December 15

The Future of Specialty Coffee and the Next Wave

castle1Predicting the future of specialty coffee, especially when it comes to the part of its history that has not yet occurred, is difficult. OK…so is channeling Yogi Berra…

ANYWAY, the fact is that when I started off in this business 35+ years ago, no one knew there was a Specialty Coffee Industry; the term had perhaps just been coined a few years hence by Erna Knutsen. However, while not as commercially significant as some categories, specialty coffee as a grocery category or foodservice staple is big business and is talked about a lot, at least by the people who depend upon it for a living.

Assessing the future for specialty coffee involves first identifying all the factors that might exert change, including: the relevant business entities, the people working for them, the factors impacting production (such as climate and varietal development, and diseases that are or may spread. The investment in and evolution of new technology is also important. Finally, there is the culture of the industry to consider. Forty years ago the culture of the industry was much more tradition-based, rather than change-based. The various technologies applied to coffee production, such as agronomics, roasting and packaging, were just beginning to shift to a culture based on innovation. This prepared members of the specialty coffee industry for the current, more transient environment.

One pattern that has been repeating is the process of little coffee companies growing up to slightly larger companies and then gobbled up by bigger coffee companies. The nature of the companies being acquired and those buying them, and the reasons for those acquisitions, have all been changing and will continue to evolve. The first half of the 20th Century acquisitions were based on circumstances that included the evolution of packaging, improved transportation lanes across North America, the advent of radio and television, and the necessary population growth making nation-wide marketing programs not only possible but much more efficient.

It used to be the norm for large metropolitan areas to have local coffee brands, but the above factors allowed for the acquisition and consolidation of coffee production, distribution, and marketing. Thus companies were acquired and brands were either enhanced or extinguished. During this period, it was not unusual for a company to acquire another company with the express intention of “killing” the brand and replacing it with one that the acquirer already owned. The national brands could and would compete with local brands because the market was just becoming big enough to accommodate both scales of marketing. Now, however, as our nation has tripled in population over the last 125 years, there are enough people to support several different types of brands across different levels of quality and brewing platforms and the “micro” roaster who was once viewed as antiquated a hundred and twenty-five years ago is now seen as a cutting edge.

Now, though, the opposite is occurring: large roasters, even those known for their strength in and understanding of specialty coffee, are reaching out into the marketplace to either acquire or partner with smaller companies; not to kill the brands of those companies, but to learn from them or broaden the appeal of their own.

So, when in December of 1999 I first wrote about a Third Wave of coffee, I used the term a little differently than it came to be used a few years later: I was referring to three waves that included the first, being a wave of packaged coffee washing across the U.S. as our nation grew and became more interconnected. During this period, from the late 1800s to the 1960s, coffee went from a raw ingredient that was roasted at home, to a product that was roasted locally, often in the grocery store, to a product that was pre-roasted, pre-packed and finally pre-ground. As a reaction to that consolidation within the industry and the homogenization of products, a second wave of coffee rolled across the country as companies sought to recreate freshness, quality and variety that used to be available before national and large regional brands existed. These companies were sometimes the rejuvenation of older companies but mostly the creations of entrepreneurs in the 60s, 70s and 80s that realized that many local markets across the US were now large enough and sufficiently sophisticated to support local specialty brands. These companies focused on whole bean sales and exhorting their customers to brew their coffee at home, brew it strong, and brew it often. The most successful of these companies sold what now would be considered staggering amounts of whole bean coffee in one pound bags on a regular basis to repeat customers. Slowly, however, they began to promote in-store consumption of brewed drip and espresso.

But even these companies, those of the 2nd Wave, started to consolidate and acquire other companies. In the meantime, the market for specialty coffee grew. During this period, population density increased and as coffee consumption patterns began to change, people began drinking more coffee outside of the home. These conditions opened an opportunity for another set of roasters, which I called the 3rd Wave (and a couple of years later, other people, most notably Trish Rothgeb in 2002, did as well, but for different reasons.) The 3rd Wave characterized itself by devoting even more attention to quality than the 2nd Wave while trying not to make the same mistakes of those that failed, or, to the minds of those starting 3rd Wave businesses, grew too large. 3rd Wavers devoted unprecedented resources to sourcing and started the now fully-realized trend of buying microlots — small lots of single estate coffees especially prepared for one roaster to highlight to their customers. They also worked hard to improve quality control at all levels, both on the side of roasting and preparation of brewed beverages.

At the same time the 3rd Wave blossomed, the World Barista Championship came into being and provided incentive for baristas to compete on the basis of quality and professionalism.

