As Specialty Coffee Grows, Single-cup Follows in Japan

Japan may be years ahead of the U.S. in vending, but in coffee service, the reverse is true. Which is why Japanese coffee service firms are paying careful attention to developments in the U.S. OCS market, such as the growth in specialty coffee.

The Japanese OCS industry is paying special attention to single-cup brewers, which provide coffee house quality coffee in the office.

The country has already responded favorably to the specialty coffee revolution that has revitalized U.S. coffee consumption in recent years, creating a new coffee culture that is further refining that country's well established appreciation for coffee. As a new coffee culture takes hold, coffee service providers see a rising demand for cartridge-based, single-cup systems.

Flavia Japan, the largest provider of cartridge single-cup systems in Japan, recently held its first annual distributor conference in Tokyo. The company hosted Automatic Merchandiser to provide an overview of the U.S. single-cup phenomenon, the purpose being to offer Japanese service providers a sense of what the future holds for their country.

Because coffee is more readily available to Japanese consumers – coffee houses are to be found on every urban block, as are coffee vending machines and convenience stores – Japanese coffee service operators are particularly interested in products that better meet customer needs.

As the specialty coffee market grows in Japan, coffee service operators are interested in knowing that in the U.S., where specialty coffee is more established, a system exists that successfully delivers coffee house quality coffee to the office.

Starbucks, which opened its first store in Japan in 1996, introduced a new refreshment concept, and it is more popular than the traditional type of coffee house among the younger people.

Having placed stores in high-rent retail areas, Starbucks has a non-smoking policy, which in Japan is a pioneering move. Starbucks also makes it easy for customers to mix milk, cream, chocolate or whatever they want in their coffees, which is also a departure from the more traditional coffee house.

As Starbucks invades Japan, the market responds
Japan's traditional coffee culture has responded to Starbucks by incorporating some of its features.

Doutor Coffee, long the dominant coffee shop chain in Japan, has responded to Starbucks with a new line of stores called Excelsior Café, imitating Starbucks' interior design and adding an extensive food menu, but also allowing a smoking section.

There is now a two-track coffee house industry in Japan, the old and the new, each catering to its own clientele.

And just as Starbucks must compete against the more established coffee house, which features mildly-roasted black coffee, specialty OCS systems must compete against the better established glass pot brewers and omnipresent coffee vending machines. It's a challenge that OCS operators are studying carefully.

Japan's own specialty coffee association, the Specialty Coffee Association of Japan, only recently formed in 2003.

Japanese coffee service operators believe the demand for their service will increase as the country faces a severe labor shortage and the younger workers change jobs more frequently than their parents, who typically spent their entire working lives at one company.

The Japanese government forces people to retire at a certain age, and immigration is carefully restricted. Employers, many believe, are becoming more anxious to provide higher quality worker benefits such as specialty office coffee.

According to Japanese coffee industry sources, cartridge-based single-cup systems account for about 5 percent of office coffee systems. This was the percent of U.S. coffee service installations five years ago. Hence, Japanese observers believe the number of cartridge-based, single-cup systems can triple in the next five years if current market trends continue.

Coffee faces competition from other beverages
As in the U.S., coffee, while rising in popularity, faces competition from other beverages in Japan. Bottled water, mineral water, energy drinks and a variety of teas are also becoming more popular. Most coffee service companies carry these products.

Another popular product in Japan is chilled coffee, which can be found in vending machines, convenience stores and supermarkets.

Starbucks recently launched a ready-to-drink chilled coffee called Discoveries. According to a publication called Japan Today, Starbucks and Suntory co-developed the ready-to-drink chilled coffee that comes in two flavors, latte and espresso.

Vending is more pervasive in japan
Japanese OCS operators face far more competition from vending than their U.S. counterparts, given the much higher number of vending machines in relation to the population. Vending has long been a more popular retail format among Japanese consumers, and coffee is no exception.

In Japan, beverage machines in particular are more pervasive than in the U.S. Beverage machines vending both cold and hot drinks can be found on most streets. Most have a section for hot beverages, offering a variety of coffee and other hot drinks in 2-ml. cans for about 110 yen, or $1.00 in U.S. currency.

