State of the Coffee Service Industry: Higher prices drive up OCS sales for a second year

For the second straight year, OCS operators have raised prices aggressively, enabling the third consecutive year of growth. Total OCS revenues hit an all-time high of $3.73 billion in 2005/2006, eclipsing the previous $3.63 billion benchmark set in 2000/2001. However, the 5 percentage point annual growth rate has not matched that of the retail competition. The OCS customer base remains stagnant, location populations have not increased, and operators have not significantly added new services to build per-location sales.

The 2006 Automatic Merchandiser State of the Coffee Service Industry Report found that OCS operators continued to raise prices to cover higher costs, including product, equipment, raw materials, labor, fuel, benefits and wages.

The last two 12-month periods witnessed some of the most aggressive operator pricing in the OCS industry's history; about 74 percent of all operators raised prices in each of the last two years.

Higher pricing has emerged as the OCS industry's most significant means of increasing revenues to protect bottom lines. Whether or not revenues are keeping pace with cost increases was not certain, since the survey did not measure costs.

Operators found customers willing to accept higher prices due to widely reported increases in business operating costs. Operators found customers were generally sympathetic to their need for higher prices since most customers, also being business people, have experienced similar increases.

Employers want better coffee

The nation's vibrant economy also created an atmosphere making customers more willing to accept higher coffee prices than a few years ago, when employers were in more of a cost-cutting mood. With the unemployment rate reaching historic lows of 4.6 percent, many businesses recognized the need to provide customer perks, and saw OCS one of the least expensive benefits they can provide their employees.

Operators started passing on higher prices in 2004/2005

when roasters began raising coffee prices. The higher green coffee prices encouraged supermarkets to raise coffee prices, creating an environment for OCS operators to follow suit.

Retail coffee prices stabilized in 2005/2006. However, energy prices began to surge, giving operators another incentive to either seek additional price increases or add fuel surcharges. The survey did not ask if operators sought fuel surcharges, but informal interviews indicated many of them did. Those who did this said customers were accommodating. Surcharges were adjusted based on changing fuel costs.

The comparative health of professional and service accounts was fortuitous for OCS operators in the post-9/11 recovery period. Most of the nation's economic growth has been in technology, finance, health care and professional services; industries that rely on OCS more than manufacturing, which has continued to suffer.

Operators serving markets with high concentrations of financial, high-tech, health care and professional employers, such as the West Coast, East Coast and South Florida, witnessed particularly strong growth in the last 12 months.

Per-cup revenue rises

Per-cup coffee prices in 2004/2005 increased 8.45 percentage points to 7.7 cents, a benchmark, as indicated in chart 3C. Contributing to this comparatively high average has been the continued proliferation of single-cup coffee brewers, the OCS industry's main tool for cashing in on the consumer's appreciation for better quality coffee.

As indicated in chart 9, single-cup placements continued to expand at a rapid clip in 2005/2006. These units provide the combined benefits of ease of use, higher quality product and increased variety. OCS operators found customers willing to pay a higher cost per cup for these benefits.

The last two 12-month periods marked the first time that so few operators reported lowering prices.

The State of the Coffee Service Industry Report is based on the results of a questionnaire e-mailed to 600 dedicated OCS operators and 2,700 vending operators with OCS operations. The survey generated a 10 percent response.