Single-cup options expand, offering more tools to cash in on specialty coffee

Feb. 1, 2005
Single-cup concepts continue to increase.

While the specialty coffee industry has enjoyed rapid growth in recent years, the OCS industry has been slow to capture its fair share of these sales. Developing delivery systems for the office that replicate the convenience, variety, quality and overall value of the specialty coffee shop -- in a cost-effective manner -- has not been an easy task. Operators and manufacturers have sweated through years of testing numerous delivery systems.

View Specialty versus traditional coffee consumption, 3-year review (Chart A) and Out of home coffee consumption among different age groups, 2-year review (Chart B)

By 2002, one concept showed particular promise. The portion control brewers from Keurig and Flavia were less costly than the older hopper-based brewers and provided an excellent tasting product. In addition, they could provide variety, and they were physically compact, low maintenance and convenient.

The coffee itself was contained in portion control packs which were more expensive on a per-cup basis than any OCS coffee concept, but they still allowed the operator to make a reasonable profit in many locations. The only downside, as far as many operators were concerned, was the machines required a proprietary product.

OCS operators were accustomed to relying on a single coffee supplier. Once they bought the brewer, they reasoned they would be at the mercy of the supplier's coffee prices. This didn't sit well with many OCS operators.

Portion pack systems prove popular

Nonetheless, the portion control pack systems proved popular. Keurig and Flavia both doubled placements from 2001 to 2004, according to the Automatic Merchandiser State of the Coffee Service Industry Report, published in July 2004. The Gevalia portion pack system marketed by Kraft Vending & OCS has also picked up momentum in the past year, noted Steve Hyde, vice president of sales at Newco Enterprises Inc., which makes the machine.

Several operators interviewed for this article went as far as to say that portion control systems have saved their business.

In the meantime, bulk hopper, single-cup manufacturers have continued to improve their systems. Bean grinders allow operators to serve whole bean coffee and the operator can adjust the grind to meet customer requests. Features include multiple hoppers to offer soluble in addition to whole bean products, hot chocolate and hot water spigots.

While hopper systems haven't grown as fast as portion control pack systems in the last three years, the State of the Coffee Service Industry Report indicated these systems have also posted gains. Single-cup as a whole proved itself to be the OCS operator's answer to the specialty coffee shop.

2004: progress noted at NAMA Expo

On the trade show floor at the 2004 NAMA National Expo in Chicago, operators witnessed plenty of progress. There were bulk hopper systems with bean grinders that were more compact. There were downsized portion control dispensers, including some with pourover options. Most prevalent of all were pod systems: machines that brew a disposable pod of coffee at just the right temperature.
Single-cup systems were no longer physically too big, complex and expensive.

The new pod systems are similar in concept to the portion pack dispensers. One difference is that the brewing does not occur within an enclosed disposable chamber, but in a permanent section of the machine. Only the pod, not the chamber, is disposed. The machines are simpler, contain fewer parts, and are less expensive than the portion pack systems.

But more importantly, the pod systems do not require proprietary coffee. The equipment manufacturers designed the systems to brew a single pod -- 57 to 61 millimeters in diameter -- that is non-proprietary. The pods, which look like smaller versions of the pods provided with automatic drip brewers in hotels, are easy to produce, and are presently available from numerous coffee roasters.

Pod system advantages

The pod brings two key advantages to the table; it is non-proprietary, meaning the operator does not depend on any one coffee supplier, and the machines are competitive in price with standard batch brew systems.

The introduction of non-proprietary product has been a long-time wish of many OCS operators who saw this as a disadvantage to Keurig and Flavia. However, the openness of the system means less quality control. Skeptics note that consumers will be able to buy pods at the supermarket sold in bulk and use them in office pod brewers. The result could be a less than satisfactory experience.

The poor quality of the newly introduced homeowner pod systems is another concern. Skeptics wonder if the negative reviews that have met the homeowner pod systems from Melitta, Black & Decker and Philips portend experiences with commercial pod systems.

These homeowner systems have encountered the following issues: 1) Inconsistent reliability of machine construction, 2) Inconsistent brewing temperature, 3) Inconsistent coffee volume, and 4) Messiness resulting from damp pods not being removed immediately from the brewer.

These issues shouldn't concern OCS operators provided they pay attention to customer service.

