For many Americans, the day doesn’t truly begin until they’ve had their first cup of coffee. Despite this enduring ritual, the overall popularity of coffee has remained relatively stable over the past decade. However, analysts from Bank of America (BofA) predict a shift towards higher-priced, premium coffee experiences, a stark contrast to the styrofoam cups and diner brews of the past.
This forecast hinges on the preferences of Generation Z, who favor specialty coffee offerings and customizable options. BofA analysts highlighted that Gen Z’s prime coffee-drinking years are still ahead, suggesting a significant market opportunity for upscale coffee brands.
This trend could bode well for Starbucks Corp. and Dutch Bros. Inc., both of which stand to benefit from this shift. On Monday, BofA raised its price target for Dutch Bros. from $44 to $49, resulting in a 5% rally in Dutch Bros. shares. Meanwhile, Starbucks shares saw a modest increase of 0.21%.
The analysts’ predictions followed a challenging period for Starbucks, whose stock experienced a sharp sell-off in April after quarterly results were dampened by cautious consumer spending and increased competition. In contrast, Dutch Bros. did not face the same issues but acknowledged a “volatile economic backdrop for the consumer.”
Data from the National Coffee Association showed that the proportion of the U.S. population drinking coffee daily has remained around two-thirds between 2013 and 2023. However, the average number of cups consumed daily has decreased from 3.2 in 2019 to 2.75 in 2023.
Despite this stagnation, specialty coffee shops—those emphasizing high-quality ingredients and careful preparation—have outpaced other quick-service restaurants over the past decade. BofA analysts attribute this growth to a rising preference for specialty coffee, which commands higher prices and premium ingredients.
“The relative stagnation in coffee volumes suggests the preference for specialty coffee—with its premium ingredients and pricing—is driving sales growth for LSR coffee specialists,” the analysts noted, referring to limited-service restaurants like fast-food chains and cafes.
The share of adults drinking specialty coffee daily has surged from 15% in 2009 to 45% as of January, with specialty coffee being particularly popular among younger consumers aged 18 to 24, compared to those over 60.
“Importantly, this specialty-heavy generation is only just now entering its peak coffee-consuming years,” the analysts said. “Each prior generation has increased its total coffee consumption as it has aged. If Gen Z follows that same pattern, the mix shift toward specialty coffee could continue for at least the next two decades.”
Starbucks has faced declining sales, fewer store visits in North America, and an uneven economic recovery in China. The company has struggled to retain infrequent customers and has been caught in geopolitical tensions, facing boycotts from supporters of both Israel and Palestine amid the ongoing conflict in Gaza.
To address these challenges, Starbucks executives in April announced plans to use technology to reduce wait times, especially during morning rush hours, introduce new beverages, and enhance engagement with occasional customers and non-rewards program shoppers.
Dutch Bros., a smaller competitor, has found success with new drinks like protein coffee and boba, which have been popular in both morning and afternoon segments. The company’s first-quarter same-store sales increased by 10%.
While Starbucks’ stock has declined by 15.2% this year, Dutch Bros.’ stock has risen by 26.1%, reflecting the market’s optimism about its growth prospects in a changing coffee landscape.