Brandweek
May 15, 2006

NEW YORK -- It's a chilly April afternoon in the middle-class suburb of Branchburg, N.J., and the local Starbucks is swarming with customers. While a dozen or so people run in to grab a coffee while their cars idle outside in the lot, around 20 patrons have settled into a cluster of small round tables. Of these, easily a quarter are not old enough to drive a car. One boy with a skateboarder's coif of long, unkempt hair ambles around holding his Grande (for the uninitiated, that means 16-oz.) coffee. Asked why he's drinking coffee, the boy, 14, shrugs that he "just likes the taste of it." His friend is less forthcoming, but he too clutches a healthy-sized brew, smiling. When told that not so long ago only adults drank coffee, both youths laugh, obviously amused at the idea. Just a number of years ago, you'd only find teens packing McDonald's, not a chain whose cornerstone offering is coffee (and strong coffee, at that.)

Not only are more teens turning local coffee shops into their personal clubhouses, but they're also drinking copious amounts of caffeine in the form of souped-up "energy" drinks. The hipper answer to colas, energy drinks were once available only in 8.3-oz. cans. However, Red Bull and its vast array of knockoffs now come in 16.6-oz. quantities and some, even, in 24-oz. cans. The curly haired boy and his quiet friend holding cups of joe or cans of Red Bull have become so common a sight, in fact, that their ilk has a nickname. Forget Gen-Y or echo boomers; these young coffee sippers are the "wired generation."

By any name, however, the idea of America's youth strung out on legal stimulants is generating its share of controversy. The explosion of caffeine consumption among teens and adults alike has some predicting that it will only be a matter of time before this drug (which has been shown to be mildly addictive) comes under fire by watchdog groups and nutritionists. Dr. Richard Stein, director of preventative cardiology at New York's Beth Israel Medical Center and a representative for the American Heart Assn. said, "What five years ago was considered outrageous doses of caffeine is now well within the range of expected doses. We will soon find out the effects of prolonged usage in high doses starting at an early age. In the past, that's always been a formula for poor health and mental outcomes."

So far, however, all the talk about caffeine has been just that: talk. While other vices like cigarettes, alcohol, fatty foods and sugary sodas have been targeted by lawmakers and concerned parent groups, caffeine has slipped past largely unscathed. But if caffeine consumption by kids does raise the public ire as the others have in the past, the results will likely go beyond rhetoric. As it is, new restrictions and regulations have already begun to change the business picture for beverage makers.

That caffeine is a drug complete with effects both good and bad comes as little surprise. After all, millions of Americans drink coffee for its stimulating effects. However, users of caffeine can also experience symptoms of withdrawal, including headaches. Excessive amounts of the drug can disrupt sleep patterns, make the user agitated and even affect neurons within the body. Perhaps because caffeine is so widely used, though, few outside of medical circles have raised many objections.

"As a culture, we're very permissive with respect to caffeine," said Roland Griffiths, a professor in the departments of psychiatry and neuroscience at the Johns Hopkins University School of Medicine, Baltimore. "It's the most widely used mood-altering drug in the world."

With teenagers, however, mood alteration isn't the only effect. Teenagers using caffeine to keep themselves awake may encounter developmental issues, according to Pierce Howard, research director for the Center for Applied Cognitive Studies and author of the Owner's Manual for the Brain. He said typical adolescents need up to 10 hours of sleep per night: "Slightly before puberty there's a burst of neuronal growth. It's dizzying and tiring. Sleep helps establish new neuronal pathways. It's like letting cement dry."

Caffeine and a teen, then, isn't likely to be a healthy mix. And there's little chance the average teen will effectively regulate his or her intake. "The younger the age of the individual," Griffiths added, "the less he's able to make intelligent, considered decisions."

According to the National Coffee Assn. in New York, the majority of Americans over age 18 (82%) now enjoys the beverage. That percentage puts the number of imbibers at some 108 million. This year, more than half that group (56%) will drink it on a daily basis. That's up 7% from 2004. And while the association doesn't track coffee drinkers under the age of 18, it is telling that everyday consumption among users 18-24 nearly doubled from 16% in 2004 to 31% in 2006. That's not news to observers like Griffiths. When it comes to caffeine, "the demographics are changing," he said, "probably [due to] aggressive marketing to children, adolescents and young adults through energy drinks."

