Some veterans of the office refreshment industry say the best of times are behind them. The OCS market is saturated, and the cost of product, equipment and wages are at an all time high.
Others say these are good times to be in the business, since the specialty coffee industry has injected it with new life and the newer brewers can deliver a genuine coffee house experience.
Veterans Bob Smith and Don Souden, who operate Pontiac Coffee Break Inc. in suburban Detroit, see merit in both of these positions. Having built the business from the ground up more than 30 years ago, they are realistic about today’s challenges, yet recognize the opportunities.
A new approach is needed
They believe that the future is promising, thanks to the quality of the state--of--the--art product and equipment. However, in order to take advantage of these tools, the OCS industry needs to improve its image to match its competing channels, such as c--stores and specialty stores. To do this, they believe they need to invest in better marketing programs.
“The OCS industry doesn’t get a lot of respect because we haven’t demanded it,” said Smith, who founded the company in 1974. Given the challenges the industry faces today, such as higher operating costs, increased competition from other retail channels and a stagnant customer base, Smith and Souden have pulled out all the stops and are investing heavily in marketing.
They recently invested $15,000 in a professionally produced, four--minute audio--visual presentation on a CD ROM that demonstrates the benefits of OCS, complete with customer testimonials. The company is presently conducting a bulk mailing of this presentation to prospective customers.
New focus on marketing
The CD ROM is one aspect of a new marketing plan. The company also offers monthly product promotions which customers can find on its website. It also offers custom logoed coffee dispensers and gives away free condiments. All of these activities are part of an ongoing plan to create a higher level of customer appreciation for OCS.
The enthusiasm can be felt throughout the company’s Waterford, Mich. headquarters. Employees greet visitors with smiles. Drivers, known as route managers, and service techs wear neatly pressed uniforms. The walls are decorated with coffee memorabilia and displays of both historic and new products and equipment, such as coffee pods and pod brewers. Most visitors would never know the building is over 30 years old, as it has been remodeled and is always in immaculate condition.
Humble beginnings
Today’s challenges are simply the latest chapter in a story that began when Smith returned from his duty as a fighter jet pilot in Vietnam. OCS was still a new concept at the time, and it seemed like a promising opportunity. He rented some space in his brother’s printing company and began knocking on doors with pourover brewers and national name brand, fractional pack coffees.The cost of product and equipment was so low at the time that Smith took locations with as few as four employees.
In six years, he built the business to about $250,000 in annual sales. In 1981, he met Souden, then a 27--year--old school teacher who was looking for a more lucrative career opportunity. Smith was working long hours and knew he couldn’t grow the company much more on his own. He offered Souden to buy into the company.
Both agreed that a partnership made more sense than an employer/employee relationship. This way, Souden had a stake in the success of the company, but would not be inclined to go off on his own and become a competitor. Souden remortgaged his house to buy into the business as a partner.
“I thought it was a unique business,” Souden said. He reasoned the business had a good future since coffee is a necessity in the workplace. He was impressed with what Smith had accomplished single handedly up till that point. “I liked that he had the initiative to go out and start this company,” Souden said.
Partnership evolves
The younger partner also brought some new ideas to the business that proved fruitful. Smith was using a step van in order to have his complete inventory available at every stop. Souden convinced Smith to switch to precalling the customers, so that the entire inventory didn’t have to be on the route all the time. “Instead of doing suggested inventory, you have actual orders,” Souden said. This allowed them to replace the step van with a smaller delivery van.
Souden also suggested offering free powdered cream and sugar with every coffee kit, which proved to be a great marketing tool. “We didn’t want them (customer employees) going to the store,” he noted.
Pontiac Coffee Break added private label, known as “Bob’s Blend,” and annual growth continued in double digits. Both partners were active in several chambers of commerce in Greater Detroit, which provided excellent networking opportunities.
Education and networking
They also found the National Coffee Service Association (NCSA) helpful, the OCS industry’s national trade association which folded into the National Automatic Merchandising Association in 1999. Smith and Souden came across new products as they were introduced, such as automatic plumbed--in brewers and satellite brewers. They also made valuable contacts at NCSA conventions.
