Quality Enables OCS to Grow With the Coffee Market

Feb. 7, 2008
OCS operators and suppliers find that by using better products and equipment, they can cash in on a growing coffee market.

Various market reports have indicated that coffee sales are rising, thanks in large part to a higher consumer appreciation of coffee. While coffee houses are credited with much of this growth, other retail outlets such as quick-serve restaurants and convenience stores have weighed in and are competing for this business as well.

Locations where respondents have had coffee in the past month, August 2007. View this chart in PDF format.

Increased retail competition has affected OCS operators, but recent research indicates that OCS operators remain a key player. A recent consumer survey by the Mintel Group revealed that as many consumers are getting coffee at work as at quick serve restaurants, and convenience stores actually trail the work place as a destination. (See the chart on the opposite page.)

OCS operators and roasters mostly welcome the marketing that retailers are doing since it places a subliminal message for a product that many OCS operators can provide more conveniently.

That’s the consensus of an informal sampling of OCS operators and roasters. Most believe that retail coffee marketing has created a bigger market for premium coffee.

The Automatic Merchandiser State of the Coffee Service Industry Report, published in July, has reported 5 percentage point revenue gains for each of the last three 12-month periods. The report did not track unit sales, but it did note that the majority of OCS operators have raised prices for each of the last three years and that revenue per cup has reached historic highs for each of these years.

The Automatic Merchandiser numbers indicate that higher prices are contributing to higher sales. The survey also found consistent increases in single-cup brewer placements, which typically generate 20 to 30 percent higher sales than traditional batch brew systems.


Roasters and operators interviewed agreed that the growth in sales has occurred in the higher-priced premium segment, which represents about 20 percent of total
coffee sales.

Tim Wayne, category executive for hot beverages and snacks for Procter & Gamble Professional, said total coffee consumption has not changed significantly in recent years; sales gains have reflected the shift to gourmet products which net higher prices. P&G has witnessed this shift in its sales of Millstone, a “super premium” brand, in comparison to Folgers, a mainstream brand.

As a result, P&G is trying to develop a market for what Wayne called “affordable gourmet” coffee with its new Folgers Gourmet Selections. “We believe there is still a significant opportunity in affordable gourmet,” he said. He said this market could double the size of the “super premium” market that presently makes up 20 percent of all coffee sales.

While convenience stores have also upgraded their coffee quality, Wayne, whose responsibility includes all channels of trade, said convenience stores have not moved as aggressively into the higher quality “gourmet” offerings as much as OCS operators have.


Timothy’s World Coffee, which markets to the OCS channel through fractional packs and Keurig K-cups, has been pleased by the growth in the OCS channel which has been driven by quality and convenience, according to Mike Westover, OCS sales manager. The company has expanded its initial 15 K-cups to 40.

“Everybody can have what they want when they want it,” he said. Westover said restaurants cannot offer the same coffee selection as OCS. He further noted that the more recently introduced homeowner K-cups will help build the demand for good quality coffee in the office. “The single cup is here to stay,” he said.

Offices are leading in the area of variety, agreed Brian Bradley, vice president of business development at S&D Coffee Inc., an OCS operator and coffee roaster based in Concord, N.C., which supplies coffee and tea to the away-from-home market.

Bradley said improved quickservice restaurant and convenience store coffee is benefiting OCS because office managers don’t want their employees leaving the work place for coffee. “We hear this time and time again,” he said.

Bradley, whose company’s OCS offerings include pods, claimed that coffee pods are increasing in all geographic regions his company ships to, particularly in urban markets.


These sentiments were echoed by Will Billings, senior marketing manager at Green Mountain Coffee Roasters, who said OCS operators should take note of the upgrades that the quickservice restaurants are making. He noted that McDonald’s restaurants in New England are offering Newman’s Own Fair Trade and organic blends. As a result, more office managers will want to have something similar in the office.

“It’s a pretty persuasive argument to invest to keep people in the office,” Billings said.

Geoff Paul, president of Excelso Coffee Co. in Norcross, Ga., said OCS operators are gaining sales as a result of the increased marketing by foodservice retailers. He noted three reasons for this: 1) OCS operators are providing better quality coffee, 2) OCS decision makers understand the benefit of OCS, and 3) OCS coffee is free to the end user.

Paul is optimistic about OCS in general, and he believes that single-cup systems will continue to grab more sales.

“There’s certainly a gourmet coffee shift going on in every channel of trade,” said Henry Stein, vice president of news business development and commercial sales at Caribou Coffee, which markets its brand through K-cups and OCS fractional packs. “We’ve been pleasantly surprised.”

Stein said darker roast coffees have increased in recent years due to the influence of the coffee shops. Stein echoed others interviewed in noting that OCS sales tend to be lighter roast than other channels because that’s what people prefer in the morning.

Stein said coffees of origin are gaining popularity in all channels as consumers become more educated about them. The same holds true for Fair Trade and environmentally friendly coffees. “It spans the entire gamut of consumers,” Stein said of the diverse offerings. “Offices are definitely a part of that.”