National Coffee Assn. representative Joseph DeRupo contends that caffeine is not, in fact, addictive because by definition addicts increasingly want more of their drug of choice and will engage in antisocial behavior to get it. Caffeine, he said, "is self regulating. If you drink too much coffee, you will not feel right because of the caffeine."

DeRupo has evidence to support his view. Numerous studies show that in moderation, the drink is innocuous and may even possess health benefits, including the prevention of the onset of adult diabetes and protection against colon cancer, he said. Coffee also has four times as many antioxidants as green tea.



Pour It, and They Will Come

The rise of coffee's popularity—owing in no small part to the successful efforts of chains like Starbucks to turn the beverage into a lifestyle brand—has gotten the attention of many companies, fast-food ones in particular. When they smell the coffee, they smell the opportunity for high-margin menu items. Aside from soft drinks, which also contain caffeine, coffee is their second-most profitable product, per restaurant consultancy Technomic, Chicago.

At quick-service restaurant chains like McDonald's and Burger King, hot coffee sales hit $11 billon last year. Sales of regular coffee and specialty coffees are projected to grow 7% and 15%, respectively, for the next three years. The Golden Arches credits the launch of Premium Roast coffees in March as one of the drivers of its 6.6% same-store sales surge that month. Its higher-end blend costs about 35% less than a comparable cup at Starbucks. McDonald's, which serves half a billion cups of coffee a year, also is testing specialty coffees like lattes and espressos at 50 locations.

"Premium roast coffee is very important to us. It's doing very well," said Mary Dillon, global CMO for the chain, which has 13,700 locations in the U.S. alone. "It's a great opportunity for our brand to drive more consumer visits more often. It's helping drive breakfast sales." The thinking is that better coffee brews can boost sales of Egg McMuffins and its McGriddles line of sandwiches.

McDonald's previous claim to coffee fame came from a scalded consumer who successfully sued the chain.

Burger King, which had an even lower coffee portfolio profile, beat McDonald's to the punch. Last October the 7,000-unit chain launched BK Joe. The proprietary brew comes in decaf, regular and "turbo" strength, meaning it has extra caffeine. "Two years ago our system was pouring 100 different types of coffee," said Denny Marie Post, svp/chief concept officer at Burger King, Miami. "There were many inconsistencies. We saw this as a chance to get everyone on the same page."

Burger King and other fast-food chains aren't just getting pressure from coffee shops like Starbucks; they're also feeling the heat from convenience stores. 7-Eleven and On the Run stores attached to ExxonMobil stations upgraded their coffees last year, launching their World Roasts and Bengal Traders lines, respectively.

"Our customer is more comfortable in a convenience store than a coffeehouse," explained Post. This thinking went into the coffee's plain packaging and presentation. "It's not pimped up at all," Post said. The point-of-purchase display for BK Joe reads: "If you want expensive coffee, buy two."

One only need look at 4,500-location Dunkin' Donuts to realize how big a seller coffee can be. Some 63% of the chain's sales are now derived from coffee. Yet even Dunkin' has apparently been lookin' over its shoulder at coffee competitors. The chain's new campaign, created by Hill Holliday, Boston, is called "America Runs on Dunkin'" and seeks to remind Americans that the 56-year-old restaurant chain remains a dependable place to score some tasty "fuel."

With 7,950 locations and a ruthless expansion strategy that has historically driven numerous competitors right out of town, Starbucks has given many of these chains cause to fear. Ironically, it's also given them a reason to be grateful. The "green devil," as some competitors have called the Seattle-based chain, is deservedly credited for taking an already popular beverage and turning it into a lifestyle brand. The Starbucks formula has been well documented and shamelessly copied. Comfy couches, warm lighting, pleasant- yet-hip music plus quality product has equaled strong sales for this purveyor of strong coffee. The company brewed up $5.8 billion in sales last year, per Technomic, which is up a billion dollars from 2004 and two billion from 2003.

"It's the Starbucks experience that keeps people coming back," said Starbucks rep Sanja Gould. "It appeals to so many people. They can tailor the experience to themselves . . . moms, business people, adolescents, everybody." That might be standard PR speak, but Starbucks has earned its moniker as "a third place"—meaning, a hangout as universal as the office and home.