Established manufacturing players come forth

To date, five established U.S. equipment suppliers have introduced commercial pod systems: Bunn Corp., Grindmaster Corp., Newco Enterprises Inc., AquaBrew Inc. and Vendors Exchange International Inc. Other manufacturers are in the planning stage.

The fact that established players are offering systems has generated excitement among operators. The pod brewer has the potential to rejuvenate OCS sales in what many have characterized as a mature market. Given the lower price tag of most of these offerings, many operators believe the pod system can generate a reasonable return on investment in accounts that have historically been viewed as too small for traditional OCS.

Pod systems offer a lower investment not only in equipment, but in product as well, which means they can be priced below the portion packs. Most pods cost between 18 and 22 cents, versus an average that approaches 30 cents for portion packs.

"Our game plan is to put them (pods) in accounts with fewer than 15 people and ship product UPS," said Mike Selvaggio, co-owner at Old Time Coffee Services, McKees Rocks, Pa. "Smaller offices are the future." He reasons he can sell 200 cups a month at 42 cents a pod, generating $80, on the low side. This compares favorably to a traditional batch brew system; in the same location, he would sell one case of fraction pack coffee a month for $33.

Capital outlay is also less. With the pod system, Selvaggio doesn't need five or six thermoses to provide variety to a location, as he would with a batch brew system. His total investment will be about $150 for a machine, plus $50 for a pod rack. Pod racks are available from Holiday House Distributing Inc.

Selvaggio recognizes that the first pod units have had some quality issues, but he said the manufacturers have been responsive to his concerns.

An analysis of incorporating pod systems into a route with no single-cup machines is provided on page 42 from industry consultant Ken Shea.

Uniform pod spec arrives

The key development has been the uniform pod, noted Richard Crichton, manager of sales development at Java Trading Co., which supplies pods. The roasters and equipment manufacturers specifically wanted to come up with a pod spec that would be compatible with all pod machines.

Crichton said the pod systems will bring incremental growth. He said the systems will generate 50 percent new sales in existing locations; 30 percent will be from expanded product selections, while 20 percent will be the fact that employees won't be leaving the office. "The key to this business is variety and quality," Crichton said.

"Our mistake in the office (as opposed to the coffee shop) is we served regular and decaf (and no specialty coffee.)"

Operators note pod systems's benefits

Community Coffee Co., a Baton Rouge, La. roaster/retailer/OCS operation serving the Southeast and Southwest, sees the pod as a major OCS innovation. Matt Saurage, executive vice president, said his company has never used a single-cup system before, but believes the pod can guarantee product quality and, unlike the portion pack systems, does not tie the operator to any one provider. Community Coffee will roast its own pods.

"We recognize the pod system as ideal for our company and the industry," he said. "I'm very confident in the technology." To date, the Bunn systems he has used have been reliable. Saurage likes the fact that the units are simple and don't have a lot of moving parts.

He said the units will bring incremental sales to existing OCS accounts.

These sentiments aren't shared by everyone, however.

"We haven't seen any equipment that just knocks our eyes out," said Howard Chapman, vice president and office beverage division manager at Royal Cup Inc., an Atlanta, Ga.-based roaster/OCS operation. "Equipment development has a way to go." He suspects the pod equipment manufacturers were influenced by the homeowner models, which have not proven successful to date, even among homeowners.

Pods versus portion packs

View Coffee service route analysis, pod machines versus no pod machines

Chapman is one of many operators who feels the portion pack systems have already set the standard for quality and reliability, and the pod systems have yet to make the grade.

Randy Pickus, general manager at Medallion Coffee Service, Warrensville Heights, Ohio, said the pod brewer makers have been responsive to his concerns.

The pod systems mark Medallion Coffee Service's first major foray into single-cup. The older hopper-based systems are too expensive for the available locations in the northeastern Ohio market that Pickus serves.

Another factor encouraging operators to consider pods is the marketing that the homeowner system manufacturers are doing, which they think will rub off on the commercial users.

Impact of homeowner models

Dan Ragan, president of Joe Ragan's Coffee Ltd., Springfield, Va., thinks the homeowner pod system manufacturers have done more to educate the market than all of the earlier single-cup systems. Hence, he believes the pod offerings are an option that OCS cannot ignore.

"It's in every circular that any retailer has out," Ragan said. "It's getting more known throughout the U.S. every day." He believes pod systems are an easier sell than any other type of single-cup, even though his company offers all types of systems.

