A recent analysis by Bank of America Securities has unveiled a notable shift in consumer preferences within the restaurant industry, particularly among Generation Z, towards specialty coffee. The report highlights a trend that could potentially impact major players like Starbucks and Dutch Bros in the coming years.
According to the findings released on Monday, there has been a significant uptick in demand for limited-service specialty coffee, surpassing the growth rates of the broader limited-service restaurant segment. Over the past five and 10 years, specialty coffee demand has surged with an impressive compound annual growth rate (CAGR) of 8%, outpacing the 5.6% CAGR over five years and 5.0% CAGR over 10 years for the broader segment.
The National Coffee Association’s data, cited in the report, indicates a marginal increase of only 1 percentage point in daily coffee consumption in the U.S. over the past decade. However, a noteworthy shift has been observed in the type of coffee consumed, with a significant rise in the preference for specialty coffee. In January 2024, 45% of adults reported drinking specialty coffee within the past day, marking a substantial increase from just 15% in 2009.
Interestingly, the report underscores the generational divide in coffee preferences, particularly among Gen Z individuals (born between 1997 and 2012). While 53% of coffee consumers over the age of 60 opt for specialty coffee, a staggering 89% of individuals aged 18-24 prefer specialty versions. This demographic shift signifies a changing landscape in coffee consumption patterns, with Gen Z emerging as a key demographic driving the demand for specialty coffee.
Furthermore, Bank of America analysts suggest that Gen Z’s inclination towards specialty coffee is poised to shape consumption trends for the foreseeable future, potentially lasting for two more decades. In light of these findings, the report has prompted upward revisions in price targets for major players in the specialty coffee market. Bank of America raised its price target on Starbucks (SBUX) to $112 from $108 and on Dutch Bros (BROS) to $49 from $44, reflecting the anticipated growth in demand for specialty coffee products.
These insights come at a crucial time for Starbucks, which recently faced a share-price slump amid a downward revision of its fiscal 2024 revenue and profit outlook. Despite these challenges, the projected growth in specialty coffee consumption offers a promising outlook for companies operating in this segment. As Starbucks closed at $81.60 per share and Dutch Bros at $39.88 on Monday, investors are eyeing the potential opportunities presented by the evolving coffee landscape.