Cup machines, while less common than machines
vending packaged products, are also available in many public locations in Japan. These machines also vend both cold and hot drinks. The hot drinks are also priced around $1.00 per cup.

Enhancing the convenience of vending in Japan is "m-commerce," whereby consumers purchase products using their mobile phones. The purchase is billed to their mobile phone account.

OCS is more consolidated in japan
The refreshment services industry is far more consolidated in Japan than in the U.S. This is not surprising, given the fact that the population is more condensed. Close to a quarter of the country's population lives in the greater Tokyo area.

Unimat Group is the nation's largest coffee service provider. According to some estimates, the company controls more than 40 percent of the nation's OCS business. The company is also involved in the management of coffee shops, restaurants and convenience stores, along with real estate development.

Unimat has expanded into single-cup systems, but only slightly.

Daiohs Corp., based in Tokyo, is one of the largest OCS players in Japan. Daiohs owns First Choice Coffee Services, based in Bakersfield, Calif., one of the largest regional OCS companies in the U.S.

UCC, the largest coffee roaster in Japan, is also a big OCS player. This company has expanded into cartridge-based systems on a small scale.
Aramark is also active in Japan through a subsidiary.

As in the U.S., most of the major vending operations are active in OCS.

Coca-Cola bottlers collectively control the largest number of vending machines in Japan, followed by Kirin Beverage Corp., a Japan-based company. Both Coca-Cola and Kirin have private label can coffee products.

Coca-Cola and Kirin both have sizeable OCS divisions which have expanded into cartridge-based, single-cup systems.

Japanese Customers respond well to single-cup
Coffee service customers visited by Automatic Merchandiser in Japan indicated strong appreciation for cartridge-based, single-cup systems. As in the U.S., consumers appreciate the convenience, the quality and the variety.

Many locations do not have room for vending machines.

Some locations have vending for the employees and OCS for customers.

A cellular phone rental company with 600 employees recently added a cartridge-based, single-cup machine in a break area that also has a glass pot brewer and an airpot brewer, following a trial. The on-site refreshment services coordinator said the single-cup machine is patronized by workers who would otherwise leave the office for coffee.

Because the employees at this location include people from several different countries besides Japan, including the U.S., Europe and Latin America, this manager said the system's variety addresses the employees' disparate preferences.

The most popular flavors are cappuccino and espresso.

A software manufacturer with 150 employees recently added a cartridge-based, single-cup unit in a break area that already had a beverage vending machine offering both hot and cold drinks. The single-cup system at this location is a pourover model. As in many locations in Japan, water lines are not available in employee areas. Hence, pourover systems are more common in Japan than in the U.S.

Employees at the software company said they appreciate the free coffee. One employee said she appreciates the unit because she cannot afford to patronize Starbucks on a regular basis.

A stock brokerage company with 150 employees recently installed two cartridge-based, single-cup machines. These machines are also pourover systems. The systems collectively dispense about 600 cups per day.

The location manager noted that despite the fact that the systems offer more variety than other countertop systems, the employees would like even more variety. The most popular flavor is mocha.

A furniture store also recently installed a pourover, cartridge-based single-cup system. The coffee is free to customers, but not to employees, who pay the equivalent of 90 U.S. cents per cup. The location manager said espresso and Italian dark roast are the two most popular flavors.

Big growth seen for cartridge-based single cup units
Cartridge-based systems were not new to this furniture store. The store previously used a dedicated espresso brewer that utilizes an espresso cartridge. The problem with the espresso brewer was that it did not serve regular coffee, nor did it offer anywhere near the product variety. Most notably, that system did not offer hot chocolate or tea.

One advantage that Japanese OCS operators have over their American counterparts is they have a proven operating model to follow: America's. Not many U.S. OCS observers predicted five years ago that cartridge-based, single-cup would lead the OCS industry's growth to the extent that it has.

Keeping an eye on America, Japanese observers see big growth for cartridge-based single-cup in the next five years.

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