The economics of single-cup systems have also become more favorable to many customers despite rising coffee prices.
The higher price of fractional pack coffee in the last 12-month period reduced the price differential on a percentage basis between fractional pack coffee and single-cup coffee. The elimination of wasted coffee in the single-cup system further appealed to cost conscious customers and OCS operators, both of whom noted that more expensive fractional pack coffee has more expensive waste.
While OCS sales have returned to a growth mode, profitability has been a different matter.
Single-cup systems deliver higher sales, but oftentimes, lower profitability. The dominant single-cup systems are the portion control systems, which are more expensive on a per-serving basis but also less profitable.
In 2010/2011, one sign of the impact of portion control systems was the gain in national brand coffee at the expense of private label coffee, indicated in chart 6. This marked the first year national brand coffee gained market share over the more profitable private label coffee in several years.
Hence, while single-cup has the capacity to build sales, the OCS operator needs to manage costs better in order to sustain profitability.
K Cup profits a challenge
The popularity of Keurig K Cups, the dominant single-cup product, has both helped and challenged OCS operators in recent years. The K Cup, the only portion control product that can be in used in both OCS and homeowner brewers, has created the largest following among single-cup coffee consumers.
Where other single-cup brewer manufacturers sought to protect their OCS customers from pilferage by not having a homeowner brewer that accepts the same portion control product as the OCS brewer, Keurig introduced homeowner brewers that accept the same K Cup as the OCS brewer. This resulted in both positive and negative impacts on OCS operators.
On the negative side, OCS operators face more competition for K Cups than they did when OCS was the only channel selling K Cups. Many OCS operators noted the widespread availability of K Cups has reduced its profitability.
Also on the negative side, the temptation to pilfer K Cups for home use is stronger now that homeowners have home Keurig machines.
On the positive side, consumer awareness of the K Cup has fostered a stronger demand for K Cups. By marketing to both workplace and homeowner audiences, Keurig has been able to build the largest audience of any single-cup provider.
In 2010/2011, Keurig’s dominance expanded in both the OCS and consumer markets. Chart 8 shows the large increase of OCS Keurig shipments in 2010/2011.
Homeworld Business magazine, which covers the consumer housewares industry, reported that unit sales of single-serve coffeemakers jumped from 2.7 million units in 2009 to 4.1 million in 2010. The magazine’s staff confirmed that Keurig represents the majority of these units.
The Beverage Marketing Corp., which studies beverage industry trends, reported the number of portion control packs jumped from 2.425 billion in 2009 to 3.61 billion in 2010.
The National Coffee Association (NCA), in its coffee drinking trends report, noted people who buy the portion control system have become more likely to use it to replace their current brewer.
Perception of the single-cup systems overall also improved, moving from 26 percent who think the systems are excellent or very good in 2007 to 45 percent who think the systems are excellent or very good in 2011, NCA reported.
Concern about employee pilferage of K Cups for home use has not been a major factor for OCS operators.
Attempts to offer alternative single-cup systems continued in 2010/2011, demonstrated by the increases noted in chart 8.
Manual pod systems, which are portion control systems that, unlike cartridge-based systems like Keurig, allow operators to source different coffee suppliers, increased in 2010/2011. Operators agreed that the manual pod systems have improved in quality in recent years.