Higher Coffee Prices Drive OCS Sales To Another Year Of Growth In A Mature Market

Rising coffee prices are giving OCS operators the chance to drive their sales in a highly saturated market, and most operators are taking advantage of it.

The Automatic Merchandiser 2005 State of the Coffee Service Industry Report found that most operators raised their prices in the last 12--month period more than any time since 1997/1998, which was the last time green coffee prices jumped.

The widespread price increases drove per--cup coffee prices past the 7--cent mark, the highest in the industry’s history, making the traditional “5--cent--a--cup” OCS slogan obsolete.

As a result, aggregate OCS revenues rose by 5 percentage points to $3.56 billion in the last 12--month period, building on growth that began the previous year and moving the industry almost to its historic 2000/2001 high of $3.63 billion.

Coffee prices drive gain

The revenue gain in the last 12--month period was driven more by higher green coffee prices than in any other growth year. The OCS market remains highly saturated with few new locations available. Per--location unit sales did not generally increase, as office populations remained largely stagnant.

Work site downsizing ebbs

The federal government’s Bureau of Labor Statistics reported that unemployment declined slightly — by three tenths of a percentage point — over the past year. As a result, operators reported the work site downsizing that began at the start of the new millennium ebbed in 2004, but employers were not doing a lot of rehiring.

Operators offered mixed reports on employer willingness to spend on coffee. Some said employers were more confident about their financial position and thus more willing to spend on employee perks.

Whether or not employers were confident in their own situations, several operators noted that most of them recognized the important benefit that on--site coffee service provides, and that quality matters. Coffee service systems that deliver good coffee will keep employees motivated and from leaving the office to get it.

Operators pass on price increases

The last 12--month period was the first year since the decline that began in 2000/2001 that the majority of OCS operators raised prices.

When the major retail roasters announced price increases in 2004, OCS operators began raising prices. This was the first time in the history of the report that no operator surveyed lowered prices. Most operators found that customers were willing to pay higher OCS prices.

And while higher prices may not have allowed operators to offset all of their operating costs, it did allow them to maintain product quality. As indicated in chart 5, OCS fractional pack weights have remained steady in the last four--year period.

Specialty coffee makes inroads

The survey reported that national brand coffee made a comeback in the last two years compared to the two previous years, as noted in chart 6. The gain in national brands reflected the introduction of several specialty retail brands in the last few years. Almost all of the national specialty coffee retailers have introduced OCS fractional packs.

The specialty brand fractional packs were among the highest priced products operators carried. Many operators used them strictly as a defensive measure as they continued to promote their more profitable private label coffee.

With higher costing coffee leading the growth in coffee consumption, most OCS operators did not respond to higher coffee prices by trying to sell customers less expensive coffee. This was the tactic that operators used in the late 1970s and early 1980s in response to a spike in green coffee prices, and it proved to be a losing strategy. The industry has been working hard ever since to improve the reputation of OCS coffee.

Customer population counts drop

The 2005 survey revealed a definite downward shift in OCS customer population counts, indicated in chart 4. The largest single group of customer work sites in the last 12--month period was 20 to 29 people, compared to 30 to 49 people for the two previous 12--month periods. There were also more work sites served with fewer than 20 people in 2004/2005 than in the prior two years.