Commitment to excellence takes OCS to next level

More growth and more challenges. That describes the state of the OCS industry as it enters its fourth consecutive year of 5-percentage-point revenue growth driven by higher pricing and a continued commitment to product and service quality.

In 2007/2008, OCS sales surpassed the $4 billion mark for the first time. The gain continued to be driven by higher prices, the ongoing expansion of single-cup systems that generate higher sales, and the consumer's willingness to pay for good coffee.

The 2008 Automatic Merchandiser State of the Coffee Service Industry Report found that for the fourth consecutive year, the majority of OCS operators raised prices. The 4-year trend is the longest in the industry's history, demonstrating the OCS operator's willingness to charge more in order to provide more. This commitment began in 2004/2005, when average revenue per cup first exceeded the 6-cent mark.

The revenue growth indicates that the OCS industry is gaining a bigger share of the overall coffee market, which has posted a 53 percentage point gain between 2002 and 2007, according to the market research firm, Datamonitor. The market is forecasted to continue to grow an additional 36 points in the next 5-year period.

Ready-to-drink coffee: a growing market

Coffee sales continue to increase in almost all ready-to-drink channels - OCS, restaurants, convenience stores and specialty coffee shops - despite higher prices and declining consumer confidence. This demonstrates consumer appreciation for a good cup of coffee and willingness to pay for it.

The State of the Coffee Service Industry Report does not track operating costs, but operators' willingness to raise prices to cover higher costs indicates that operators are protecting their margins, which is necessary to ensure profitability. This year, the report also indicated that more than a third of operators (35 percent) levied fuel charges in addition to higher coffee prices.

This was the first year the survey asked about fuel charges. Fuel charges have become common among product delivery industries as gas prices have reached record highs this past year.

While OCS revenues have posted consistent increases, it is important to recognize that the State of the Coffee Service Industry Report does not measure operator
profitability.

The report does not indicate to what extent higher sales matched higher operating costs. Key cost areas include coffee, salaries, benefits and fuel, most of which increased in the last year.

Higher prices: both opportunities and challenges

The higher coffee prices, indicated in chart 1, presented a double-edged sword to OCS operators. The higher prices eroded operators' profits, but also justified higher prices to customers. While customers often resist higher prices, most operators noted that customers have been more accepting of higher prices than in previous years.

Because green coffee prices rose (indicated in chart 2), retail outlets raised their coffee prices, thereby justifying higher OCS coffee prices in the minds of many if not most customers.

Cost control proved to be one of the major challenges that OCS operators faced in the last 12-month period, with pricing only one of several strategies they used. Operators also adjusted their routes to serve more customers with fewer deliveries, adjusted minimum orders to reduce deliveries, and adjusted schedules to reduce deliveries to smaller customers.

Fuel charges were a key cost control strategy in 2007/2008. Operators that used this strategy charged set fees for deliveries. In some cases, customers could forego a fuel charge by increasing their order. In other cases, fuel charges were only imposed on unscheduled deliveries.

Investment in personnel more critical

Investment in personnel also proved exceptionally important in addressing a more demanding customer. OCS operators noted that investment in salaries, benefits and employee education were key to improving employee retention, which has a direct bearing on account retention.