Perfect Storm Brewing for North American Coffee Market

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Aug 23, 2018, 08:30 ET

NEW YORK, August 23, 2018 /PRNewswire/ --

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The annual report for 2017 by the National Coffee Association indicated that for the first time in almost seven decades of reporting the industry trends, more than half the coffee consumed daily in the United States was gourmet, which represented a hearty 59 percent of total consumption.

Coffee consumption in North America at highest levels since 2012
Gourmet coffee over half of all consumption for first time in recorded history
Coffee prices potentially bottomed out with some analysts predicting major rise
Product quality/innovation and end market resonance likely the key differentiating factors moving forward

With 64 percent of adults reporting drinking at least one cup per day, overall coffee consumption is up 2 percent from last year to reach the highest levels since 2012. The North American coffee market is on pace to run at a CAGR of some 5.8 percent through 2023, according to a recent report published by Mordor Intelligence. Youngevity International, Inc. (NASDAQ:YGYI) (YGYI Profile), while historically recognized more for the company's innovative products, direct sales and marketing, has been steadily executing on a plan to build scalable coffee operations across multiple vertical segments. Dunkin' Brands Group, Inc. (NASDAQ:DNKN) continues to differentiate itself in the consumer market with broad appeal and offerings such as its recently debuted Cold Brew coffee, the most successful launch in the company's history on an incremental sales basis. Industry juggernaut Starbucks Corporation's (NASDAQ:SBUX) share price may be in a holding pattern with a slight decline lately, but the king is still trying on new clothes, as evidenced by the recent launch of a plant-based Protein Blended Cold Brew in almond and cacao. Coffee Holding Co., Inc. (NASDAQ:JVA) continues to branch out in the commercial end of the market via deals such as its partnership extension with Smart & Final, which has 323 upscale locations across California and Oregon. Farmer Brothers Company (NASDAQ:FARM) is also banking heavily on North America's seemingly unflappable love affair with coffee, as this roaster, wholesaler and distributor recently detailed expansion of its roasting capacity to more than 200 million pounds per year, as well as expansion of its distribution capabilities.

A Perfect Price Storm Brewing?

Mounting global input sources and a decline in the value of primary global producer Brazil's currency have added momentum to falling coffee prices, which have been declining since the highs of late 2016. Coffee futures are currently off by around 17 percent since the start of the year to near five-year lows, mirroring the decline in the value of the Brazilian real against the USD and defying analyst consensus about a rebound. The International Coffee Organization's global composite price dropped 3 percent last month to the lowest monthly average in over a decade, and the CFTC report indicates record net short positions in the coffee market for the start of August.

Nevertheless, coffee futures may be bottoming out and in a position to realize the kind of jump seen back in 2014, especially if a developing El Nino Modoki (the other dominant mode of interannual variability in the tropical Pacific), exacerbated by lower solar output (a lack of sunspots), translates into dry weather in the coffee growing regions of Brazil, as it does around 75 percent of the time.

Newer to the Field but Bringing Plenty of Ammo

Youngevity International, Inc. (NASDAQ:YGYI) operates via two distinct segments: direct selling, which currently accounts for 83 percent of revenues, and commercial coffee, which contributes the remaining 17 percent. The company uplisted to NASDAQ in June 2017 and was subsequently added to the Russell Index in June 2018. With more than 18.6 million direct selling reps in the United States - the two largest segments of which are millennials and gen Xers (36.9 and 34 percent respectively) - Youngevity is uniquely poised to communicate with two of the most difficult to market to and yet highly sought-after target demographics.

On the back of the company's sizeable direct marketing presence in areas such as anti-aging, skin care, weight loss and brain health, Youngevity has been branching out rapidly into commercial coffee via its wholly owned CLR Roasters subsidiary. Projected to be worth more than $622 billion combined by 2021, these scalable growth areas in health are targeted quite effectively by an ever-evolving array of intelligently designed and differentiated brands.

Recipe for Success Includes Field-to-Cup and Customized Blends

This same eye for formulating unique, intelligently designed products has primed Youngevity exceptionally well for addressing emerging fronts in the coffee game, such as functional beverages. Youngevity's CLR Roasters has already been doing robust business via company-owned brands Josie's Java House and Café La Rica.

