Is private label coffee worth the effort?

Why use private label coffee? What are the key benefits to a small OCS operator in having private label?

Private label allows the operator to be different in the sense that the competition cannot sell the same product. Private label is a point of distinction and a statement about the quality of the coffee and integrity of the operator.

There is no doubt that national brands dominate the overall coffee service market. But a properly-executed private label program can dominate the operators' market. In fact, the private label can evolve into the benchmark by which other products are judged.

A promise to the customer
By offering a private label coffee, an operator extends a promise of service to the client. The operator becomes the source of the quality of the product. After all, their name is on the package, and no one wants to be recognized for poor quality.  

When we talk about the quality of the product, we are talking about taste and freshness. This is not something that is communicated by the package alone, although this is very important. A regular coffee consumer can taste the difference between a coffee that is fresh and one that is not. And between a higher and lesser quality coffee.

Hence, to the extent that private label gives the operator more control over freshness and quality, private label can prove an important advantage.

The private label owner can say with confidence that the coffee he is selling was roasted within a certain time period, and that the national brand coffee in many cases might have been sitting in a warehouse for months.

This is a big reason why many OCS operators use private label; it is a strong selling point.

Cost advantages
There are cost advantages as well. By contracting to have a certain volume of coffee roasted for a specific time period, the operator is less vulnerable to price fluctuations as determined by the national branded products.

This does not mean the private label operator isn't affected by price fluctuations. He is. But under most roasting contracts, the operator commits himself to an expected volume of coffee over an extended time period.

Nor does it mean that the national brands don't impact the private label selling price. The movement of the national brands has become a barometer as to when prices can be raised.

The private label operator, does, however, tend to command a better price for a private label product as the perception is generally one of quality, provided that the product is surrounded by a level of service and equipment to support the price. 

Specialty coffee creates opportunity
The "specialty coffee" revolution has created some new opportunities to market private label.

Some of the big retail coffee organizations have become outstanding marketing machines. However, customers visit these retail establishments for more than the coffee; it's the experience, the lifestyle and the "cool" thing to do. But remember, as OCS operators, we are in the coffee business. We can beat some of these national marketing organizations if we know how to market our products, provided we have the right products.

My company offers some of the top national retail coffees, and we sell very little of it compared to our own brand. This reflects the success we have experienced marketing our brand. We have been able to educate customers that our brand is a better value for their money.

Private label better meets local needs
We know the consumer tastes in our market, and we offer coffee that better meets the local tastes. The national retail brands aren't as widely accepted and they don't help the office manager control costs.

This brings us back to cost and benefits, which is what being in any business is all about. What exactly do your customers want? If they want the experience of leaving the office to experience the ambience of a coffee house, there isn't much you can do to compete, short of building a coffee house in the customer's location.

But if it's good coffee they want in the work place, we win hands down. Our company's main selling tool is the taste test, and we win every time. The taste test is done blindly with a cross section of people in the office. In our market, the majority will turn up their nose at the well known national retail brand and go for the smoother, richer cup, provided the quality is there. Again, it is up to the operator to create and carry the flag of quality.

Keep in mind that you can't use a 1-ounce pack of coffee and expect to appeal to a market that calls for a heavier cup of coffee.

By having a private label, an OCS operator can also tap new customer bases, such as restaurants, delis and convenience stores.

Expanding into a new customer base does require another set of costs, particularly sales and marketing. But it also creates new profit opportunities since much of the overhead is already in place.

Cost Savings will vary
It is difficult say how much an operator can save using private label since there are so many variables. The reason for having private label is to provide a higher than average level of quality. The operator should take the position that he is offering a better coffee and seek a higher selling price. Hence, the private label has the potential to provide higher profits.

The potential exists for the operator to save money on the cost side and to increase margins with a higher selling price. Let's say that the national average price for a 42-count case is $25. Here are a couple of scenarios.

If the national brand product has a $14 cost to the operator, that represents a gross profit of 44 percent. If the operator can purchase a better quality private label coffee for $13 (a $1 savings) and sell it for $27, then the gross profit grows to almost 52 percent.

