Starbucks dives deep into cold brew coffee

Sixty-one percent of Americans drink coffee everyday. So it’s no surprise that retailers are testing new innovations to satiate an age-old addiction.

Overall, coffee consumption tends to skew older with 72% to 75% of consumers over the age of 25 drinking coffee in the past week, compared to 60% of 18- to 24-year-olds, according to the National Coffee Association, a trade group.

Iced coffee, in particular, is a trend that caters to the taste of a younger generation: 38% of those aged 18 to 24, compared with 11% in the 55-to-64 bracket, drink iced coffee, according to market research firm Mintel.  

And coffeehouses are capitalizing on these shifting preferences. Cold-served java’s share of all coffee in U.S. coffeehouses and restaurant menus increased from 19% in 2009 to 24% in 2013.

One way coffee chains are targeting the millennial crowd is through cold brew. The process is not a new one, but the category has picked up steam in recent years. Whereas regular iced coffee is made by cooling down a regular batch of hot coffee, cold brew takes a different approach: the coffee grounds are steeped in cool water for 12 to 24 hours and then filtered. The result is a flavorful, nuanced drink that is less bitter and smoother than iced coffee.

Cold brew, also known as Kyoto style, dates back to the 1600s. It’s not known exactly how the Japanese started cold brewing, but some speculate they learned about the practice from Dutch traders, who utilized the method so that the coffee could be carried on their ships.

Though it’s unclear which U.S. company pioneered the cold brew crusade, Portland, Ore.’s Stumptown Coffee is recognized for popularizing the process since its inception in 1999. 

Over the past few years, cold brew coffee has gone from niche menu item offered by a few independent craft shops like Stumptown to the mainstream.

San-Francisco based Peet’s Coffee found cold brew so popular that it replaced its traditional iced coffee with the alternative approach. The chain has over 400 stores in 10 states, and started offering cold brew in June. Peet’s reports that its cold brew sales so far this summer exceeded last year’s iced coffee sales by seventy percent.

In its announcement of the new product, Peet’s chief marketing officer Tyler Ricks explained the decision as a pure millennial play: “Iced coffee is a cultural phenomenon and the accelerated popularity of cold brew, especially among millennials, is similar to the early craft beer movement.”

Then there’s Oakland, Calif.-based Blue Bottle, which has 22 locations, including Los Angeles, New York and Tokyo. Its signature drink is the New Orleans cold brew coffee, which is made with roasted chicory and organic sugar cane.

Sensing the growing popularity for the specialty method, Starbucks (SBUX) has jumped on the cold brew bandwagon. In March the Seattle coffee chain expanded its popular small-batch cold brew coffee as a core menu item across the U.S. and Canada.

Starbucks has over 14,000 stores across the Americas, and is selling its cold brew at 2,800 of them this summer. Prior to this year, Starbucks offered the option in just a few locations. Each store makes just a single batch each day, which is the equivalent of 40 grande-size cups. The specialty brew costs about 50 cents more than a cup of regular iced coffee.

“Starbucks’ entry into the cold brew space is not a game changer for the company or the competing boutique brands,” RJ Hottovy, an analyst at Morningstar, told Yahoo Finance. “The product has been well-received and is very popular, but it won’t move the needle.”

Starbucks may be creating a sense of consumer demand with a limited amount of cold brew coffee made each day (especially if disgruntled customers order a cup after their local shop has run out), but ultimately it’s just another addition to the company’s menu. “There’s certainly pricing power, but trends go in cycles, and I think it’s just the latest product that Starbucks is adding to its innovation story,” said Hottovy.

Starbucks wouldn’t tell us how well its cold brew has been selling, and said it had no plans of removing the item from the menu.

The cold brew sector is quickly getting saturated, and it may be an opportunity for boutique brands such as Blue Bottle, Grady’s, Chameleon and Wanderlust, especially if Starbucks decides not to focus on the particular item.

It remains to be seen whether the appetite for cold brew can move beyond a summer-only appeal, but it’s indisputable that consumer interest in iced coffee is on a caffeinated high.