U.S. specialty coffee market in 30-year renaissance

In this story: Starbucks shapes history From the street into the home What is specialty coffee? Can futures help specialty coffee RELATED STORIES, SITES

NEW YORK, New York (Reuters) -- The U.S. specialty coffee business is booming, with a 1960s downturn long forgotten, and its popularity evident in a Starbucks shop even in China's Forbidden City.

But the gourmet coffee industry's own success over the last three decades could also restrain its growth down the road, experts said.

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While overall coffee consumption is flat, specialty coffee is still a growth sector, driven by the younger drinkers.

"Witness Starbucks' (SBUX.O) plans to expand in Europe. There is still a lot of room for specialty coffee. Things are still in an uptrend but a limiting factor may be how much specialty coffee can be produced," said James A. Reynolds, vice president of Peet's Coffee & Tea, a Starbucks competitor based in Emeryville, California.

Prominent figures in the renaissance, Jerry Baldwin, Gordon Bowker and Zev Siegl founded Starbucks in Seattle's Pike Place Market in 1971.

Their start has become a legend in coffee circles.

Howard Schultz, now the chairman and chief global strategist, joined Starbucks in 1982. After a trip to Italy where he was taken with espresso bars, Schultz convinced the founders to test the coffee bar concept in 1984. The rest is history.

Starbucks' 3,600 outlets now include one in Beijing's Forbidden City, and the company announced at the end of October that it plans to have 10,000 stores open by 2005.

Almost like subliminal advertising, coffee bars are scenic backdrops in the popular U.S. television situation comedies "Frasier" and "Friends."

This illustrates the popularity of expensive brews among 18 to 24 year olds, which has been the key to the growth in specialty coffee. Some of this age group have not been deterred by prices of $12 per pound or more for whole bean coffee.

In its 2000 survey of coffee trends, the National Coffee Association found that 45 percent of this segment had drunk cappuccino in the past year, 24 percent had drunk espresso, 21 percent latte, 29 percent cafe mocha and 36 percent iced and ice-blended coffees.

"These numbers are up significantly from recent years," Gary Goldstein, director of public relations and communications for the NCA, pointed out.

In his book "Uncommon Grounds," author Mark Pendergast identified Erna Knutsen as the first lady of the business, who coined the term "specialty coffees" in 1974.

"The definition is simple. It tastes great and has no defects," added Ted Lingle, executive director of the Specialty Coffee Association of America.

"By tastes great, we are referring to taste, acidity, body and aroma. By no defects we mean no sour, black or unripe beans," Lingle explained.

Donald M. Schoenholt, CEO of Gillies Coffee Co. in Brooklyn, New York, said that in the 1930s, '40s and '50s consumers counted pennies and coffee was widely considered a non-necessity food item.

"This depressed the value of coffee. The little guy dried up. In the early '60s I counted 114 wholesalers in New York. In the '70s you could only count 14," he said.

"By the 1980s people saw the value of good coffee and this changed the business," added Schoenholt, who is also the gourmet editor of the Tea & Coffee Trade Journal.

The SCAA was founded in 1982 by 42 charter members. As of November it boasted nearly 2,600 member companies, demonstrating the turnaround and growth of the business.

"In 1997 there were 80 million occasional coffee drinkers and seven million daily gourmet coffee drinkers. In 2000 there were 110 million occasional coffee drinkers and 20 million daily gourmet drinkers," said NCA's Goldstein.

The idea of specialty coffee futures has been circulating in the industry, but there is some debate as to the feasibility of launching exchange-traded contracts for a boutique market.

"I'm not sure a specialty contract can work, it's so fragmented and subject to weather," said Matt Gordon, senior vice president of market development at the New York Board of Trade, the main arena for trading arabica coffee futures.

Gordon said NYBOT was in talks with Internet commodities marketplace InterCommercial Markets Corp. (www.intercommercial.com) about the grading and certification of coffee, which could lend itself to the specialty market.

He also said a smaller size contract like the so-called "mini contract" being contemplated by the exchange for arabicas might also help specialty roasters and producers by providing a vehicle to offset their market risk and lock in prices.

Copyright 2000 Reuters. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.

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National Coffee Association
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