There is a saying, "you make money selling coffee, not buying coffee." It is often used in context of the end user in a foodservice scenario, but it holds true in this example. 

There may not be huge or any significant savings on the buying end, but a private label program allows the operator to differentiate himself in the marketplace.

Typical costs
It is difficult to apply a volume threshold as to when investing in a private label coffee makes sense. Operators have different objectives. Some are more interested in improving profitability while others are more concerned about establishing a reputation for product excellence. 

Typical costs incurred are printing plates for packaging film. The cost is determined by the complexity of the graphics, such as multi-color, process colors, screening, etc. These costs easily run into the thousands of dollars and can be cumbersome for a small operator.

Printed boxes versus generic boxes is another cost to consider.

Printing plates for film costs very widely based on the printing technology used by the film converter and by the graphics design of the package.

A 2- or 3-color print job incorporating a simple logo or name might cost $1,500, but a complex, multi-color process print job could result in a bill of $5,000. These costs vary widely.

Printing plates for the boxes will also have varying costs. Printing on corrugation is not nearly as sophisticated as the package, but plate costs can be $200 or $600, and it is typically determined by the square inches of printed area and the number of colors.

It is important to note that these costs are tied to the number of films and box sizes desired. A decaf coffee requires a different set of plates than a regular coffee. There will be some commonality in the packages. Box manufacturers don't like switching plates to different size boxes, as it is time consuming and creates the possibility for damage.

Printing plates, film and boxes are one-time charges and they are replaced by the printer as they wear or are damaged. However, if a graphic change is desired, another cost is incurred.

Given that a box of OCS coffee probably averages about 4 pounds, 50 cases of a special print film would be difficult to efficiently produce. The more blends involved, the higher the upfront cost.

There is also a cost for the roasting, which will vary based on volume. Economy of scale does not come into play on short production runs.
Besides product, roasting costs also include system cleanout and blending.

Floor stock programs
Some roasters offer a floor stock program; keeping ready-made product on the floor for future orders. Keep in mind that the smaller the order, the less control the roaster will have over the cost. Floor space will vary more when smaller volumes are ordered.

Most roasters produce to order and have minimum orders. Commonality of blends, film, and boxes come into play, as it is simple for the roaster to increase a pack weight or a sealing tape and bar code, but coffee changes can create havoc.

If a roaster produces a finished roast of 350 pounds and the operator orders 50 cases, 50 cases times an average weight of four pounds is 200 pounds of coffee. What happens to that other 100 pounds? The roaster has to do something with it, and with this being a special blend, they are probably going to package the remaining 20 cases.

Does the roaster put it on the floor waiting for the next order a month or two down the road?

Geography is a tremendous consideration, given the fact that fuel is still fairly expensive. An operator must always consider the cost of freight. Receiving an order of 300 cases of product and incurring a freight bill of $300 for transportation has a dramatic effect on the profits of the operator.

How to select a roaster
Once the decision has been made to find a roaster to produce a private label, it is important for the OCS operator to visit prospective roasting partners to learn more about them. Are they what they say they are and do they instill confidence that they will meet your needs? Do they have the knowledge and ability to assist you in potentially creating new blends? What quality assurance processes are in place?

Is their core brand one of quality?

Is this an organization that will follow through on their commitment to you? Simply put, will they deliver a quality product to you on a timely basis at a fair price? These are all simple but very important questions that only the operator can answer. 

Every roaster should be inspected by local and state health officials and should be able to quickly produce a copy of the most recent inspection. Membership in trade organizations are a plus, but it is not necessary.

More importantly, what quality assurance processes are in place? Is the roasting process documented for reference or recall purposes? Is the packaging automated or manual? Is there a cupping process in place to ensure that today's cup is the same quality as six months from now?

A key responsibility of the roaster is to provide consistency. Is there a solid supply chain of film, boxes, filters, and green coffee? Who is responsible in the case of a natural disaster?

A facility does not have to have a lot of bells and whistles to be quality oriented, efficient, clean and consistent.