Among many others tearing a page from the Starbucks playbook is the 405-store Caribou Coffee chain, which is designed to look like a Colorado ski lodge. The outfit grew 25% last year and will expand by as many as 120 new locations this year. "Coffee shops have become the hub or tavern of the 21st century. We've taken the place of what bars used to be," said CEO Michael Coles.



Kids These Days

It's not coffee's popularity with adults, however, that's opening it—and the companies that manufacture, brand and serve it—up for potential criticism. While young people are often trend initiators, they're imitators, too. These days, more and more young people are ordering coffee. It's a topic that causes many in the industry to tread carefully. Ask Caribou's Coles. "In my experience, I have not seen where kids are abusing coffee," he said. "I'm not saying they don't come in and have a coffee. But it's not at the level where it's any different from having a couple of Coca-Colas. They're not drinking 10 lattes. I wish they were. I'm kidding."

Thing is, some of them really are. "Don't give kids coffee" was an unspoken rule of thumb, much like "liquor brands won't advertise on television." This has changed. "Kids drinking coffee has become more acceptable for whatever reason," said Ron Paul, president of Technomic. "Maybe it's because there's no [group called] Mothers Against Coffee Drinking."

Not yet, anyway. But judging from recent events, jokes like Paul's garner laughter with a decidedly nervous tinge. Recently the soft drink industry dodged a bullet when the public-health advocacy group Center for Science in the Public Interest and a team of high-powered attorneys (fresh from their successful fight with the tobacco giants) withdrew plans to publicly link sugary sodas and the addictiveness of caffeine with the childhood obesity epidemic (Brandweek, Dec. 12). The groups backed off following a historic agreement announced May 3 when Coke, Pepsi, Cadbury Schweppes and the American Beverage Assn. agreed to pull sugary sodas from schools in lieu of lower calorie and nutritious beverages. The deal was brokered by the Alliance for a Healthier Generation, a group that includes the William J. Clinton Foundation and the American Heart Assn.

Despite the accord, the soda giants still may not be in the clear, according to John Banzhaf, a professor of public-interest law at George Washington University Law School and a pioneering attorney behind the Big Tobacco actions. "Any good attorney seeking to bring an action based on soda and kids, whether or not it is related to schools, is going to include every possible reasonable claim," he said. "That includes obesity, sugar, caffeine and, now, benzene."

The chains that serve coffee are all too aware that this versatile, high-margin and socially hip substance could catch the same heat as other vices before it. At one time, cigarettes were believed to be "not all that bad" for you. For now, however, most seem to be taking a wait-and-see attitude. "Nobody's put caffeine in the gun barrel yet," said Burger King's Post. "It doesn't deserve to be there anyway. It's not in the same realm [as other vices]."

Perhaps not. But that hasn't prevented some from thinking about a possible line of defense should that barrel ever get loaded. McDonald's COO Don Thompson said the chain is "in the business of satisfying the customer . . . If it does come under attack, things change so rapidly in our society, if it changes, we'll change according to what customers are asking for."

Thompson is describing the warhorse strategy that beverage makers and fast feeders have kept at the ready for some time now: We offer choice. By emphasizing an array of, in this case, non-caffeinated beverage options, many chains hope to emasculate health advocates' arguments by stressing that caffeine consumption is simply a matter of what the consumer wants to consume, and, as such, the onus from any ill health effects rests on the customer and not the maker or supplier. Added Thompson: "[Customers can] have a cup of decaffeinated coffee, orange juice, apple juice, water. We have an entire range. For us, it's about making sure they have the choices and menu variety."

Energy drinks, however, cannot use the same mantra to shield themselves against the potential battery. Most all of the drinks contain caffeine; that, plus sugar, is essentially the "energy" component. Of course, many energy drinks also tout their vitamin content and various purportedly good-for-you ingredients like guarana, ginseng and taurine.

Such claims, however, are unlikely to placate advocates like Michael Jacobson, who heads up the Center for Science in the Public Interest, a Washington-based health-advocacy group. CSPI's very public campaigns exposing the high-fat and high-calorie content of, among other things, movie popcorn and Mexican food have become darlings of evening news broadcasts and most always bring out restaurant-chain spin doctors to do damage control.

