Quality Enables OCS to Grow With the Coffee Market

Various market reports have indicated that coffee sales are rising, thanks in large part to a higher consumer appreciation of coffee. While coffee houses are credited with much of this growth, other retail outlets such as quick-serve restaurants and convenience stores have weighed in and are competing for this business as well.

Locations where respondents have had coffee in the past month, August 2007. View this chart in PDF format.

Increased retail competition has affected OCS operators, but recent research indicates that OCS operators remain a key player. A recent consumer survey by the Mintel Group revealed that as many consumers are getting coffee at work as at quick serve restaurants, and convenience stores actually trail the work place as a destination. (See the chart on the opposite page.)

OCS operators and roasters mostly welcome the marketing that retailers are doing since it places a subliminal message for a product that many OCS operators can provide more conveniently.

That’s the consensus of an informal sampling of OCS operators and roasters. Most believe that retail coffee marketing has created a bigger market for premium coffee.

The Automatic Merchandiser State of the Coffee Service Industry Report, published in July, has reported 5 percentage point revenue gains for each of the last three 12-month periods. The report did not track unit sales, but it did note that the majority of OCS operators have raised prices for each of the last three years and that revenue per cup has reached historic highs for each of these years.

The Automatic Merchandiser numbers indicate that higher prices are contributing to higher sales. The survey also found consistent increases in single-cup brewer placements, which typically generate 20 to 30 percent higher sales than traditional batch brew systems.

GROWTH COMES IN THE PREMIUM SEGMENT

Roasters and operators interviewed agreed that the growth in sales has occurred in the higher-priced premium segment, which represents about 20 percent of total
coffee sales.

Tim Wayne, category executive for hot beverages and snacks for Procter & Gamble Professional, said total coffee consumption has not changed significantly in recent years; sales gains have reflected the shift to gourmet products which net higher prices. P&G has witnessed this shift in its sales of Millstone, a “super premium” brand, in comparison to Folgers, a mainstream brand.

As a result, P&G is trying to develop a market for what Wayne called “affordable gourmet” coffee with its new Folgers Gourmet Selections. “We believe there is still a significant opportunity in affordable gourmet,” he said. He said this market could double the size of the “super premium” market that presently makes up 20 percent of all coffee sales.

While convenience stores have also upgraded their coffee quality, Wayne, whose responsibility includes all channels of trade, said convenience stores have not moved as aggressively into the higher quality “gourmet” offerings as much as OCS operators have.

QUALITY AND CONVENIENCE: OCS HAS A FOOTHOLD

Timothy’s World Coffee, which markets to the OCS channel through fractional packs and Keurig K-cups, has been pleased by the growth in the OCS channel which has been driven by quality and convenience, according to Mike Westover, OCS sales manager. The company has expanded its initial 15 K-cups to 40.

“Everybody can have what they want when they want it,” he said. Westover said restaurants cannot offer the same coffee selection as OCS. He further noted that the more recently introduced homeowner K-cups will help build the demand for good quality coffee in the office. “The single cup is here to stay,” he said.

Offices are leading in the area of variety, agreed Brian Bradley, vice president of business development at S&D Coffee Inc., an OCS operator and coffee roaster based in Concord, N.C., which supplies coffee and tea to the away-from-home market.