Selecting the product(s)
The operator should not leave product selection up to the roaster. Seldom does one allow the server of a restaurant to pick the item you are going to dine upon. The role of the roaster is to give input as a result of a question and answer session with the operator. The result will be a learning of values.

What are your main priorities? Is it cost control, quality, mass appeal, light or dark roast? The issue of specialty coffee is important. If the objective of the operator is to operate with low to moderate costs, "specialty" coffee probably isn't the answer. High quality products, however, should be marketed as such.

Aftermarket support
Roasters offer varying levels of aftermarket support. It depends on the roaster and to what extent they wish to partner with their customers. A private label program will typically not include any sort of point-of-sale material. Marketing the coffee under most private label programs is solely the operator's responsibility.

Distributing the roaster's brand is a different matter. Distribution arrangements often include some level of marketing support. Marketing support includes point of sale material and educating the OCS operator on how to sell and market the coffee.

The question to ask yourself is: are you going to choose to partner with a company that roasts coffee or do you want to partner with a roaster that markets coffee and understands your industry? There is a difference. Not to sound like a broken record, but you make money selling, not buying coffee. 

Once the operator has contracted to provide private label, how does he get customers to switch to it from the national brands?

The rate of conversion is directly related to the aggressiveness and confidence of the operator. This is not a scenario one finds in the movies, "build it and they will come." This is one of "I believe and let me share with you." If the homework has been done properly and if service has been a key component, then there will be trust from the client to the operator.

Promoting the private label coffee
My company, the john conti Coffee Co., has acquired a number of OCS companies over the years. We begin conversion immediately and expect 100 percent conversion. We have usually accomplished this within a few months.

Another option is to form a partnership with a roaster to use their coffee on an exclusive basis in a certain geographic market. This is the distribution arrangement referenced above.

The benefit of using a roaster's brand is one of building upon a known and recognized product. The operator is able to take advantage of a number of opportunities that otherwise wouldn't exist. This is a very effective form of marketing.

Promotional materials are oftentimes readily available from a roaster that can be obtained at a fraction of the cost that the operator would have to spend if he were marketing a whole new brand.

Economies of scale are immediately recognized through the buying power and productivity of the roaster. The operator no longer has to incur the cost of preproduction: printing plates, inventory, volume commitments, etc. 

There is no simpler way to gain a business partner than by promoting their label.

Roast your own coffee?
Doing your own roasting is also an option for an operator at some point in time. This adds several new dimensions to the day-to-day operations of a business.

Setting up a plant is not an inexpensive endeavor. Equipment needed includes the roaster, dust collection, emissions abatement, a grinder, packaging equipment, elevators for moving product, scales, tape machines, and labelers. This equipment is readily available used and could perhaps allow an operator to set up a rudimentary operation for around $100,000. Bargains do arise from time to time.

In expanding into roasting, operators must be aware of zoning laws. Many municipalities have rules concerning smoke emissions.

Roasters have to consider how their operation affects nearby businesses. I recently visited a roaster and noticed that all the adjoining properties in the industrial park were blanketed by smoke from the roaster. This makes for poor relations.

Once a plant is set up, someone needs to understand the full workings of each piece of equipment. Roasting is an art, as is effective, efficient packaging. These are two areas that should not be taken lightly and can have disastrous effects when executed poorly. 

Other costs include labor and raw goods.

Once an operator has decided to have their own roasting operation, they must have the knowledge and resources to purchase, receive and store thousands of pounds of packaging film, pallets of boxes, filters and the green coffee.

One just doesn't pick up the phone and buy green coffee and throw it in the roaster and have it come out the same each time. This is a long process of education and selection to determine consistency, blends and stable supply lines that allows the operator to produce that great cup each time, day after day, month to month.

Clearly, roasting your own coffee is not something one does without planning. But it also gives the operator total control of the product and a very powerful selling point.

Our company has become a leader in the markets it serves because we can boast this advantage and deliver upon it. There is no question that being able to invite a customer to see their coffee being roasted hours before it is delivered is a major selling advantage.
The main advantage of private label coffee is that it gives the OCS operator a reputation for quality coffee. This is a great selling tool.