In addition, the company's recently executed five-year contract to sell and process more than 41 million pounds of green, high-grown washed Nicaraguan conventional coffees per year should bring in steady revenues for Youngevity to the tune of some $250 million (based on mid-August 2018 coffee future prices), which will be rolling into the company's coffers from 2019 through 2023. Extensive regional work by the company's wholly owned Siles Family Plantation Group was instrumental in securing this lucrative long-term contract, and the partnership with Alain Hernandez of H&H Export Group has set Youngevity up nicely for further expanding its footprint in Nicaragua.

CLR Roasters' Miami roasting operation roasts around 25,000 to 28,000 pounds per day (10 million pounds per year) and has an annual grinding capacity of some 15 million pounds. The company's facility is able to boast consistently high-quality standards due to a field-to-cup process that it controls every step of the way. While many bigger roasters have their own blend specs, CLR Roasters works directly with its customers to develop unique, customized blends. The company offers a wide variety of packaging options to satisfy every kind of end market consumer. From two-ounce fractional packs and five-pound bags to single-serve K-Cups of customized blends, the company's production facility provides impressive versatility and is able to churn out K-Cups at the rate of 220 per minute. Despite the impressive operational scale of the company's facility, CLR Roasters prides itself on the retention of boutique roasting methodologies, including visual, touch and smell-based analysis by in-house roasting veterans.

Share Price Pivot Point Echoing Potential Coffee Price Pivot

While seemingly rangebound at just over $4 for the last month, a number of positive indicators have cropped up recently for YGYI's share price. Full-service investment banking firm and equity research heavy-hitter The Benchmark Company initiated coverage on August 10 with a "buy" rating and $7 price target. The August 14 release of solid Q2 FY18 data included a 6.6 percent jump in revenues compared with numbers from one year ago. Those numbers appear to be led by a 23.7 percent increase in revenues from the company's commercial coffee segment as well as EPS that beat the Thomson Reuters' consensus estimate by $.03.

The Q2 data was handsomely in line with earlier Q1 FY18 results, which saw a 39.9 percent rise in coffee segment revenues and an 11 percent increase in overall revenues compared to Q1 FY17 and featured striking data points such as a 325 percent boom in sales of Café La Rica Espresso Brick Packs. FINRA data also indicates a 72 percent drop in short interest for August, from 5,000 previously down to 1,400 shares, indicating overall market sentiment may have pivoted significantly.

The rise in numbers are showing up in other companies' reports as well. Dunkin' Brands Group, Inc. (NASDAQ:DNKN) has seen impressive share price appreciation in recent years, posting a 60 percent rise over the last two years. Q2 FY18 figures were impressive with the company's consumer packaged goods (CPG) business seeing the most success. Dunkin' Donuts K-Cups in particular are showing enviable numbers, posting growth in excess of 20 percent, or four times the overall CPG growth rate.

Starbucks Corporation (NASDAQ:SBUX), which promised late last year to return some $15 billion to shareholders via buybacks and dividends through 2020, has a 22.3 percent five-year dividend growth rate although the share price has been effectively flat year-to-date. The price decline is occurring as the company faces increasing competition in markets such as China. SBUX also may be facing market saturation here in North America, where some analysts suggest that the company's latest offering, a plant-based protein coffee, is a sign SBUX is now actually playing catch up with DNKN in cold brew coffees.

Coffee Holding Co., Inc. (NASDAQ:JVA) recently acquired Wisconsin-based wholesale roasting company Steep N Brew Coffee ($7 million in revenues for the recent fiscal year) for $2.85 million, along with the fair-trade only Café Fair brand and its eponymous Steep N Brew coffee brand. JVA has also added a private label cold brew as well as the Café Caribe Espresso coffee product to further enhance its commercial ground game and is currently working on developing new areas to pump its growing portfolio of caffeinated beverages into.

Farmer Brothers Company (NASDAQ:FARM) recently posted a 13.7 percent year-over-year uptick in the company's green coffee processing capacity even as gross profits advanced by $5 million over the same period. Farmer Brothers continues work integration and acquisition of the Boyd Coffee Company assets announced this time last year, augmenting FARM's reach across its existing customer channels, product portfolios and distribution networks.

Whether talking about a small regional retail chain of commercial venues selling boutique coffee brands or a massive international retail operation, the future for coffee consumption appears to be hot. In fact, some analysts are even forecasting a 40 to 50 percent rise in prices if we get a full-fledged drought.

For more information about Youngevity International, please visit Youngevity International, Inc. (NASDAQ:YGYI).

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