“We were all committed to the same goal,” Smith said of the NCSA camaraderie he now greatly misses.Contacts at NCSA helped Smith tap into the c--store market, for example. Not only did he come across his first batch brewers for c--stores, he also met a contact who allowed him to ship equipment to a warehouse so he could service c--stores that were just outside of his immediate service area.
C--stores have never been a large part of the business, but the expansion into this market did facilitate the company’s overall geographic expansion. A 2--store chain quickly grew to 100 stores, and eventually another 75 stores in western Wisconsin. Pontiac Coffee Break shipped coffee to the Wisconsin stores via UPS.
In 1988, the c--stores chain opted to buy direct from the coffee roaster. This was a devastating day for Smith, but fortunately, he was able to find other c--stores for all of the big batch brewers.
Smith does not target c--stores aggressively because their buying decisions are more price driven than offices.As the company grew, Smith added a software system to keep track of orders, inventory and receivables. He also bought the single--story, 6,000--square--foot building he was working out of.
When the big coffee price hikes hit in the late 1970s, Smith and Souden were quick to recognize the importance of educating customers about the coffee experience. The major roasters were offering smaller pack weights to offset the rising costs. OCS operators, also wanting to minimize their costs, began selling lower pack weights.
Smith and Souden realized that if customers viewed coffee as a commodity, their profits would suffer. So they tried to convince customers that lower pack weights meant lower quality. This was a difficult chore, as the market was pushing pack weights downward.
The market changes
Where some OCS operators responded to the pricing pressure by expanding into office supplies and/or vending, Pontiac Coffee Break focused on honing its expertise as an OCS service provider. Smith made it a point to have all employees trained in servicing equipment and learning the product line, so that all employees could answer questions when asked.
In 1995, they joined the Specialty Coffee Association of America and began studying the specialty coffee business. They were among several OCS operators to explore specialty coffee retailing, seeing it as a way to strengthen their coffee expertise and at the same time educate future OCS customers about better quality coffee. Smith even taught adult education courses in coffee appreciation.
The company invested in a micro roaster and opened a carry--out store in the front section of the building, staffed by a full--time employee. To promote the store, they sent out direct mail coupons and advertised in the local newspaper.
But like several other OCS operators who went down this route, he was unprepared to make the full financial commitment that it required. There was no sit--down area in the store, and he was unable to staff it in the evenings and on weekends. “There wasn’t enough business to make it profitable,” Smith said. “We just didn’t have the location you really need.”
A limited coffee store
As a result, he was unable to sustain repeat traffic in the store. After three years, he eliminated the employee and reduced the store hours. Walk--in business is now handled by the company receptionist, who is proficient with the micro roaster and the flavoring machine. There is still a “coffee of the day” every day, and coffee grinders and other peripheral items are available for purchase.
“They’re really two separate businesses,” Smith said. “In OCS, you’re really not selling coffee, you’re selling your service.”The micro roaster has allowed Smith to roast custom blends for customers who request it. One golf course, for instance, delights in having its own house blend. “That’s where the fun comes in,” Smith said.
Specialty coffee brings change
The excursion into specialty retailing wasn’t a complete waste, however. It strengthened Pontiac Coffee Break’s coffee expertise, which has proven beneficial as coffee customers have become more knowledgeable. Specialty coffee stores came on the scene in the ’90s, creating a more quality conscious customer. OCS operators, for the most part, had a difficult time convincing customers that the products they sold were of comparable quality.
Pontiac Coffee Break was in a better position than most OCS operators, due to its association with their gourmet store. Consumers are beginning to move to heavier pack weights again, Souden said. In addition to private label packs, they are now carrying 2.5--ounce Starbucks and 2.5--ounce Gevalia.
National brands, while only 15 percent of the total coffee sales, remain important since there are consumers loyal to these brands. Souden noted that Maxwell House is the company’s top selling national brand.
In the meantime, the market became highly saturated. By the early ’90s, there were few viable accounts that hadn’t been serviced by an OCS company.
9/11 strikes, hurting sales
The biggest hit of all came on Sept. 11, 2001. Following the disaster, employers of all sizes began cutting back on expenditures. Around this time, many of the companies in the Greater Detroit area began outsourcing production to reduce their overhead. Pontiac Coffee Break’s sales declined 20 percent.
