Big Coffee’s next brew may be smaller and weaker

Keurig Dr Pepper

14/11/2025 15:33

The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

By Aimee  Donnellan

DUBLIN, Nov 17 (Reuters Breakingviews) - The buzz is fading for some of the world's biggest coffee companies. Weak crop harvests, U.S. tariffs and rising prices have all dented demand for cups of joe among Western consumers, leading to slow sales and poor valuations in the $400 billion market. A planned pivot to China and other developing countries is the obvious next growth strategy. But success may require a long and expensive grind.

The coffee boom began in the late 1990s and reached its peak in the years leading up to the pandemic. The first wave saw Starbucks SBUX.O stores and other chains ripple across major Western cities, followed later by a flood of boutique java houses. Meanwhile, consumer giants like Nestlé NESN.S expanded their coffee offerings to take advantage of rising demand for a product with relatively high margins, at least compared with other consumer staples.

In 2018, the maker of Nescafé and Nespresso paid $7 billion for the right to market Starbucks-branded products outside of the U.S. group's stores. The same year investment fund JAB, which already owned roaster JDE Peets JDEP.AS, splurged on a majority stake in $2 billion Pret A Manger. And Coca-Cola KO.N spent $5 billion on Costa. The soda giant called the UK-based group, which was then the world’s second-largest chain, a “scalable coffee platform”, implying that it wanted to use the brand to sell more cups of joe everywhere from supermarkets to self-service vending machines.

But the payoff from this caffeine high hasn't materialised - especially in recent years. Soaring crop prices have pushed up the cost of cappuccinos, cafe lattes and the like, denting demand among inflation-hit consumers. In the U.S., the price of a pound of ground coffee has soared to a record-high $9, double the price of the same volume in 2021, according to data from the U.S. Bureau of Labor Statistics. In the past year alone, coffee prices have risen 9%, far outstripping broader inflation.

This trend may continue. Future harvests are under threat from poor growing conditions caused by extreme weather like droughts, floods and frost in key countries including Brazil, Indonesia and Vietnam. And baristas cost more than they used to, eating into profit margins. Analysts from ING reckon that labour, raw materials, rent, tax and other costs account for about 90% of the price of a cup of coffee. Margins are likely to fall further given double-digit tariffs on countries like Switzerland, which produces Nespresso coffee pods, and Brazil, where 40% of the world’s coffee is grown. The only good news is that U.S. President Donald Trump seems keen to reduce the impact of his levies on food prices, judging from recent framework agreements with Argentina, Ecuador, Guatemala and El Salvador.

The industry shake-out is percolating. Starbucks, the $100 billion titan, has been plagued by profit warnings in past years and is in the midst of an expensive turnaround that will see it shutter 1% of its stores under newish CEO Brian Niccol. Keurig Dr Pepper’s KDP.O recent $18 billion offer for JDE Peets is also a sign that the market is on the turn. The deal announced in August will allow the buyer to split higher-valued soft drink sales from the much lower-multiple java business, while cashing JAB out of its long-held JDE Peets stake and allowing the investment group to focus on racier sectors like insurance.

The same holding company's Pret business also recently issued a goodwill writedown which amounted to about a third of the total enterprise value when JAB bought its stake. Finally, Coca-Cola has explored the sale of Costa, Reuters reported. The $300 billion U.S. group's CEO James Quincey said this year that the group's Costa investment "is not where we wanted it to be from an investment hypothesis point of view".

Nestlé, whose at-home products are cheaper and contain less coffee than some others, looks better insulated from the inflationary issues. But the bigger question for everyone is how to boost sales in a seemingly saturated market. Starbucks and Dunkin’ Donuts have a combined total of nearly 30,000 stores in the U.S. alone. In the United Kingdom, 98 million cups of coffee are consumed every day and nearly a fifth of people visit a coffee shop daily, according to data from the British Coffee Association. It's hard to see consumption materially rising from those levels.

Amid this conundrum in the West, the logical move for Nestlé, JDE Peets and others is to bank on expanding coffee drinking in China and South America. The Swiss group's new CEO Philipp Navratil is committed to launching new products into those markets. Last month, Starbucks unveiled plans to expand its Latin American and Caribbean footprint by opening 145 new stores everywhere from Mexico to Chile, though the company has also sold control of its mainland retail China operations.

Yet it will be difficult to expand in these countries. South America may have fast-growing populations, but average incomes are still low on a global scale. That means thin margins for coffee chains and roasters. Boosting growth will require large increases in marketing investments too, further undermining profitability. Starbucks's China experience shows how difficult it can be to compete with local players in competitive markets. The U.S. group expanded aggressively across the People's Republic but ended up being disrupted by an army of cheaper copy-cat versions of its stores. Finding a perky alternative to a saturated Western market makes sense, but Big Coffee may have to settle for a weaker brew.

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Coffee makers and sellers are underperforming the wider stock market https://www.reuters.com/graphics/BRV-BRV/gdvzjwmqovw/chart.png

The costs of making a single cup of coffee https://www.reuters.com/graphics/BRV-BRV/gkvlqxlwkpb/chart.png

(Editing by Liam Proud; Production by Streisand Neto)

((For previous columns by the author, Reuters customers can click on DONNELLAN/Aimee.Donnellan@thomsonreuters.com))