The aggregate OCS revenue reported in this study includes the OCS revenue reported in the State of the Vending Industry Report, which is published in August. The OCS revenue reported in the vending report includes OCS sold to accounts that are primarily vending accounts. The vending report does not include OCS business handled by dedicated OCS organizations within vending companies, or in partnership with a vending company.
New tools net higher prices
OCS operators have found higher quality products an important tool in their efforts to remain profitable in a business environment with limited growth opportunities. While the nation's productivity has improved in the last two years, this growth has occurred without more densely populated work sites.
For the second straight year, the majority of OCS accounts had fewer than 30 people, as indicated in chart 4. Account populations have paradoxically declined as work site productivity has increased, according to labor productivity reports.
Private label declines
The growth in single-cup brewers has contributed to a decline in private label coffee at the expense of national brand coffee in recent years. Private label as a percent of sales has been on an almost steady decline for the past five years, as indicated in chart 6.
The single-cup systems that have posted the fastest growth in recent years have been portion control, brew-bypack systems that do not use private label coffee.
Some of the gain in national brands has also come from specialty retail brand fractional packs. Most of the nation's large specialty coffee retailers have introduced fractional OCS packs, which represent OCS operators' most expensive fractional pack offerings.
Many OCS operators noted that the specialty retail offerings have performed exceptionally well in the last two years as the retail coffee chains continued to open more stores. The Specialty Coffee Association of America reported that specialty outlets grew another 15 percentage points in 2005 to 21,400 outlets nationwide.
The growth of large specialty coffee retailers has reminded the OCS industry of the importance of brands.
Brands find new life in OCS
Branded fraction packs played a key role in the industry's early development. However, as OCS operators grew in those early years, they expanded into private label coffee. Private label coffee is not only more profitable; it allows an OCS operator to provide a proprietary product, thereby strengthening his customer relationship.
The emergence of specialty coffee brands in recent years has altered this marketing model for many operators. Specialty brands command a higher selling price than private label coffee, and a perception of even higher quality. Where the OCS operator historically downsold customers from a national brand to private label, he or she can now upsell from private label to a specialty brand.
The specialty brand does not provide as high a profit margin as private label to the operator on a percentage basis, but if the selling price is high enough, it can mean a higher net margin.
For the first time, the survey attempted to determine operator perceptions about branded brewers, as indicated in chart 7. The majority, 64 percent, do not have brewers that promote a specific brand. However, 57 percent said they believe branded equipment improves sales.
This finding contrasts to sentiments expressed in previous surveys. Traditionally, OCS operators have not believed that branded equipment improved sales, as confirmed by the existing paucity of branded machines.
Operators could be changing their view about the benefit of branded equipment due to the rising visibility of specialty retail coffee and the increase in single-cup machines that promote some of these brands.
(One caveat: the survey did not specifically ask about retail brands. If the respondent assumed the question referred to an OCS industry specific brand, no conclusions can be made about retail brands.)
Specialty coffee has presented a double-edged sword for the OCS industry. While the popularity of specialty coffee has revived consumer interest in coffee, the growth has been monopolized by retailers who increasingly target the away-from-home audience.
The New York City-based National Coffee Association (NCA) has reported for the past two years that more at-work coffee is being brought in from out of the workplace. This indicates that coffee retailers are winning business from both OCS and vending operators.