The 9/11 recession served as a wake--up call. “It’s harder in this business to service as a little guy,” Smith said. The company began scrutinizing its operating costs and consolidated five routes into four.
They began working on a strategic plan to move the company from a reactive to a proactive mode. In evaluating the local market, they recognized the need to cater to more professional offices as opposed to the traditional employer — the manufacturing related company.
They also took a harder look at how well they were motivating their employees. All drivers, known as “route managers,” now receive a commission on all products sold, even though the orders are presold. There is also always a monthly contest that allows the employees to win some sort of extra reward.
Focus on employee development
Management has been holding regular meetings with the employees to encourage all employees to help seek new business. “We tell them it’s their livelihood,” Smith said. “We’re trying to get the employees to see it as their own future.” He tells the employees to take advantage of every opportunity to get the company’s name out when they’re out and about.
Customer service has been fine--tuned as well. There is no automated voice instruction. All calls are answered by a live person during working hours, and the receptionists are authorized to quote prices over the phone. “We get every account that calls here,” Smith said.
The company has also been offering customers e--mail ordering, a recent convenience that many appreciate. An e--mail is sent to every customer weekly, asking them to fill out their order. This gets entered into the delivery log.
The company has upgraded its website, its corporate brochure, and its business cards with more professional art. These improvements not only project a more professional image to the public, but to the company itself. It allows the employees to feel proud of what they do and motivates them to excel.
Educational CD ROM
The most significant initiative recently has been the four--minute audio--visual on a CD ROM the company produced. The presentation explains the benefits of OCS, the company’s product portfolio, and shows the staff taking calls, delivering orders, and cleaning coffee stations.
There are also testimonials from satisfied customers.“We need to get the word out about what we are,” Smith said. “It’s not that expensive to do that.”
Souden said there are three different versions of the CD ROM: the generic one, a Maxwell House/Gevalia version, and a Folgers version. The national brands are offered to offset the cost of the CD ROMs that advertise their products. Pontiac Coffee Break sends these out with samples of the national brand coffee being promoted.
Smith and Souden continue to keep up with new innovations. They are aggressively promoting 2--ounce and 1.5--ounce round filter packs, which they view as being more convenient than the traditional fractional OCS pack.
Smith acknowledged that the round filter pack does not produce the same extraction as a fractional pack, but it leaves no residue in the brewer basket. If all brewers on a given route took filter packs, the driver would spend no time cleaning the brewer, resulting in a fairly significant time savings. He said a 40--stop route could become a 45--stop route.
Because they are seen as a different product from the fractional pack, Smith said customers have less price sensitivity about round filter packs.
Expansion into single--cup
The company recently expanded into single--cup brewers for the first time, thanks to the economies now offered by manual pod brewers. Smith and Souden did not believe earlier single--cup systems were economically feasible.
They recently placed 20 BUNN manual pod brewers on location, some in new accounts and some in existing accounts, and have another 20 on order.
Like several other OCS operations, Pontiac Coffee Break recognizes the opportunity to expand into the home--owner brewer and coffee pod market using the new manual pod brewers. However, Smith and Souden don’t think the manual pod systems will work with every customer.
In comparing the cost to traditional batch brew systems, the manual pod system nearly doubles the cost to the customer. This is certainly good for the operator, they noted, but some customers may need to be sold on the benefits to accept the higher cost.
Another benefit the new pod systems provide is they allow the operator to choose his own coffee supplier. This was not true of the earlier portion pack single--cup systems.
Smith said the Greater Detroit economy is beginning to come back since 9/11, but employers are still slow to rehire workers.
Smith and Souden are under no illusion that the future will continue to be challenging for independent operators. Businesses that need OCS want high--quality service but are still very cost conscious.
With new products and equipment available, Smith and Souden are optimistic they can cash in on the public’s rising appreciation for good quality coffee. In order to make it happen, however, their employees need to be prepared to answer any and all questions and willing to do whatever is necessary to meet customers’ needs.
Pontiac Coffee Break’s strategic plan consists of investing in employee training and upgrading its marketing program to create a higher level of customer appreciation for OCS. Its historic commitment to high--quality coffee and coffee education have already helped establish Pontiac Coffee Break as a serious player in the Greater Detroit market.
