www.AMonline.com 07.07
Quality
coffee
drives OCS
demand
page 46
state of the coffee service industry
OCS sales rise 5
points as quality
drives growth
46
Automatic Merchandiser AMonline.com 07.07
By Elliot Maras, Editor
Chart 1: OCS revenues — 10-year history
4.0
3.5
Billions of Dollars
The OCS “turnaround,” heralded in 2004, continues. Coffee service operators are making headway in their efforts to
cash in on coffee’s new popularity. For the fourth consecutive year, OCS operators raised aggregate revenue, pushing
total sales to $3.925, an all-time high, according to the
Automatic Merchandiser Coffee Service Market Report.
OCS operators are boosting sales in a stagnant customer base by providing better quality coffee and charging
accordingly.
While the OCS industry continues to lag behind its retail
competitors in the vibrant coffee market, OCS operators are
While OCS operators
continue to trail their retail
competitors, a continued
emphasis on better quality
products and equipment
translates into another year
of growth.
3.0
3.15
3.30
3.46
3.63
3.46 3.36 3.39 3.56
3.74 3.92
2.5
2.0
1.5
1.0
0.5
0.0
97/98 98/99 99/00 00/01 01/02 02/03 03/04 04/05 05/06 06/07
Caféjo Café
gaining ground as they invest in more
single-cup brewers and sell more higher
pack weight coffee.
The 5 percentage point increase in
the last 12-month period doesn’t match
the overall retail industry’s gain in coffee sales. Foodservice coffee experienced a compounded annual growth
rate of 15.2 percent over the past five
years, driven by strong growth in the
coffee shop, quick service restaurant
and convenience store segments, according to the market research firm,
Datamonitor. Convenience stores were
the fastest growing single channel.
However, the OCS industry’s recent
gain is comparatively stronger than in
the previous two years. OCS operators
are building sales by generating more
revenue from their existing accounts.
The majority of OCS operators
increased their prices for the third
consecutive year in 2006/2007, as indicated in chart 4. The last three years
marked a significant increase compared
to the previous five years, when on
average, only a quarter of the operators
raised prices.
OCS operators have been more
confident about raising prices for
several reasons. One is the retail pricing
environment.
The retail environment changes
In the fall of 2006, Starbucks raised
its retail prices for the first time in two
years, prompting similar moves by all
the major consumer coffee companies,
making it easier for OCS operators to
raise prices.
The public’s rising appreciation for
better quality coffee also played a role.
The consuming public has become
more interested in better quality coffee,
thanks in large measure to the efforts of
specialty coffee shops.
This year, the National Coffee Association reported for the first time that
daily coffee consumption among adults
surpassed that of soft drinks, according to its Coffee Drinking Trends 2007
market research. This national telephone survey revealed that 57 percent
of American adults drink coffee daily,
compared to 51 percent that consume
soft drinks each day.
Consumption by adults tied last
year’s record of 82 percent, which had
risen from 80 percent in 2005 and 79
percent in 2004. Weekly consumption
came in just under the 2006 record
high, 67 percent versus 68 percent, but
remained ahead of 2005’s 64 percent.
All of the increase in daily consumption occurred in regular coffee, for
which daily consumption increased to
48 percent from 47 percent last year.
Daily consumption of “gourmet”
coffee beverages softened to 14 percent
from 2006’s 16 percent, with subsets
espresso-based beverages off by one
percentage point from last year to 6
percent, and “gourmet” coffee down to
8 percent from 10 percent in 2006.
While these numbers suggest trending toward increased traditional coffee
consumption, how consumers define
“gourmet” – given the wider variety of
coffee options available in the marketplace – may impact the responses
behind the numbers.
Coffee consumption among 18- to
24-year olds jumped 6 percentage
points, the fourth consecutive annual
increase. Consumption among this age
group rose from 16 percent in 2004 to
37 percent in 2007.
The economy strengthens
The state of the economy was also
fortuitous for OCS operators in the last
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07.07 AMonline.com Automatic Merchandiser
47
state of the coffee service industry
Chart 2: composite green coffee prices, 2004 to May 2007
100
60
40
2004
Retail competitors push harder
The intensive marketing by coffee retailers – particularly
specialty stores, quick-serve restaurants and convenience
stores – impacted office managers in a way that benefited
the OCS industry, according to many operators.
Where location managers historically were inclined to
reduce expenditures on employee perks in order to save
costs, in the last two years they recognized the need to
counteract the tendency of employees to leave the work
place for a cup of good coffee. According to the National
Coffee Association, the percentage of consumers drinking
coffee in the office dropped from 64 percent in 2003 to 52
percent in 2006.
The OCS operator, armed with a comparably high quality
coffee, emerged as the solution for office managers seeking
to keep employees in the office instead of going out for
coffee.
The key tool in the OCS industry’s arsenal to provide
good quality coffee has been the single-cup brewer, which
has been the driving force of the OCS industry’s growth in
Automatic Merchandiser AMonline.com 07.07
Apr
May
Mar
Jan
Feb
Dec
Oct
Nov
Sep
Jul
2006
Aug
Jun
Apr
May
Mar
Jan
Feb
Dec
Oct
Nov
2005
two years, particularly the comparative health of professional and service accounts. Much of the nation’s economic
growth has been in technology, finance, health care, and
professional services; industries that rely on OCS more than
manufacturing, which has continued to suffer.
