue to grow, we will have the space to provide the kind of coffees that those customers desire.”
According to Telford, there is also opportunity to get an edge in the on-trade market by introducing sustainable pods.
“If they could bring that fully recycleable pod it would be a real benefit,” he says.
But while environmental groups and activists have made a fuss about the sustainability impacts of the capsules, Telford doesn’t believe it’s quite the driver of off-trade sales for consumers as it should be.
“I don’t know if it’s a real concern for the mass market consumer,” he says. “There’s a real draw for convenience.”
Future of industry
While Keown is optimistic about the company’s growth potential with the capsule market, the company certainly isn’t putting all its eggs in one basket.
“It’s a debated trend just how much pod industry will grow,” he says.
One thing Keown is sure about, though, is the need to cater to an up-and-coming generation of coffee drinkers. He believes coffee is to youth today what soft drinks were in the past.
“One of the key engines of growth in these businesses is younger coffee consumers,” he says. “I think that trend will continue and aggregate.” GCR.
Source: http://gcrmag.com/profile/view/single-serve-success
( Global Coffee Report).