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Can Millennials Push Starbucks, Dunkin' Donuts to Greater Heights?

By Daniel B. Kline – Updated Nov 1, 2016 at 9:52AM

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Consumption of espresso-based drinks is way up and you can blame/credit the Seattle-based cafe chain for that. And millennials love espresso.

Millennials not only like their coffee, but they start drinking it earlier in life while being willing to spend seemingly any amount on it.

In addition to drinking more java overall, younger coffee drinkers are also pushing increasing consumption of espresso-based beverages. In fact, sales of espresso drinks have nearly tripled since 2008 and it's millennials pushing that trend, according to the National Coffee Association's (NCA) National Coffee Drinking Trends report, released earlier this year.

The shift to espresso drinks, which generally cost more than a basic cup of joe, coupled with more young people drinking coffee bodes well for chains including Starbucks (SBUX 2.34%) and Dunkin' Donuts (DNKN) that push lattes, cappuccinos, and other high-end coffee drinks.

Between 2008 and 2016, the proportion of 18- to 24-year-olds who had consumed an espresso-based beverage in the past day rose from 9% to 22%, while it climbed from 8% to 29% for those 25-39, according to NCA.The numbers are similar in the broader "gourmet coffee beverages" category, according to NCA, where 18- to 24-year-olds saw a jump from 13% to 36% while the 25-39 category saw an increase to 41% from 19% in 2008.

Those are big jumps that benefit coffee purveyors that sell more than a basic cup. Starbucks has perhaps created some of that demand while Dunkin' has been very smart in following along.

Millennials drink more espresso-based drinks. Image source: Starbucks.

Young people simply drink more coffee

There's no definitive starting point for what defines a millennial, but the term generally gets applied to people who became adults in the 2000s. That makes anyone 18-39 loosely part of that generation depending upon your personal definition of adult.

It's not an exact science, but younger folks are drinking more coffee of all types. Daily coffee consumption among 18- to 24-year-olds nearly doubled between 2000 and 2016, jumping from 25% to 48%, according to NCA. The increase was also substantial among 25- to 39-year-olds, who went from having 42% drinking the beverage everyday in 2000 to 60% doing it now.

Is this Starbucks' fault?

If you grew up in the 1980s, Starbucks, which closed 1989 with 55 stores , was not a thing yet. That meant the only places serving espresso-based drinks were funky local coffeehouses, Italian restaurants, and French cafes. Cappuccinos were still en exotic after-dinner drink, espresso was something rarely seen, macchiatos were barely sold in the United States, and the Frappuccino had yet-to-be invented (that came in 1995).

Before Starbucks, the outside-of-home coffee experience was diner coffee, convenience store coffee, and regular cups from Dunkin' Donuts. The Seattle-based coffee chain brought espresso-based drinks to prominence in the U.S., making them a status symbol of sorts for younger coffee consumers. According to NCA's research:

Older Millennials, the 25-39 group, are the most likely group to drink gourmet coffee beverages weekly, along with specific options including cappuccino, latte, café mocha, espresso, macchiato, flat white and cold-brew coffee. The younger Millennials, however, edge them out in frozen blended coffee. Overall, though, Millennials far outstrip consumption of all gourmet coffee beverage varieties among the 40-59 and 60+ age groups.

Most of these drinks were either largely or completely unknown before Starbucks built a market for them. Now, a Caramel Macchiato may seem as normal to coffee drinkers of a certain age as a large "light and sweet" from Dunkin' Donuts did to a now-older coffee consumer back in the early 1990s.

This is going to continue

As millennials get older it seems unlikely they will opt for cheaper, more traditional coffee drinks. That means that as younger millennials grow up they are likely to spread their coffee habits to their children. Accordingly, a generation that grew up with a coffeehouse on every corner will teach its kids that espresso-based drinks and de facto milkshakes are the new normal.

Going forward, that's very good news for Starbucks and Dunkin' Donuts even as fast-food chains, convenience stores, and nearly every place that sells coffee tries to get in on the action. Demand for more expensive, higher-end espresso drinks has increased, driven by millennials, and there's no reason to think that trend won't continue as new generations become old enough to order Frappuccinos, mochas, and whatever else passes for a cup of coffee these days.

Daniel Kline has no position in any stocks mentioned. He sits somewhere between both generations and tends to drink cold brew because it's low-acid. The Motley Fool owns shares of and recommends Starbucks. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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