For Ragan, the pod system is one more option to offer customers. Because he roasts his own coffee, he can provide the costlier hopper units more economically than other operators. The hopper units do require more service, but Ragan likes the fact that the electronics allow him to make sure there is no unauthorized coffee being placed in the machine. This is an advantage that the portion control systems and the new pod systems don't offer.

Entr?e into smaller accounts?

Chris Nachtrieb, owner of Chris Coffee Service, Albany, N.Y., believes the pod systems will allow OCS operators to serve more small accounts, but warns operators that the potential profit in smaller accounts is not the same as larger ones. While the pod system lowers the investment in the account, the account that cannot justify a Keurig brewer is not big enough to produce the same returns as the account that can justify the Keurig.

Thomas Miller, owner of Thomas Miller & Co., Calmar, Pa., has already witnessed this with the B-100 Keurig unit, which is smaller than the original Keurig machine. "You've got an extra sale, but they're only going to buy one or two cases of Keurig coffee a month," Miller noted.

Who is the pod customer?

Nick Lazaris, president of Keurig Premium Coffee Systems, said he isn't sure that the pod system's customer will be the same as the portion pack customer. He pointed to a disparity in the results of surveys done of the two groups.

A survey of consumer pod system users found that most are looking for something that is "hot, black and fast." The Keurig customer, on the other hand, is looking for more.

Pod technology continues to evolve, however.

W.P. Coffee Co., the Seattle, Wash.-based franchisor of Wolfgang Puck OCS coffee, has been studying pod systems for years, and is going to be introducing a proprietary pod brewer, noted Don Stoulil, a principal in the company. The company initially offered a pod system made by Italy-based W. P. Rossi S.p.A., but currency exchange issues created some problems.

W.P. Coffee Co. is as concerned as anyone with the quality of the product, Stoulil noted, and the pod system can deliver. "Ultimately, it's what you put in there," which includes the quality of the roast, the brew, and how well the pod is packaged.

Does perception favor portion pack?

Scott Aalbers, sales manager for OCS at Texas Refreshments in Houston, Texas, said whether or not pods deliver the same quality as portion pack systems, the latter will enjoy a perception of superior cleanliness since the brew chamber is disposed. Nonetheless, he realizes the pod systems will allow him to get new accounts. He also thinks the homeowner systems will build consumer demand.

"The reality is that there is a market," said Brent Garson, president of Vendors Exchange International Inc., one of the few companies offering both pod and hopper-based systems. "We came to the conclusion that pods have an advantage in that they allow the consumer to choose the particular variety that they prefer, albeit they don't make the milk-based drinks that have proven popular with consumers, and as with anything packed per serving, the cost is dramatically higher (per serving)," he said.

Not all pod systems have the same features or the same price points. The AquaBrew Caf?jo, for instance, costs more than the Bunn, Grindmaster and Newco units, but also offers a pod ejector. "We designed our products to compete head-on with Keurig and Flavia," said Patrick Rolfes, president. He maintains his machine is not targeted to the same accounts as the other units. "Our customers want the 'A' account. That's what my accounts have come to us asking for."

More options for operators

"There's going to be an opportunity to reach more customers than ever before," said Dan Cignarella, senior marketing manager at Green Mountain Coffee Roasters Inc. Green Mountain produces many of the Keurig K-Cups, and is also offering several varieties of fair trade and shade grown pods for commercial pod brewers. He said the pods will work in all the commercial units on the market to date.

Like many of the other pod manufacturers, Green Mountain plans to sell pods to the homeowner market as well. Cignarella said that unlike the commercial pod market, there is no uniform standard pod size for homeowner units, which is one factor preventing his company's entry into that market at present.

Most operators were not concerned about losing pod sales to retail outlets. While many of the retail pods will fit in commercial machines, the roasters are pricing pods in such a way that retail will not undersell the OCS operator.

Most OCS operators were not concerned about pilferage for home use, either. OCS operators already faced this hurdle -- successfully -- with fraction packs.

Will retail pods affect OCS?

One concern that several operators raised was the fact that retail pricing could affect the price point they will be able to charge for pods. The consumer pods are similar in size to commercial pods. However, it is more likely that competition among OCS operators will determine OCS pod prices.

Meanwhile, the hopper systems continue to provide certain advantages.

