Thursday, May 7 (Rm104B) 8:00am - 9:30am - Single Serve: Tea in an Instant Speaker: Dan Bolton, President, Mystic Media/Tea Biz Blog Managing Editor STiR Tea & Coffee International Tea in capsules will account for 10% of all bagged and loose leaf sales in the U.S. in 2015, up from 6.5% in 2013 and growing at a faster pace than coffee. Tea retailers, grocers, wholesalers and distributors need to understand the competitive advantages of offering tea in this format and the limitations it imposes.

Tea in an Instant By Dan Bolton

Managing Editor STiR Tea & Coffee International

How tea in portion packs changed the game

Tea Takeaways

Huge potential growth depends on new flavors, formats and function.

Watch for advances in bottles, cans, cold brewers and concentrates.

Portion pack systems have advanced sufficiently to deliver tasty tea.

Sell premium. Use quality ingredients. Sit out the race to bottom pricing.

Tea growth hinges on innovation

Convenience drives sales

Technology triumphs

Profitability is paramount

U.S. Tea Market Tea is narrowing soda’s lead for share of throat. • Women drink 9 cups (2.2 liters) of total beverages daily. Men average 13

cups (3 liters). Half of their intake was once soda. Today only 29% of adults reported drinking soda the previous day. Americans have responded to the advice of medical professionals by also reducing sugary juice.

• To achieve health benefits, studies suggest men and women drink at least 1.5 cups of tea daily. During the past decade per capita consumption of tea rose annually from 7.8 gallons in 2000 to 8.9 gallons in 2012.

• Tea consumption during the past day is at 43%, surpassing bottled water. Juice now ranks 6th, with a new low of 28% daily consumption.

• When it comes to drinking coffee or tea, young people are now evenly divided at 42%. A surprising 51% of full-time workers who drink coffee daily also report drinking tea at work during the past seven days.

SOURCE: PACKAGED FACTS 2015 OFFICE COFFEE | NATIONAL COFFEE ASSOCIATION 2015 NATIONAL DRINKING TRENDS SURVEY

Brewer Insights About half of brewer owners make hot tea and a quarter iced tea. • The National Coffee Association in 2014 presented the owners of single-

serve brewers a list of beverages and asked them to indicate which they make regularly and which occasionally.

• Forty-five percent brew tea. Seventeen percent of single-serve brewer owners brew hot tea regularly and 28% brew hot tea occasionally.

• Twenty-three percent use the brewers to make iced tea with 16% indicating they do so occasionally and 7% “regularly.”

• Five years ago single-cup drinkers complained of limited variety and gave low scores for taste. Today 61% rate single-cup coffee as “excellent” or “very good” and only 12% call it “fair” or “poor.”

• Those aged 25-39 are most likely to own brewers. Owners often trade up to better coffee making brewers “the gateway to gourmet.”

SOURCE: PACKAGED FACTS 2015 OFFICE COFFEE | NATIONAL COFFEE ASSOCIATION 2014 SINGLE SERVE REPORT NATIONAL DRINKING TRENDS SURVEY

Then…

SOURCE: VOLPAK STATE OF THE ART TEA BAG

• Single-serve brewers are now found in 32 million U.S. homes (27% household penetration)

• Beverage makers will ship 14 billion capsules in 2015 with about 71% filled with coffee – and 20% tea

• A 12-ct box of K-Cups filled with tea sells for an average $8.78 or about 65 to 75 cents per capsule. Premium brands sell capsules for $1 or more

Now…

SOURCE: NATIONAL COFFEE ASSOCIATION 2015 COFFEE DRINKING TRENDS SURVEY | IRI INFOSCAN REVIEWS, TOTAL U.S. MULTI-OUTLET W/ C-STORE (SUPERMARKETS, DRUGSTORES, MASS MARKET RETAILERS, GAS/C-STORES, MILITARY COMMISSARIES AND SELECT CLUB & DOLLAR RETAIL CHAINS)

Keurig Green Mountain Licensed K-Cups

Nespresso

Caffitaly

Vue Versimo

Special.T

SolaBev

Dulce Gusto

EcoCup

Unlicensed

Rogers Family

New Formats

Keurig sold 40 billion K-Cups between 2009 and 2014. Capsule sales growth has slowed from 30% to 13%.

