Recession squeezes sales and profits for second straight year

A stubborn recession keeps OCS sales depressed as U.S. employers remain reluctant to rehire. The nation’s jobless rate more than doubled from 4.5 percent in early 2007 to 10 percent in late 2009 and only slightly declined to 9.5 percent in the first half of 2010.

OCS revenues posted a 5 percent decline in the 12-month period ending in July of 2010, marking the second consecutive aggregate sales decline following a 5-year growth period, according to the Automatic Merchandiser State of the Coffee Service Industry Report. The second consecutive 5-point decline took aggregate OCS sales to $3.73 billion in 2009/2010.

Location managers remain in a cost cutting mode, forcing operators to reduce prices, offer less expensive products or less coffee variety.

Price concerns have caused customers to shop more aggressively since the recession began in 2007, making it harder for operators to raise or even sustain prices. This, combined with rising operating costs, has hurt operators’ profit margins.

The State of the Coffee Service Industry Report is based on the results of a questionnaire emailed to 600 dedicated OCS operators and 2,700 vending operators with OCS operations. The commentary in this report is based on interviews with operators, product suppliers, equipment suppliers and researchers.

The aggregate OCS revenue in this report includes OCS revenue in the State of the Vending Industry Report, released in June/July. The OCS revenue reported in the vending study includes OCS sold to accounts that are mainly vending accounts.

OCS operators noted revenue declined in the last 12 months due to falling or stagnant location population counts and requests by customers for lower prices.

Declining revenue naturally results in lower profits unless profit improvement measures are taken, such as reducing staff. The survey indicated operators reduced staff in both the last two 12-month periods. Slightly less staff reduction activity took place in 2009/2010 than the previous year, as indicated in chart 11.

Profits suffer

The State of the Coffee Service Industry Report does not measure operator profits. However, phone interviews with operators nationwide indicated that profitability declined in the last 12 months.

Lower profit margins make it harder for operators to invest in new equipment, salaries and employee training.

While customers wanted to cut expenditures, they did not want lower quality products or services. Hence, OCS operators have been pressured to sustain existing product offerings at lower prices.

Due to the variety of OCS products and equipment available, many operators were able to switch to lower cost products that did not necessarily reduce customer satisfaction. For instance, in a location with fewer employees, operators could exchange a 4-station brewer with a less expensive 2-station brewer.

For another example, the operator can switch from a name brand specialty coffee to a less expensive private label coffee which, while costing less, can deliver comparable quality.

The operator can also exchange a name brand creamer or sweetener with a generic version to save money.

While operators faced pressure to lower prices, customers still wanted high quality coffee. Customers wanted to spend less money, but they did not want to switch to lower quality coffee, giving OCS operators some leverage to maintain prices.

Even in a recession, location managers recognize that lower quality coffee in the office will cause employees to leave the office for coffee stores.

Consumer demand stays strong

The National Coffee Association (NCA) national coffee drinking trends survey found that in 2010, consumption of coffee in the past day remained essentially unchanged from 2009, with 56 percent of adults aged 18 and older partaking. Daily consumption in 2009 was also unchanged from 2008.

Coffee consumption within the past week also held stable versus previous years at 68 percent, according to the NCA survey. This stability indicates that the number of people consuming coffee has not been significantly affected by the economic environment.