“Earlier this this year, we led the market increasing prices to recover significant commodity cost inflation, which impacted price gaps and elasticities” across the coffee portfolio, most notably in the premium segment, CEO Mark Smucker said in prepared remarks about JM Smucker Co.’s second quarter of fiscal 2023, ending Oct. 31.
“As a result, the Dunkin brand grew net sales modestly [at 3%] as volume decelerated, consistent with trends within the premium coffee segment,” contributing to an overall 13% drop in volume in mix in the coffee segment over the same period last year and a 10% drop in segment profit to $187.7m, Smucker said.
The company’s K-Cup portfolio also saw a slowdown as more consumers shifted away from premium products to save as inflation across categories continue to squeeze their budgets.
Smucker hypothesized the deceleration in the K-Cup business may not be a loss for the company, but rather “there may have been some folks brewing more drip coffee,” which he dismissed as not a sustainable trend.
“Obviously, brewer penetration in the Keurig brewers has grown significantly over the last several quarters. So, we would expect over time that would continue to benefit us,” he said.
In addition to expecting additional growth of single-serve coffee in the coming quarters, Smucker said he also remains “confident in the overall health of the Dunkin brand, its leadership position and our long-term outlook for growth.”
Price gaps between Smucker brands, competitors starting to close
As such, Smucker said he is optimistic about the future of coffee, and remains bullish about the category. His optimism is grounded partially in competitors following Smucker’s lead and raising prices – helping to close the price gap so elasticities are expected to ease again.
“On premium, we’re seeing those gaps close now over the last several weeks, and we think that will continue to be the case,” just as it was in the “mainstream space as well,” Smucker said, adding the “value spectrum of our portfolio will continue to bode well for us.”
His positive outlook extends to the category overall, which saw net sales increase of 10% over the prior year to $709.8m, thanks in large part to higher net price realization, which increased net sales by 23 percentage points.
The growth comes partly from strong sales of JM Smucker’s other coffee brands, including double-digit net sales growth of Folgers – up 12% yoy – that led to nearly half a point increase in dollar share during the quarter – allowing it to maintain more than double the volume share of any other brand in the category, Smucker said.
“This growth was supported by our bold, new marketing campaign and refreshed packaging,” he said.
Smucker also called out Café Bustelo as one of the fastest growing brands in the at-home coffee category with increases in both dollars and volume during the quarter and consumer takeaway up an “impressive” 28%. Sales for the brand were up 21% in the quarter over the same period last year.
Margin relief on the horizon
Looking forward, the company also anticipates some margin relief in the coffee segment as green coffee costs year-over-year are expected to moderate in the third and fourth quarters. In addition, the company pushes through cost inflation in real time, so the higher prices introduced at the beginning of the fiscal year are fully covering the current costs, which suggests additional margin relief as price gaps continue to close.