1.94

3.28

5.92

8.1

9.88

11.8

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2

4

6

8

10

12

14

2009* 2010* 2011* 2012* 2013* 2014**

Num

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ions

SOURCE: KEURIG GREEN MOUNTAIN; TREFIS.COM; ID 326392 | FURTHER INFORMATION REGARDING THIS STATISTIC CAN BE FOUND ON PAGE 8

$5 billion 2014

Sales of Keurig portion packs grew 13% in 2014 2013 – Global sales of tea pods estimated at $300 million 2014 – Starbucks shipped 100m pods in December ($1b in 2015) 2015 – One-third of adults had a single-serve drink yesterday 2015 – 75% know about and 12% expect to buy a home brewer

$8.6 billion 2018

$132 million

2008 SOURCE: TREFIS NCA 2015 NCDT SURVEY | PACKAGED FACTS/MARKETRESEARCH.COM TEA AND READY-TO-DRINK TEA IN THE U.S.: RETAIL & FOODSERVICE MARCH 2014

$82 million

2014

Sales of bagged/loose tea grew 3.92% last year 2013 – Capsule sales reached 6.5% share of loose leaf market 2013 – U.S. tea pod sales grew an estimated 20% vs 2012* 2014 – Top 4 tea brands earned $75 million (105 million pods) 2015 – Pods will exceed $150 million** of $2.6 billion dry tea sales

$150 million

2015

$55 million

2013 SOURCE: PACKAGED FACTS/MARKETRESEARCH.COM TEA AND READY-TO-DRINK TEA IN THE U.S.: RETAIL & FOODSERVICE MARCH 2014 | *EUROMONITOR INTERNATIONAL PROJECTS WHOLESALE TEA SALES AT $10.41 BILLION IN 2014. **THE $150 MILLION SALES ESTIMATE IS BASED ON A RANGE FROM $130 MILLION TO $206 MILLION (ESTIMATE BY DAN BOLTON). PRECISE SALES FIGURES THAT INCLUDE BOTH KEURIG GREEN MOUNTAIN AND NON-LICENSED CAPSULES ARE UNAVAILABLE.

Disruptive… • Globally 29 million home brewers were sold in 2014 up 11%.

U.S. households now buy 10 million a year.

SOURCE: DANIEL GRIMSEY, SENIOR RESEARCH ANALYSIT, EUROMONITOR INTERNATIONAL

• In the U.K. loose leaf sales have fallen 2% per year since 2009. Unit sales of kettles fell by 1 million from 2010 to 2014. Capsule sales are up 26%.

• In Japan kettles are the largest kitchen appliance category. Sales declined 6% last year while single-serve sales increased.

• U.S. kettle sales declined to fewer than 2 million last year. Sales of drip coffeemakers peaked in 2006. Capsule sales rose from $132 million in 2008 to $5 billion last year.

SOURCE: PODPACK BATON ROUGE, LA | INTELLIGENT BLENDS, SAN DIEGO

• There are two kinds of capsules: open mesh (ring or cup) and sealed capsules (generally packed in nitrogen).

• Plastic manufactures such as LBP make billions of empty capsules sold by the pallet for about15 cents per capsule.

• Co-packers spend millions on equipment that fills hundreds of capsules a minute, adding 5 cents.

The Basics…

• Capsules are nested in standard boxes to save space. Standard cartons hold 12, 18 or 24 K-Cups. Mesh capsules must be individually enclosed in bags.

• Total cost: 30 to 55 cents per capsule

Tea Blending for Capsules

SOURCE: Q-TRADE TEAS & HERBS | SOLABEV (ORANGE ILLUSTRATION)| ECODUP | KEURIG GREEN MOUNTAIN (K-CUP DIAGRAM)

• Blenders recommend 500-pound lots, enough for 28,350 (8-gram) iced tea capsules or 56,700 (4-gram) capsules used for hot tea

• Inclusions must be fine with uniform density • Production runs are shorter as a competitive

advantage with minimums as low as 15,000

It is now possible to replicate existing product offerings and deliver an excellent cup. - Manjiv Jayakumar, President Q-Trade Tea & Herbs

“ ”

Blending Advice Keurig’s brew cycle is 30-45 seconds which requires adjustments in cut, throw weight and even packing such as vacuum conveying instead of augers that can damage fragile leaves. The result is cups as close as possible to the bag teas people have used for years. Filters have a range of specialized properties. Choosing the correct material delivers the best infusion, aroma, color and flavor. We test many filter papers for particle retention properties to get the right dissolvable solids in the cup. - Jeff McIntosh, R&D Intelligent Blends

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• First generation machinery produced hundreds of capsules a minute and cost more than a million dollars.

