Put plainly, America runs on coffee!
According to data aggregator Statista, some 100 million Americans drink coffee on a regular basis, with the average consumer drinking an average of 3.1 cups (9 oz. cup) of coffee per day. Each year the average coffee drinker will spend nearly $165 on coffee, with the overall industry generating $18 billion within the U.S.
In short, coffee is a vital component to most Americans' day, and it's been a thriving industry for investors to latch onto.
Unfortunately, standing out can be difficult in the coffee industry with so many mom and pop stands and major corporations to choose from. Statista estimates that the number of coffee and snack shops in the U.S. have shot from 37,006 in 2002 to nearly 54,000 in 2015. We know that consumers who get overwhelmed by choice might simply skip coffee altogether and could instead go for a more direct shot in the arm of caffeine (i.e., energy drinks), so touching consumers on an emotional level is the key to keeping them loyal for life. However, measuring that engagement isn't always easy.
The importance of brand loyalty
That's why today we're going to turn to Brand Keys and its 2015 Customer Loyalty Engagement Index which examined 540 brands over 64 categories to determine which brands were the best at engaging their customer base. Brand Keys looked at a number of angles of engagement, such as how customers interact with a brand and how they compare that brand to its peers, within its study.
"Why does brand engagement matter in the first place" you wonder? It might appear that Americans' love affair with coffee makes the need to create an emotional connection with consumers a moot point, but this couldn't be further from the truth.
Loyal customers can serve multiple purposes for coffee shops. First, they can spread free word-of-mouth advertising that can help companies save on their market expenses. If consumers like a brand there's a good chance they'll tell a friend about it. Conversely, if they don't like a brand they're liable to tell even more people about it. Therefore, it's in a company's best interests to go that extra mile for consumers and make their experience unique.
Loyal customers also usually pack the best margins for businesses. They are attached to a brand regardless of whether or not there's a sale. They tend to be more willing to accept price increases as well without any pushback. In other words, they're the reason a business truly succeeds.
Now that we have a better understanding of the importance of brand loyalty, let's examine the surprising kingpin of the coffee shop industry (which Brand Keys describes as their "Coffee, out of home" category) as well as those few who didn't claim the top spot.
Two brands that missed the mark
Despite being high profile companies with deep marketing budgets, neither McDonald's (NYSE:MCD) nor Tim Hortons wound up claiming the top spot as America's favorite out-of-home coffee.
McDonald's held onto the fourth spot in 2015 in spite of the fact that its coffee is very attractively priced relative to its peers. McDonald's offers coffee drinkers a quick cup of Joe when time is of the essence, and they can rest assured they're getting a select blend developed just for McDonald's. However, McDonald's is also dealing with a number of PR flubs that it's yet to overcome. From the wages it pays its employees to the awful example of a monthly budget that it produced in 2013 for its employees, McDonald's business practices are under constant fire, and I suspect that does hurt its ability to attract and retain coffee customers.
Restaurant Brands International (NYSE:QSR)-owned Tim Hortons also held its ground, laying claim once again to the No. 3 spot. Like McDonald's it offers quality coffee for a reasonable price and in a quick timeframe. However, its parent company is also dealing with the integration of Burger King into the fold, which may be detracting from other areas of its business.
The surprise you didn't expect
The big surprise in 2015's CLEI report from Brand Keys was that after a three-year run as the top dog in the out of home coffee category, Dunkin' Brands' (NASDAQ:DNKN) Dunkin' Donuts had to share the honor with Starbucks (NASDAQ:SBUX). That's right folks ... it's a tie!
I don't believe Dunkin' Donuts losing the sole possession of the top spot is a sign that it's doing anything wrong so much as Starbucks is just doing everything right. Dunkin' Donuts continues to lure in faithful coffee drinkers with its DD Perks Rewards Program, and its partnership with Keurig Green Mountain offers another way to add convenience to their customers' day by allowing them to brew single-serve K-Cups filled with Dunkin' Donuts-branded coffee in their homes.
If there's any degree of concern here it's the company's second foray onto the West Coast. Dunkin' Donuts has a faithful following on the East Coast, but it's not been successful when trying to branch out to the West Coast. Hopefully this next attempt will prove that statement wrong.
Starbucks, though, has been coming on stronger than ever. It's beefing up its natural and organic food selections, it has expanded its beverage menu, coffee snobs and aficionados can look forward to higher-end brews in the near future, and it's going to begin serving alcohol in nearly 3,000 locations nationwide between 2015 and 2019. Even more intriguing, Starbucks recently announced plans to begin a delivery service in an attempt to really boost the convenience factor for its customers. It's really done a phenomenal job of taking feedback from its customers and making those requests a reality.
The proof is in the pudding, or should I say the foam, that Starbucks' innovations are working. In its recently reported holiday quarter its sales rose 13% on the heels of 5% same-store sales growth (i.e., an apples-to-apples comparison to the stores that were open last year). Starbucks' card growth also soared, with dollars loaded jumping 17% to $1.6 billion. The Starbucks card is a simple and easy way for the company to continue keeping its customer base loyal (and I know this firsthand as I handed out more than 20 Starbucks gift cards this past holiday season).
All told, I fully expect Starbucks and Dunkin' Brands' Dunkin' Donuts to continue to excel in the out-of-home coffee category due to their loyal customer base and would certainly suggest that those people considering an investment in the coffee industry give these two companies a closer look.
Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
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