3rd Wave roasters managed to remain independent until the past few months when two prominent 3rd Wavers (Stumptown and Intelligentsia) aligned themselves financially with Peet’s Coffee & Tea, which was, itself, acquired a few years ago by a large European holding company.

As we see the era of the 3rd Wave Roaster come to a close an argument will be made for a 4th Wave, which has been defined in varying ways. These roasters will distinguish themselves with the descriptors, “local, independent, and small,” whenever convenient; but many of the up-and-coming roasters today will not be underfunded. 4th Wave Roasters, due to the success of 2nd and 3rd Wave roasters, will have more capital available to them if they can show their investors that they have a grasp on the market and can motivate at least a few consumers to buy in to their gestalt (and buy their coffee.) They will be even more precise in terms of their green coffee buying habits as even 2nd and 3rd Wave roasters increasingly are themselves. This will be more in an effort to define a specific and differentiating flavor profile for their coffees rather than to just ensure a high level of quality. Farmers and green coffee processors at origin will be asked increasingly to produce specific lots with special techniques to ensure these unique flavor profiles.

4th Wavers will not be as shy as 3rd Wavers with regard to bending the rules, if not breaking them outright. Even some 3rd Wavers have started to do it by bottling, canning and cartoning brewed coffee. This trend was clearly apparent at the 2014 Roasters Retreat where the challenge was to produce the best roast for cold brewed coffee, a method of extraction that was much-shunned by early second wavers and old-fogey specialty coffee persons.

These roasters will also flavor their coffee beverages and packaged liquid concoctions if they see an opportunity to widen the market appeal of certain coffees, but they will use the best ingredients they can find and try to start from scratch, rather than buy syrups and other flavorings. The idea of applying flavoring to beans themselves, particularly with flavorings based upon ethylene glycol flavor carriers, is not something the 4th Wave will adopt with gusto except in particular cases, such as aging green coffees in old whiskey barrels. Speaking of alcoholic beverages, there will be more mash-ups between beer brewers and distillers (and maybe winemakers) and “4th Wave” roasters.

Due largely to the increasing availability of information and technology, the 4th Wave will include an element of scientific awareness on the part of its practitioners. Many 3rd Wave roasters were involved in helping to found and fund World Coffee Research and their involvement with this organization and others like it will become more typical as the industry continues to evolve. So too, with public/private partnerships that involve governmental agencies and non-governmental organizations in producing countries. Programs that include research, education and marketing, but that depend upon the revenue produced from that coffee, will increasingly have to tie their funding more directly to the pennies per pound they add in value. The work being done on the coffee genome by public and private entities is one example of this, as well as such programs as the New Generation Coffee Grower initiative in Antioquia, Colombia to increase the revenue of coffee farmers and the quality of their crops.

Specialty coffee roasters will become more aware of the agronomics and genetics of coffee, the study of the diseases that threaten coffee and effects that climate change will have on the production of coffee in the future. Increasingly, the production of coffee will be viewed as a group effort with exporters, importers, and roasters trying to ascertain which varietals are best for all the factors at play including climate, disease, availability of labor, and the palate of the specialty coffee drinker.

The 4th Wave of the specialty coffee industry will have some other challenges to deal with and those will likely be dealt with in a more public manner than past challenges. Three come rapidly to mind.

The issue of price transparency comes up first, and it is a sword that cuts in many directions… retailers and the marketers who own the brands take the biggest share, but they also have the most face time with the coffee drinker who pays for the coffee. In the meantime, each sector of the business will play to its strengths… but as long as it is played as a zero sum game, even when coffee in some formats is selling for over forty dollars a pound, the process will drive toward lower quality and lower net revenue for the farmer.

The “Fairness” Dilemma — if more time had been spent arguing that coffee farmers are great, and that they could do an even better job if they were paid more money for better quality — rather than that they are pathetic and need more money because they can’t make a decent living growing coffee — then coffee would be in a better place today and in the future.

The evolution of language in the coffee business — Even before the development of a “coffee lexicon,” that is being spearheaded by World Coffee Research, other trade organizations and participants have been pushing for a more precise language with which to describe coffee. Recent efforts to do this can be seen as an outgrowth of previous attempts at defining the flavors found in coffee over the years, most notably the Coffee Cuppers Handbook (by Ted Lingle,) the tasting wheel published by the Specialty Coffee Association of America, and the tasting set Le Nez du Café produced by Jean Lenoir.

Picture of Tim CastleFinally, the 4th Wave won’t necessarily be characterized by a particular group of companies as clearly as the 3rd Wave. The 4th Wave will embody an approach to specialty coffee that many roasters may hew to, and eventually become an ethos that the specialty coffee industry will adopt as a whole, or in part.

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