• The latest generation capsule fillers use augers to deliver the dry tea and pack with inert gas. These machines fill 100 capsules a minute for less than $100,000

• Manual fill and seal units can now be purchased for $7,500 to $12,500.

Filling Machines

SOURCE: RYCHIGER . PICTURED IS A FS 200 CAPSULE FILLER (TOP RIGHT) AND CAPSULE SEALER (LEFT) | PBI OFFERS A $7,250 FILLER AND SEALER.

Environmental Concerns

https://youtu.be/uRGiGbX9lIo

Capsule Recycling

SOURCE: MOTHER JONES: “YOUR COFFEE PODS’ DIRTY SECRET,” MARCH 2014 | THE ATLANTIC: A BREWING PROBLEM, MARCH 2015| KILLTHEKCUP.ORG

• Keurig sold 9.8 billion K-Cups last year, enough capsules to circle the globe 12.5 times. Cumulative totals approach 100 billion.

• K-Cups utilize a four-layer blend of #7 polypropylene which is BPA-free but most are neither recyclable or biodegradable.

• Non-licensed designs are 60% to 80% recyclable with 5% (Vue Packs) using a mail-back system.

• The most promising designs are made of #5 polypropylene and bio-plastics but regardless of plastic used, a formidable challenge is that in order to be recycled most cups must be disassembled into components that include tea, paper or nylon filters, plastic and metal or foil.

• Keurig has pledged to make only recyclable capsules by 2020.

Protection from Air and Water

SOURCE: RYCHIGER | TRENDS IN FLEXIBLE PACKAGING APPLICATIONS, BY HENKY WIBAWA, TECHNICAL DIRECTOR, AMCOR FLEXIBLES INDONESIA, MARCH 2012

ALUMINUM

Protective Lacquer

Protective Lacquer

PP - Polypropylene

EVOH (Ethylene vinyl alcohol

PP – Polypropylene

PP – Polypropylene

PP – Polypropylene

PET – Polyester Polyethyleneterephthalate

EVOH - Ethylene vinyl alcohol

Protective Lacquer

ALUMINUM

Capsule Compostability

SOURCE: CLUB COFFEE | BPI | SUSTAINABILITY REPORT CARD, CANTERBURY COFFEE ONECOFFEE TM

Compostable capsules are challenging as bio plastics do not withstand heat and are less efficient barriers. Club Coffee makes the only 100% compostable bio-based capsule with a ring made of coffee chaff – the skin shed during roasting. The capsule is undergoing tests by the Biodegradable Products Institute prior to certification. Club just opened a $50 million capsule filling plant.

Science shows that composting is an effective and conscientious solution to this growing environmental problem. Recycling isn’t a convenient or well-developed solution because hot pods full of coffee grounds must be carefully separated and cleaned before collection. And biodegradation is too slow of a process, taking centuries to break down the billions of pods in landfills. - John Pigott, CEO Club Coffee

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• Are smaller, colorful and more sophisticated • Steep at temperatures more suitable for tea • Accept licensed and non-licensed capsules • Range from $49 to $300 in department stores • Make many

sizes:

Home Brewers:

SOURCE: FROM LEFT, ONE TOUCH | FLEXBREW | COFFEE BEAN & TEA LEAF | KRUPS |REMINGTON OPUS SPIN BREW | TOP, KEURIG 150

Special.T • Nestle’s tea brewer precisely

adjusts temperatures and steep times for 25 premium teas.

• The $145 machine filters water stored in a 1.5 liter reservoir

• Introduced in France in 2010, it is now sold in Austria, Belgium, Luxemburg, Switzerland, Germany and Japan (2013).

• The strong majority (78%) of coffee drinkers who value beverage selection are passionate about their workplace offering single-serve.

• 51% of full-time daily coffee drinkers also drank tea at work in the past seven days.

Office Brewers

SOURCE: PACKAGED FACTS 2015 OFFICE COFFEE SERVICE

SOLABEV OFFICE BREWER | INTELLIGENT BLENDS

KEURIG BOLT COFFEE SYSTEM

For office coffee providers this is good news , as tea can be positioned as a complement to coffee service. Beyond wellness, the tea opportunity in the workplace should focus on customization. – Packaged Facts

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Tea in Licensed K-Cups Dollar Sales % Chg Share Units Sold % Chg Keurig Café Escapes Tea $30,273,848 4.72 2.27 3,423,269 9.04 Celestial Seasonings Tea $23,514,876 (25.43) 1.76 2,863,454 (22.32) Snapple Tea $10,832,507 (16.60) .81 1,122,356 (14.48) Bigelow Tea $10,394,118 (16.77) .78 1,234,794 (19.16)

