Coffee sales rise, so do costs

Sept. 8, 2014

Download the report as a PDF including charts

Overall revenues for the office coffee service segment continued to climb from 2013 to the start of 2014. While the aggregate segment revenue for operators who provide OCS grew at a more modest rate of 4 percent than the previous year, the total OCS sales revenue number of $4.50 billion is still a record high for the last decade (chart 1). Operators report three main drivers of the rise in coffee sales. The first is an increase in the number of workplaces offering a beverage program to employees and increasing office populations as the economy in many areas improves. The second is the strong demand for single cup among end users, along with the wider availability of brewers that create specialty coffee lattes and cappuccinos. Finally, OCS providers report that the consumer is more educated than ever before about the quality of coffee that they drink, and are therefore more willing to pay for it.

The findings of the 2014 Automatic Merchandiser and VendingMarketWatch.com State of the Coffee Service report are based on more than 180 operators from across the country who reported on their OCS businesses. Full-line vending operators, OCS operators who offer vending and OCS-only operators provided the data and insight into the coffee service channel, which continues to break sales records for a fourth straight year.

OCS pulls up totals

More than 70 percent of OCS providers report a rise in total operation sales in addition to increased coffee sales (chart 2). Indeed, OCS was reported as the strongest segment of growth with many operators indicating rising coffee sales balanced out stagnant or declining segments, such as vending. However, while OCS sales increased, operators saw margins squeezed by the prices of green coffee. Several operators indicated concern about how to handle price fluctuation. Many called the pricing volatile. The price of green coffee reached its most recent peak in April of 2014 at 170 cents per pound, according to the International Coffee Organization (ICO), see chart 3. It was difficult for OCS providers to quickly recover that nearly 70 cent jump from the last quarter of 2013 especially when the price continues to fluctuate. Reports of drought in coffee growing countries and crops destroyed by coffee leaf rust threatened to drive the price of green coffee higher, while other countries announced coffee surpluses, with more than enough crop to meet demand.

About half of operators reported raising prices in an attempt to recover profits as the cost of coffee increased, although not by a significant amount (chart 4). The national average revenue for fractional pack coffee was relatively flat at 13 cents per cup, compared to 12.9 cents the year before. Single cup revenues increased a bit more, with prices up 3.4 cents to reach 46.5 cents per cup.

Many operators report being forced to implement a combination of raising prices and absorbing the increased costs (chart 3b). Competitive pressures from other operators, paper supply companies and direct competition from Keurig Green Mountain themselves. Both the higher costs and location price points demands has also affected the types of coffee operators are selling. In the past year, OCS providers report an increase in private label coffee, which is generally a less expensive option than premium national brands, which slipped in share of sales for 2013/2014.

Local roasts meet demands

Possibly a more surprising category change, however, is the emergence of local roasters as a 12.5 percent share of sales (chart 5). This is the first year that the AM/VMW State of the Coffee Service Industry report has included local coffee brands, a decision based on early indicators of this growing category. Based on operator insights, locally roasted coffees are less expensive than comparable roasts and blends of the same gram per cup. In addition, local roasters are noted as able to provide a better tasting coffee as there is less time between its roasting and consumption. Operators also said that part of the popularity of local coffee brands is the local aspect. Several operators described that customers like to support their community, and coffee can be a positive way to do so.

Single-cup remains strong contender

Another new category in the 2014 State of the Coffee Service report was the addition of single cup to the product categories making up OCS sales. Operators report that over the past year, single-cup has driven revenue increases, but lowers the profit margins in doing so. Single-cup coffee accounts for 13 percent of OCS sales (chart 5). That is more than the 12.5 percent from local coffee brands and approaching the approximately 20 percent of national and private label coffees.

As single-cup coffee increases in sales, so does the placement of single-cup brewers. These countertop, brew-by-the-cup machines account for 22.3 percent of brewers operators report placing on location in 2013/2014 (chart 6). As single-cup is the most expensive OCS option, that likely kept the increase in placements modest with only a 2.2 percentage-point increase over the prior year. Despite the number of placements, operators unanimously report that locations are inquiring about single-cup options and prices when searching for coffee service. Operators have seen users enthusiastically use single-cup systems if the location will pay the higher cost.

One way operators are offering single-cup to locations with tighter budgets is with bean to cup systems. These systems, such as the De Jung Duke and Cafection Enterprises Avalon, can offer single-cup but with a lower cost per cup and are slowly gaining market share (chart 7). Pod brewers, such as Newco and Bunn are also showing positive growth.

The leaders in the single-cup brewer OCS marketplace remain Keurig Green Mountain with the Keurig brewer and Mars Drinks with the Flavia beverage station, according to reports from operators. The variety of coffee available to these systems—as well as the ability for consumers to make coffee-based specialty drinks—are key benefits for the consumer.

Locations vary

In areas where the economy is improving, businesses are offering more beverage programs, according to operators. However, many locations are also price sensitive. Operators noted locations have gone to extremes. Either locations want premium products and good service, or the location is focused mainly on price. Fewer locations are balancing both, compared to previous years. If price is the location’s primary concern, operators have found it difficult to price the coffee for good margins.

Most operators report serving more locations this past year – 57.7 percent of OCS providers have increased the number of locations they service. Only 8.7 percent indicated they decreased locations (chart not shown).

Service to medium-sized locations is reported to be decreasing. Operators indicated that for the past year, they reduced service most often at accounts with 11 to 49 employees due to layoffs and financial challenges of the location (chart 8). Service was increased most often in the accounts with 50 or more employees.

The type of account has also shifted in the last year. Operators report an increase percentage of their OCS sales industrial plants, restaurants, convenience stores, schools and retail (chart 9). Coffee providers who serve large military and government accounts reported revenue declines as a result of the government shutdown. The aggregate sale of coffee in offices has also declined, although this is not the case in every area. One operator noted that office sales are declining as a result of the fact that there isn’t the previous amount of appreciation for service in the traditional office workplace culture any longer. Other operator are struggling with large offices demand an OCS operator carry a greater array of nontraditional OCS products, especially in urban areas. Geography has a lot to do with the specific demands of the OCS provider.

Consumers are more educated about coffee than ever before and opting for gourmet coffee choices. The National Coffee Association (NCA) reports that 34 percent of Americans consume a gourmet coffee beverage daily, up from 31 percent in 2013, according to the NCA National Coffee Drinking Trends (NCDT) market research study. Daily non-gourmet coffee drinking is down to 35 percent, a drop of 4 percentage point from the year before.

Coffee ends strong

OCS providers had another good year. The improving economy has allowed locations to increase employee counts and put a focus on coffee that grows its demand in the workplace. Single-cup is gaining market share and increasing sales as more users focus on individual taste preferences and the ability to create coffee-based drinks. A saturated marketplace remains a challenge for operators especially among price-sensitive locations who shop for the lowest cost without regard for service or margins. Still, local roasters and bean to cup systems are some emerging tools operators are using to meet the end user’s gourmet coffee palette while maintaining the price set by the employer. It’s a balancing act, especially with the future cost of coffee so uncertain. Right now, however, OCS remains a strong business thanks to the coffee-smart consumer and multitude of brewer and coffee options.