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Coffee pods remain the fastest growing category in the coffee sector, but market maturity, high prices, intellectual property battles and sustainability concerns mean the category has started to lose its lustre.

Growth will continue in coffee pods’ core markets, says Matthew Barry, an analyst at Euromonitor International, but at a more subdued rate than in the recent past, as the gatekeepers to the major pod systems try to fend off a wave of new entrants to the category.

According to Mr Barry, the pods category grew at an average annual rate of 18 per cent in real value terms over 2011-2016. This astounding growth rate was unsustainable, and slowed to single digits in 2016, which is predicted to continue for the foreseeable future. Pods remain the best performing category not only in coffee, but in hot drinks in general, but the market is slowing down.

“Consumers in Canada and the US fell in love with the Keurig system and its compatible K-cups during the early years of the review period, but a botched follow-up machine led to both the company and the category in general falling out of favour with consumers,” said Mr Barry. “Market maturity also played a major role in slowing North American growth. Because of this, Western Europe will resume being the central region for global growth, as was the case prior to 2010.”

Mr Barry says the cost of pods is also an issue, as they are comparatively much more expensive than alternative options. Although this has made for healthy profit margins for companies, it has restricted the category’s appeal and made it vulnerable to disruption from newer, value-oriented products, especially private labels.

Patent expirations affecting the Nespresso and Keurig systems have opened the category up to a large number of new, value-oriented competitors. This has made the category more affordable, but has posed a challenge to the category’s model of getting the machines into the hands of consumers and profiting from high mark-up pods.

“Global volume growth of coffee pods fell to single digits for the first time in recent history in 2015, and continues to decelerate. It is predicted to be just 5 per cent annually by 2021,” said Mr Barry. “The developed markets that pods have been generating their growth from are increasingly mature, and the category has not been able to expand in developing markets to the extent that this could start to compensate.”

For more information see the forthcoming November 2017 issue of Coffee & Cocoa International.

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