Starbucks Coffee Co., which has increased its presence in the OCS market, provides a fully integrated, bean-to-cup, single-cup system that ensures a Starbucks quality cup of coffee in the office. The company has placed about 1,000 of its proprietary single-cup machines, called the Starbucks Interactive Cup? brewer, in the last year, which has exceeded expectations, noted Sean Kell, director of office coffee and emerging channels.

Ladd Little, owner of L.C. Vending Inc. in San Antonio, Texas, thinks being able to adjust the grind and the gram throw are important advantages, as not all customers want the same product.

In addition, the electronic data that his Cino machines from America Vendors Co. (Rheavendors) allow him to know exactly what products customers are buying at each location.

Hopper units have their own benefits

The ability to download sales by product also gives Little information that the customer often appreciates. "It's to our advantage to know and the customer's advantage to know," he said. "A lot of companies don't give them that information and they don't know what the coffee is costing them."

The company is manually recording the meter readings on its handhelds, tracking all products sold.

The data his driver records on their handheld allows him to compare servings to the amount of coffee that the customer purchases. This will alert him if someone at the location brings in coffee they bought elsewhere. Because the sales vary a lot by location, it helps to track what products are selling best in which location.

This is an advantage that only the hopper systems presently offer.

Andrew Joyce, national sales manager at Saeco USA, agreed that the ability to monitor product mix is important. "There's a lot of variance (in location preference)," he said.

"It enables the opportunity to set up in such a way as to maximize return."

Some operators insist that hopper brewers can deliver better quality coffee than portion control or pod systems. Hopper units have not grown as fast as the portion pack units, but they remain the largest part of the single-cup market.

Steve Danzig reported that his 14 Saeco 8P machines in Spokane, Wash. continue to do well. "With the continued growth of premium coffee drinks, there's still so much growth," he said. "The consumer is educated today better than ever before." He noted that 8-ounce servings at $1.50 compare favorably to the $3.00 being charged at retail.

Water-soluble systems have increased in recent years as well.

Soluble coffee improves

John Jell, business development manager at Nestl? FoodServices, said the company has patented a process to improve the aroma in its coffee. The company has conducted taste tests at the last two NAMA National Expos, and NESCAF? soluble coffee beat out the ground coffee both times.

Coffee Solutions Inc., based in Miami, Fla., has placed 120 Nescafe machines in less than a year, noted Patrick Johnson, general manager. The high concentration of Hispanics makes Miami a good market for this product, since Nescaf? is well established in much of Latin America.

Liquid concentrate systems improve

Suppliers of liquid concentrate systems also claim to have developed better tasting coffee. This concept has long been used in catering and concessions, where speed of service is often more important than product variety.

Ron Fuelner, owner of Douglas Distributing LLC in Salt Lake City, Utah, said the Douwe Egberts liquid concentrate brewers have found a place.

"In certain applications, it has been a perfect fit," he said of the system. "We were always challenged to come up with a fresh-brew system for accounts with people taking a break all at once."

With single-cup options proliferating, the OCS industry is poised to cash in on specialty coffee in a major way. Operators are increasingly finding they need to offer the benefits of increased variety, superior convenience, and better quality coffee in order to compete with not only the specialty coffee stores, but with convenience stores and fast food restaurants.

The specialty coffee industry has raised the bar for all coffee providers, and the OCS industry has no choice but to provide single-cup brewers.

For more information, contact:

Absolute Coffee Co. 215-526-2201
AquaBrew Inc. 800-888-2739
Bunn Corporation 800-637-8606
Cafection Enterprises Inc. 418-650-6162
Douwe Egberts Coffee Systems 919-469-0327
Flavia Beverage Systems 800-882-6629
Green Mountain Coffee Roasters, Inc. 888-879-4627
Grindmaster Corp. 502-425-4776
Holiday House Distributing 813-929-0909
Ken Shea & Associates Inc. 636-441-6685
Keurig Premium Coffee Systems 888-CUP-BREW
Kraft Vending & OCS 847-646-6933
Newco Enterprises 800-325-7867
Procter & Gamble Inc. 513-983-1100
Java Trading Co. 425-917-2920
Saeco USA 800-933-7876
Sara Lee Coffee & Tea 800-373-6705
Vendors Exchange International Inc. 800-321-2311
W.P. Coffee Co. 949-548-1688


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