"Caffeine is a mild addictive stimulant drug that's being marketed as if it's totally innocuous," Jacobson complained. "If a kid is drinking a coffee or two for awhile, he or she can become addicted to it. Kids may stay up all hours and have a hard time going to sleep and waking up the next day. Starbucks has been able to break down the general parental decision that kids shouldn't drink coffee . . . The fast-food and the vending industries have gotten us to think that a cup of soda is something to drink that's perfectly fine."



Hit Me Again

Meanwhile, caffeine's popularity with young people has given rise to a class of high-octane beverages that are hardly your father's cup of joe. Energy drinks are surging in popularity, and there are big sales to be had from these little cans. "Energy drinks are extremely important to business because there is significant contribution to sales and profits," said John Sicher, editor of Beverage Digest, Bedford Hills, N.Y.

"From a profitability perspective, energy drinks will be the No. 1 profit growth contributor between 2005 and 2010," added Tom Smallhorn, vp of marketing at SoBe Beverages, a division of PepsiCo, which manufactures SoBe Adrenaline Rush, No Fear, No Fear Gold, Mountain Dew Amp and Mountain Dew MDX "energy sodas."

Pepsi in May launched a limited-time 16-oz. Superman energy drink and will debut a 24-oz. Amp energy drink in mid-summer. The North American Coffee Partnership between PepsiCo and Starbucks also has bridged the gap between energy drinks and coffee with its ready-to-drink Starbucks beverages. Of the $191 million ready-to-drink coffee category, Frappuccino owns $158 million in sales and DoubleShot $24.5 million, per IRI. It introduced new Starbucks Iced Coffees earlier this year, as well as DoubleShot Light.

Meanwhile, Coca-Cola has brought Full Throttle to the general market while attacking specific demographics like female energy seekers with Tab Energy and Coke Blak. "Consumer needs are evolving. They're looking for more ways to power their day," said Rafael Acevedo, senior brand manager for Coca-Cola North America's energy drink portfolio.

And still the challengers keep coming: Fighting for their share of the category are drinks new and old with such wild names as Big Bang, Bawls Guarana, Boo Koo, Chinese Rocket Fuel, Crunk, Energy 69, Go Girl, Hair of the Dog, Kabbalah, Kronik, Pimp Juice, Pit Bull, Radioactive, Tantra Erotic Drink, Who's Your Daddy and Xtazy.

Rockstar recently took excessiveness to new heights by debuting a 24-oz. can. CEO Russ Weiner expects to pull in more than $200 million in overall sales this year.

"Sixteen ounces is an overdose," said Ken Sadowsky, president of Atlas Distributing, Auburn, Mass. "Americans are notorious for wanting too much—24 ounces becomes that much dumber."

All of this would have seemed almost inconceivable a half-decade ago. In the late 1990s, energy drinks were mainly used by club kids seeking a jolt, possibly with a shot of vodka (credit trailblazer Red Bull—still No. 1, with 37.4% of the category—for starting the trend).

Energy drinks have already been bathed in international controversy. In 2001, the Swedish national food administration investigated Red Bull's ingredients—one of which was rumored to be bulls' testicles—in relation to three deaths. The product's sales are still restricted in Denmark, France and Norway. Canada legalized the beverage in 2004.

Meanwhile, Coca-Cola arguably mainstreamed the energy drink category when its No. 4 Full Throttle brand took on Red Bull in a Super Bowl pregame commercial. Red Bull has worked hard to bring its product to the general public as well, spending $44.5 million on media behind its slim blue and silver cans last year, per Nielsen Monitor-Plus.

How long can it last? While some see the cola giants' interest in energy drinks as the beginning of the end ("Coke and Pepsi will price-promote the category into oblivion," observed former SoBe CEO John Bello), other big players are circling. Anheuser-Busch last week signed a distribution deal with Monster, the No. 2 energy drink, and Cadbury-Schweppes also is mulling an entry.

According to Coke's Acevedo, there's still plenty of room. "This is not going to stop," he said.

He could be right, and not just in terms of market share. Even if the public's opinion hardens on the conspicuous consumption of caffeine by youth, some say it'll never be enough to halt the irrefutable dominance of supply and demand.

Rockstar's Weiner maintains that concerns about caffeine are unjustified because the stimulant is already in so many other products that people consume every day. "Coke's been around 100 years. What are the trial lawyers going to say?" he challenged. "Lawyers want to steal. They've circled around cigarettes and fatty foods. They're thieves. There's nothing they can say about caffeine."