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Meditations on Tea Pods: Limitless Opportunity or Limited Potential?

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As the pod format continues to drive value growth in the global coffee market, the question of whether pods can produce similar results for the tea industry looms large. While at the global level tea is nearly twice the size of coffee in terms ready-to-drink volume, coffee outperforms tea in value by nearly the same margin. The potential of a value-added tea product like the tea pod to close this gap is an exciting possibility that has caused nearly every major tea brand, from Lipton to Tetley to enter the pod race. However, the likelihood of this prospect depends on similar needs existing for tea and coffee drinkers.

Coffee Pods = Convenience + Quality

The impact of pods on the coffee industry is indisputable. Between 2007 and 2012, sales of fresh ground coffee pods accounted for 24% of the global coffee market’s overall absolute value growth for the period. The success of coffee pods lies in their ability to instantly produce a cup of fresh coffee of consistently high quality, with minimal preparation and clean-up. As consumers live busier and busier lifestyles, they are increasingly demanding convenience from their hot drinks. Before the advent of coffee pods, instant coffee was the most convenient type of coffee due to its single-serving format. Yet, the majority of the world’s coffee drinkers prefer fresh coffee, which accounted for 71% of the total cups consumed in 2012. Fresh ground coffee pods combine the efficiency of single-serving instant coffee with the quality taste of fresh coffee.

Do Similar Needs Exist for Tea?

While pods may represent the first quality single-serve option for fresh ground coffee, an analogous innovation to the tea industry has existed since the turn of the twentieth century: the tea bag. Tea bags enable consumers to brew single cups of tea at home or on-the-go. The format also allows individual customization – those that prefer a stronger brew can allow the bag to steep for longer, those that prefer a milder cuppa can remove the bag sooner.  The recent introduction of pyramid shaped tea bags enable an even more premium tea experience as they are able to hold and protect whole tea leaves, providing a brew that can compete alongside high-end loose leaf varieties.  While fresh ground coffee pods are able to easily edge out the convenient aspect of instant coffee because of their high quality, tea pods are competing with tea bags, a format that already provide that key combination of convenience and quality.

Accordingly, for tea pods to succeed they must prove to be either easier to prepare, or of better quality than tea bags. In terms of ease, it’s true that tea pods are able to produce a drinkable cup in under a minute, while tea bags generally requires a steep time of around three to five minutes. However, whether consumers are willing to pay a premium for a couple of minutes– the price of a Twinings K-Cup is more than four times a standard Twinings tea bag – seems unlikely.

In terms of quality, a major hurdle for many tea pods already on the market is that they are designed to be compatible with existing coffee pod machines, like Green Mountain Coffee Roasters’ Keurig platform or  Nestlé’s Nescafe Dolce Gusto. Although both systems are increasingly marketed for their multi-beverage capabilities, they are still primarily made and positioned with coffee as the main beverage. As such, the level of customization for tea pods in these systems remains minimal. On many, adjusting the cup size up or down is the only way to affect the strength of the brew, making tea bags still advantageous in terms of being able to cater to individual preferences in terms of steep time. Nestlé, the global leader in the coffee pod market, is attempting to address this issue with its Special T system – a pod platform devoted entirely to tea. Currently the machine is available only in Japan and six markets in Western Europe with a very premium positioning, similar to that of Nespresso.  However, the high price of Nespresso pods is offset by the fact that they are still more economical than special coffee shops prices, a point of comparison that remains lacking in the tea industry. Thus, even if Special T is able to best tea bags in terms of the quality of tea it can provide, its high price tag may still mitigate significant penetration.

Potential Still Exists

Despite the preceding scepticism, there is still plenty of potential for tea pods.  In order to be successful, however, manufacturers should considering focusing on pods that produce tea drinks that require preparation above and beyond that of using a standard tea bag, such as iced teas and tea lattes. This strategy is already proving successful in the US – the leading global market for coffee pods. Thanks to the increasing variety of tea pods positioned to be served as iced tea, Euromonitor International’s most recent findings indicate that tea pods are the fastest growing category in the US hot drinks market – increasing at nearly double the pace of fresh ground coffee pods.

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