Recession Tests Management Skills

The party is on hold, but it’s by no means over. A recession has shaken the U.S. economy and tripped the OCS industry’s 4-year growth curve, but operators and suppliers remain hopeful growth will return. In May, some economists claimed there were signs of recovery.

OCS operators have not responded to the economic downturn in a reckless manner. Like many of their customers, OCS operators have adjusted their service schedules, reviewed their operating expenses and reduced overhead to protect profitability.

In 2008/2009, OCS sales posted a 5 percentage point decline from the prior 12-month period, marking the first setback since 2003/2004. OCS revenues totaled $3.9 billion in 2008/2009, according to the 2009 Automatic Merchandiser State of the Coffee Service Industry Report.

The 4-year gain from 2003/2004 to 2007/2008 was the longest consistent growth trend in the industry’s history, driven by higher pricing and investment in better quality products and equipment. The percent of operators raising coffee prices declined in 2008/2009, but most operators still raised prices, continuing a trend that began in 2004/2005, as shown in chart 3A.

The use of single-cup brewers, which have played a big role in the industry’s growth in recent years, remained high at 18 percent of all brewers in 2008/2009, slightly less than the all-time high of 19 percent the prior year.

OCS sales have fallen as a direct result of declining worksite populations and employer cost cutting. The nation’s unemployment hit 9.4 percent in June of 2009, the highest level since 1982. Location managers have mandated across-the-board cutbacks in operating expenses, including OCS.

In addition to reducing staff, many employers cut hours for remaining employees, further reducing the need for OCS.

FINANCIAL SECTOR TAKES A HIT

Layoffs in the financial services sector were particularly devastating to OCS since these employers are better than average OCS customers. Challenger, Grey & Christmas Inc., an outplacement consultancy, reported that financial sector job cuts jumped from 153,105 in 2007 to 260,110 in 2008, after nearly tripling in 2007 from the prior year.

The most common scenario OCS operators faced in the last 12 months was having customers tell them they need to cut OCS expenses by anywhere from 10 to 20 percent. Such a scenario presented a challenge, but not a disaster, since it allowed the operator to still service the account profitably.

Operators claimed that employers still want to provide good quality coffee, reflecting the overall consumer appreciation for coffee that OCS operators themselves helped to build in recent years.

In such situations, operators offered less expensive coffees and/or reduced ancillary products. These actions were evident in the survey results.

The percent of private label coffee sold rose to its highest level in more than five years, shown on chart 5, indicating OCS operators are using private label to offer a good quality coffee at a reduced cost. Private label has always been a tool for operators to provide better quality coffee at less cost than national brands.

OPERATORS HELP CUSTOMERS REDUCE COSTS

An Automatic Merchandiser reader survey in March found that switching to a less expensive coffee was the most common way to help customers reduce OCS costs. Close to 40 percent of operators took this approach, followed by 24.8 percent who reduced non-coffee products, 16.8 percent who found other methods, 8 percent who added payment mechanisms, 6.6 percent who lowered coffee prices, and 5.1 percent who lowered prices for non-coffee products.

The 3.58-point gain in private label came at the expense of national brand coffee in 2008/2009. National brand coffee posted a decline in all but one of the last five years.

When national brand posted a 2-point gain in the previous 12-month period, some observers noted the impact of national coffee house brands. The coffee house brands introduced in recent years offer a higher selling price than the more traditional national brands.