Coffee’s Future Lies in Fancier Ingredients and Younger Consumers, Analysts Say, as Daily Consumption Dips

BofA analysts predict that specialty coffee, with its premium ingredients and pricing, will drive sales growth in the future. The preference for specialty coffee is driven by the relative stagnation in coffee volumes, which suggests that the demand for higher-priced and higher-end options is driving sales growth. Gen Z, who tend to lean more toward specialty offerings and the opportunity to customize orders, is ahead of them in their prime coffee-drinking days. This could be beneficial for Starbucks Corp. and its less formal peer, Dutch Bros. Inc., whose price target they raised to $49 from $44. Shares of Dutch Bros. rallied 5% on Monday, while Starbucks’ stock was up only fractionally.

The National Coffee Association data shows that between 2013 and 2023, the share of the U.S. population that drank coffee daily hovered at around two-thirds. However, between 2019 and 2023, the number of cups consumed daily actually went down, from 3.2 cups in 2019 to 2.75 in 2023. However, so-called specialty coffee shops have grown faster than other quick-service restaurants over the past decade. The share of adults drinking specialty coffee each day has jumped from 15% in 2009 to 45% as of January.

Specialty coffee is far more popular among younger coffee drinkers (ages 18-24) than those over the age of 60. If Gen Z follows this pattern, the mix shift toward specialty coffee could continue for at least the next two decades. Starbucks has faced falling sales, a drop in visits to its stores in North America, and a shaky economic recovery in China. To address these issues, executives in April said they would focus on using technology to cut down wait times at stores, roll out new drinks, and engage occasional customers and shoppers who aren’t in the chain’s rewards program.

Dutch Bros.’s protein coffee and boba drinks proved popular in the morning and afternoon, and its first-quarter same-store sales were up 10%. Starbucks’ stock is down 15.2% so far this year, while Dutch Bros.’s stock is up 26.1% year to date.

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