Tea Capsules Total $75,015,349 5.62 8,643.872

Source: TREFIS

Keurig 2014 2015 2016 2017 2018 2019 2020 Capsules 11.8b 13.6b 15.5b 17.4b 19.1b 21.1b 23.2b

Revenue $5.08b $5.96b $6.90b $7.86b $8.62b $9.91b $11.12b

Unit Price 32.3¢ 32.8¢ 33.6¢ 34.4¢ 35.3¢ 36.2¢ 37.1¢

SOURCE: IRI INFOSCAN REVIEWS, TOTAL U.S. MULTI-OUTLET W/ C-STORE (SUPERMARKETS, DRUGSTORES, MASS MARKET RETAILERS, GAS/C-STORES, MILITARY COMMISSARIES AND SELECT CLUB & DOLLAR RETAIL CHAINS) LATEST 52 WEEKS ENDING MAR 22, 2015

Top Selling Capsule Brands

Keurig Green Mountain (tea & coffee capsules combined)

• The slogan made from the best stuff on earth was the focus of a 2009 media campaign shortly after the firm went public. The DPS brand was one of the first to introduce iced tea in K-Cups (May 2013) and continues to sell at a higher price point than rival teas. List price is $20.97 for 22-ct (95 cents each on Amazon)

• The teas mix green and black leaves with natural extracts and sugar. Snapple recently signed a three-year agreement to produce capsules for Keurig’s cold brewing system.

• During the past 52 weeks Snapple sold $10.8 million K-Cups in grocery and department stores delivering 1,122,356 (12-ct) units at an average price of $9.65 per unit, down 25 cents from the previous year. The average price per capsule was 80 cents.

Case Study:

SOURCE: IRI INFOSCAN, TOTAL U.S. MULTI-OUTLET W/ C-STORE (SUPERMARKETS, DRUGSTORES, MASS MARKET RETAILERS, GAS/C-STORES, MILITARY COMMISSARIES AND SELECT CLUB & DOLLAR RETAIL CHAINS) | LATEST 52 WEEKS ENDING MAR 22, 2015

Chris Savage

Case Study: True Honey Teas

• To scale up he convinced 180 donors to contribute $7,000 via Kickstarter. He designed a filling machine with the money and with his parents worked night and day to make and mail boxes of capsules to donors.

• Chris Savage is a 27-year-old engineer who graduated from George Mason University in 2011 and went to work for Northrup Grumman aerospace. In 2013 he launched a tea company with three flavors.

• Initially he made capsules by hand, filling them with tea and locally sourced honey at a cost of about 50 cents each. He sold them for 83 cents, grossing $1,500 to $3,000 on weekends at farmer’s markets.

• Grossed $60,000 during first year on initial $50,000 investment ($7,000 from Kickstarter)

• Unit sales of 5,000 per month. Currently offering 8 varieties online. Intends to develop 14 flavors.

• ETSY and Amazon are top selling retail sites. The teas are also sold in local grocery stores. Cartons sell for $18.99 to $19.99 on Amazon where the teas have a four-star rating.

• Challenges: Made fresh the honey remains liquid and gently dilutes as hot water enters to sweeten the brew but over time honey can become hard and will not dissolve.

• Revenue estimate for 2015: $300,000

SOURCE: WORLD TEA NEWS | AMAZON | INTERVIEWS WITH CHRIS SAVAGE

True Honey Teas

Summary

SOURCE: PACKAGED FACTS/MARKETRESEARCH.COM TEA AND READY-TO-DRINK TEA IN THE U.S.: RETAIL & FOODSERVICE MARCH 2014

Single-serve pods represent the only category where sales have grown in supermarkets, drugstores, and other non-restaurant outlets. Whole-bean, ground,

“ ” and jarred instant coffee sales are all flat or falling.

– Ric Rhinehart, President, Specialty Coffee Association of America

Just as coffee has seen whole bean and ground coffee sales thwarted by single-cups, so, too, may the tea market see declines in bagged/loose tea—on top of existing declines in instant. While single-cup margins are a marketer’s dream, this assumes that the particular marketer has a foot in the single-cup space—or the dream may become a nightmare. – Packaged Facts ”

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Dan Bolton, Managing Editor STiR Tea & Coffee International dan@stir-tea-coffee.com

Thank You Questions? Feel free to contact me at:

1108-21 Roslyn Road Winnipeg, MB R3L 2S8 Canada (204) 788-1359 (204) 230-7125 (cell) Skype: dwjbolton

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