Bob Hale, chairman of Mister Coffee Services Inc. in Toronto and president of Bodecker Brewed, thinks the retail competition makes it more necessary for OCS operators to upgrade their coffee. He estimates 60 percent of his own OCS sales are in single cup, and he expects it will eventually grow to 75 percent.

Hale believes that the retail competitors have a lock on much of the morning coffee. “People go to these places for consistency,” he said. “They get used to a taste. People are creatures of habit.”

Dave Manley, vice president of marketing at Keurig Inc., noted that countries of origin coffees are growing. The Kona K-cup posted the most growth recently.

Manley said the success of the various K-cup brands is giving brands a new importance in the office market. This is true not just for coffee, but tea and cocoa as well.

Manley said the growth will continue for some time. He said while Keurig has experienced rapid growth, it has only penetrated 7 percent of the OCS market. He thinks it could reach 30 percent penetration.

Total U.S. retail coffee sales 2002 - 2007 in billions of dollars & Forecast U.S. retail coffee sales for next five years, in billions of dollars. View these charts in PDF format.


Katie Ryan-Strimbam, the North American marketing manager for Mars Drinks, believes that the pervasive single-cup systems are becoming consumer brands. “We’re bringing the coffee shop experience direct to them,” she said.

The portion control systems are becoming established consumer brands, thanks to their ability to provide consistent quality, variety and convenience.

“In the sense that the brand acts as an endorsement for the operator and the consumer alike, the answer is yes, absolutely,” said Ennio Ranaboldo, CEO and executive vice president at Lavazza Premium Coffees Corp., which offers branded machines and capsules whose reliability and quality are sanctioned by the brand.

Consumers Choice Coffee, a roaster and OCS operator based in Louisville, Ky., has experienced strong growth in both offices and foodservice in the last 10 years, according to Bob Patterson, president. “People are drinking more coffee; it’s pretty amazing,” he said.


Patterson was among several to note that OCS pack weights have increased in recent years as consumers prefer darker roasts and more full bodied blends.

Patterson said the demand for Fair Trade and sustainably grown coffee has been much stronger in foodservice accounts than in offices, but this could change.

“People are drinking more because they find what they want,” agreed Steve Wall, executive vice president at Baronet Coffee, which makes OCS fractional packs and pods. “With one cup, people are coming back to the break room.” Wall, whose company also sells to foodservice accounts, said the foodservice offerings are not as diverse as those in the office.

John Conti, the Louisville, Ky.-based roaster, retailer and OCS operator, said his business is up in all channels and he does not believe his OCS sales are being cannibalized by convenience stores or other retailers.

Conti was one of several roasters who noted that OCS accounts typically buy lighter coffee than foodservice accounts because more of the office consumption is in the morning.

Other observers pointed to the ability of single-cup systems to provide more variety as a key factor in their success.

Tony Scarpino, western regional manager for Diedrich Coffee Inc., which produces Diedrich, Gloria Jeans and Coffee People branded K-cups for the Keurig brewer, said the availability of so many high quality products has resulted in a much stronger office market.

“The snowball effect is taking over,” he said. “Convenience is a big factor with Americans.” Scarpino said the more recent K-cup offerings for the homeowner market are not cannibalizing office sales at all. In fact, he thinks the consumer K-cup market further develops the office market.


Procter & Gamble’s Tim Wayne noted that the recently introduced coffee pods have not done as well in the commercial (OCS) market as at retail (the consumer market). He said no manual pod brewer has gained market leadership in either the homeowner or OCS side. “Pods in general for all manufacturers have really struggled to gain traction,” Wayne said.

Stuart Daw, president of Heritage Coffee Co. in Winchester, Ky., said pod brewers have improved after a shaky start.

Robin White, vice president of marketing at Reunion Island Coffee, thinks pods have a future because they can be manufactured more efficiently than cartridges. In addition, they are biodegradable, which is something that will continue to become increasingly important to customers. “There is huge growth ahead in single cup,” White said.

White also sees growth in Fair Trade and organic products. He said the certifications for these products make strong selling tools, and he pointed out that McDonald’s offers Newman’s Own Fair Trade coffee.

Brian Bradley of S&D Coffee claimed that pods are increasing in all geographic regions his company ships to, particularly in urban markets.

Green Mountain Coffee Roasters, which makes cartridges and pods, sees the cartridges leading the growth, noted Will Billings.

Howard Fischer, president of US Roasterie, which produces fractional packs and pods, said OCS operators are using more point-of-sale materials to communicate their products. He said it is important to educate the customers about higher quality coffee available to the office.

Fischer said retail competitors have done a better job of marketing their products historically, but OCS operators can apply this marketing strategy in an OCS environment.

One supplier and former OCS operator, Don Stoulil, a principal at Wolfgang Puck Coffees, believes the OCS industry still has a long way to go in upgrading its offerings to compete with the retail competition. “Foodservice (coffee) quality is definitely increasing,” he said. “There is a high percentage of (office) customers that are interested in having something better.”

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