Many operators who worried about the margin erosion of single-cup caused by competition from the homeowner market noticed that the rising demand for single-cup delivered higher volume which in many cases offset the impact of lower profit margins.
Single-cup brewers have become the fastest growing retail coffee format. The single-cup category rose 105 percent in U.S. food stores over the last year for the period ending June 10, 2012, according to Symphony IRI Group, Inc., a research firm. Single-cup was the second fastest growing sub-category overall in dollar sales within total U.S. grocery.
Homeowner single-cup has created new opportunities for OCS as well as a new source of competition.
Retail competition for single-cup cartridges became fiercer in the last year as more retailers began carrying single-cup products.
This downward price pressure resulted in a slight decline in single-cup prices, noted in Chart 4c. The decline from 42.5 cents to 41.8 cents per cup was not significant and, at 0.7 cents, it falls within the margin of error. The fact remains that single-cup coffee, the fastest growing OCS category, did not net higher prices in a year in which overall OCS prices increased.
The inability of OCS operators to raise single-cup prices challenges operator profitability.
The growing customer demand for single-cup coffee delivered volume gains for some operators that were significant enough to offset the lower margins. Some operators believe that gross dollar gains are more important than margins.
The “dollars versus margins” debate is not new in OCS.
Fraction pack value changes
Another positive result from the growth of single-cup was the price differential between single-cup and fraction pack coffee. Rising customer awareness of single-cup coffee, with its higher prices, gives fraction pack coffee a stronger cost/value perception since it is less expensive. This, coupled with the increased offerings of retail coffee brands in OCS with perceived high product quality, supported higher fractional pack prices.
Chart 4c indicates consistently higher prices for fraction pack coffee through the recession. The traditional “five cents a cup” mantra that ruled OCS in its earlier years has long been relegated to the history books.
Fraction pack sales also carried higher profit margins than single-cup sales. A sizeable portion of fraction pack coffee is private label, which is more profitable than national brand coffee.
Falling green coffee prices in 2012, indicated in Chart 3, benefitted private label profitability.
The growth in single-cup contributed to the gain in national brand coffee for the second straight year, indicated in Chart 6. The dominant and fastest growing single-cup systems are cartridge-based systems, such as Keurig, Flavia and Tassimo, which carry national brand coffee.
National brands have posted a slight comeback since the recession began. National brands lost market share in 2009/2010 for two reasons. One reason, already noted, was that the demand for single-cup slowed in the first two years of the recession, curtailing the growth of national brands.
The second reason was that green coffee prices remained steady through most of 2009/2010, encouraging OCS operators to offer more profitable private label alternatives. By offering private label, operators could provide coffee that was both less expensive to themselves and their customers.
In the last two years, single-cup has rebounded rapidly, reviving national brands and rechallenging OCS operator profitability.
Single-cup systems that allow operators to use private label coffee, such as hopper-based and soft pod-based systems, also increased in recent years, indicated in Chart 8. However, the cartridge-based systems (Keurig, Flavia and Tassimo) increased the most. Keurig and Tassimo also have strong market positions in the homeowner market, which points to continued growth in the work site environment for these products.
The growth of the homeowner market has created a new market opportunity for some OCS operators. While many operators complained about competition from the homeowner market and a new reason for customers to pilfer coffee at work, some operators turned this perceived threat into an opportunity for ancillary sales.