Coffee and Tea Manufacture
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Industry Overview
The coffee and tea manufacturing industry includes about 250 companies with combined annual revenue of almost $6 billion. Major companies include divisions of Proctor and Gamble, Kraft Foods, Nestle, and Sara Lee. The industry is highly concentrated: the top 50 companies hold over 90 percent of the market.
Competitive Landscape
Consumer taste and population growth drive demand in the consumer sector, while economic growth of businesses, like restaurants and hotels, drives demand in the commercial sector. The profitability of individual companies depends on effectively managing raw ingredient costs, efficient operations, and effective marketing. Large companies have scale advantages in purchasing, distribution, manufacturing, and marketing. Small companies can compete effectively by offering specialized products or serving a local market. The industry is capital-intensive: average annual revenue per worker is about $500,000.
Coffee and tea manufacturers face intense competition from other beverage companies, especially soft drink, bottled water, and juice manufacturers. Although the US coffee market is in long-term decline, the US is the largest coffee consumer in the world.
Products, Operations & Technology
Major products include roasted coffee (70 percent of the market); tea (15 percent); and coffee concentrates (10 percent). Roasted coffee includes whole beans and ground-roasted beans. Tea includes tea bags, and loose and instant tea. Coffee concentrates include freeze-dried, frozen, or liquid concentrates, along with coffee substitutes. Companies in the commercial sector may provide wholesale customers coffee brewing and grinding equipment to maintain product quality, and some own and operate retail coffee shops. Specialty coffees and teas are generally high-quality, premium-priced products.
Coffee production starts with the harvest of coffee cherries, either by hand or machine. Suppliers remove the coffee bean from the cherry and dry the beans to produce green coffee. To produce decaffeinated coffee, companies or processors use water, chemicals, or carbon dioxide to extract caffeine. Swiss Water decaffeination is a chemical-free patented process. Blending multiple types of green coffee results in different flavors. Roasting machines heat beans through a process known as pyrolysis, producing the coffee’s flavor and aroma, and air or water is used to cool the roasted beans. During roasting, the caffeol (oil inside the beans) emerges and the beans turn brown. Roasted beans fall into color categories – light, medium, medium-dark, and dark.
To produce ground coffee, roasted beans go through grinders. To produce instant coffee, extraction equipment converts specially ground-roasted coffee into a coffee concentrate. Next, dehydration through freeze- or spray-drying removes moisture from the concentrate to produce dry instant coffee granules. Manufacturers must add back aroma, as instant coffee loses much aroma during processing.
Packaging uses bags (paper, plastic, or foil) or cans (plastic or metal), and in some cases, single-serving pods meant for use with proprietary brewing appliances. Packaging is about 15 percent of product cost. Companies in the commercial segment may provide private label products for businesses, and offer custom packaging bearing the institution’s name. Companies typically have a network of distribution centers or warehouses to store products prior to delivery. Many specialty products require fast delivery to maintain flavor and freshness.
Types of tea include green, oolong, and black. Most Americans drink iced tea brewed from black tea. Herbal teas aren't actually tea, but a combination of leaves, bark, roots, and flowers of other plants. Processing defines different types of tea, as all tea originates from the same plant. After harvest, withering removes moisture from tea leaves, then roller machines break leaves and release key enzymes. Oxidation exposes tea to air to produce different flavors and colors. Screens sort leaves by size. Orange pekoe is the classification for the largest leaves, followed by pekoe, and pekoe souchong.
After processing, manufacturers blend tea to produce a desired flavor and may add or spray on additional flavors, like cinnamon or vanilla. Automated bagging machines produce tea bags for individual servings. Companies sell loose tea for multiple servings. Institutions, like restaurants and food service vendors, use tea concentrates and extracts to produce mass servings. Instant sweet tea typically consists of sugar, additives, and a very small amount of tea.
Companies typically establish contracts to buy tea from foreign manufacturers, importers, and growers; most teas are imports from the Far East and Argentina. Large companies, like Lipton (Unilever), own foreign tea estates.
Green coffee beans are agricultural commodities. Most beans are imports from countries with tropical climates conducive to growing coffee trees. Companies may use brokers to buy coffee on the open market. Manufacturers may also have direct agreements with farms, estates, exporters, and cooperative groups, especially if the company produces specialty coffee. Companies may hold futures contracts and options to protect against price changes.
The two main varieties of green coffee are arabica and robusta. Manufacturers typically use high-quality arabica beans in specialty coffees, and robusta beans in commercial or instant coffee. Arabica beans generally command a premium price, although blending allows companies to mix in less expensive robusta beans and still produce high-quality coffee.
Electronic sorters remove defective or discolored coffee beans by scanning for particular colors. Coffee roasters, which may be retrofitted with computers to control temperature, may use infrared technology to generate heat. Because fast delivery and product freshness are important, many companies have computerized ordering and inventory management systems.