Operators serving markets with high concentrations of
financial, high tech, health care and professional employers, such as the West Coast, East Coast and South Florida,
witnessed particularly strong growth in the last two 12month periods.
And while competition from other retail channels has increased, the end result has been a more educated consumer willing to pay for a good quality product in all settings,
including the office.
50
Sep
Jul
Aug
Jun
Apr
May
Mar
Jan
Feb
Dec
Oct
Nov
Sep
Jul
Aug
Jun
Apr
May
Mar
0
Jan
20
Feb
Cents
80
2007
Source: International Coffee Organization, London, U.K.
Chart 3: Raised prices in the last year, 9-year review
83%
23% 27% 24%
32% 40%
74% 74% 64%
97/98 98/99 99/00 01/02 02/03 03/04 04/05 05/06 06/07
Chart 4: Operator pricing activity, 4-year review
● Raised Prices
● Lowered Prices
40%
56%
2003/04
4%
26%
24%
74%
2004/05
● No Change
2%
74%
35% 64%
1%
2005/06
2006/07
Chart 5: Revenue per cup in cents per cup,
9-year review
5.8¢ 5.2¢ 5.2¢ 6.3¢ 6.2¢
5.8¢
7.1¢
7.7¢
7.7¢
97/98 98/99 99/00 01/02 02/03 03/04 04/05 05/06 06/07
recent years. Several single-cup systems have proven their
reliability, giving the operator the means to offer coffee
house quality coffee.
Single-cup provides a solution
Besides providing good quality coffee, the single-cup
systems have emerged as the most efficient tool for serving
a variety of hot beverages, meeting the demand for different
drinks introduced by the specialty coffee shops.
Besides regular and decaffeinated coffee, today’s consumer also wants milk-based drinks, mocha, hot chocolate
and teas.
State of the Coffee Service Industry
New market research offers consumer insights
The need to do a better job of meeting customer
expectations was documented in 2005 when the National
Automatic Merchandising Association (NAMA) released
some groundbreaking research on how consumers view OCS
coffee. The survey, the most comprehensive OCS consumer
survey ever conducted, found that consumers overall did
not view office coffee as being especially good.
Three quarters of consumers, according to the survey,
did not believe OCS operators provided specialty beverages. About 70 percent ranked OCS coffee as average in
quality. These findings represented both a challenge and an
opportunity.
By providing single-cup brewing systems that provide
high quality coffee, OCS operators have been able to demonstrate that office coffee can be comparable in quality to
what they can buy at a specialty store.
More investment required to meet consumer needs
In order to provide the better quality service, OCS operators have had to invest more money in equipment, product
and employees. The single-cup brewers are more expensive
than traditional batch brewers and most of them also require
more maintenance. In addition, selling these systems
requires a better educated sales person, and servicing them
demands a more qualified delivery/service person.
Meeting these challenges has required a high level of
commitment, particularly in the areas of recruitment, training and employee compensation.
OCS operators have needed better trained employees
at a time when the labor market has not been favorable.
Unemployment has remained below 5 percent for the last
12 months, the lowest rates since the end of 2001. (In
May of 2007, the U.S. Commerce Department reported the
creation of 8 million new jobs since August of 2003.)
While low unemployment helps the OCS industry by
raising head counts in work sites, it also drives up OCS
wages. Operators continued to fight higher costs in payroll
as well as other areas, including health care, taxes, fuel,
products, recruiting and training.
Rising costs and a competitive marketplace gave
operators no choice but to position themselves as coffee
professionals, enabling them to cover their costs with higher
priced products and equipment.
About the survey
The State of the Coffee Service Industry Report is based
on the results of a questionnaire e-mailed to 600 dedicated
OCS operators and 2,700 vending operators with OCS
operations. The survey generated a 10-percent response.
The commentary in this report is also based on telephone
interviews with operators, product suppliers, equipment
manufacturers, and researchers.
The aggregate OCS revenue reported in this study
includes the OCS revenue reported in the State of the Vending Industry Report, which is published in August. The OCS
revenue reported in the vending report includes OCS sold to
Chart 6b: Sales by
type of account,
2006/2007
Chart 6: Accounts by type, 4-year review
● 2003/04
● 2004/05
● 2005/06
2 3 1 7 2 4
Restaurants, Delis,
Bakeries
Convenience
Stores
Government/
Military
5
1
4 5
Schools/Colleges
Percent
Other (Healthcare, Hotels/Motels)
1 1 3 1
Schools/Colleges
2 4 4 3
Retail Outlets
B&I
2 4 4 3
Convenience Stores
23 20
Government/Military
16
B&I
63
24
Offices
63
Restaurants, Delis, Bakeries
54
Offices
64
27
● 2006/07
64
55
54
Percent
Most OCS operators reported that single-cup systems
increased revenues over traditional batch-brew systems by
20 to 30 percent.
Each year, the OCS industry does a better job of meeting the needs of a more educated coffee consumer.
4 3 3 2
7 7 5 5
Retail Outlets
Other (Healthcare,
Hotels/Motels)
Continued
07.07 AMonline.com Automatic Merchandiser
▶
51
state of the coffee service industry
Chart 7: O CS sales by product category,
4-year review
2003/04 2004/05 2005/06 2006/07
Private label coffee
National brand coffee
Espresso/cappuccino
Other coffee*
Total Coffee
Other hot beverages
Soft drinks/juices
Bottled/filtered water
Creamers/sweeteners
Cups/paper products
Other
22%
46
4
0
72
4
7
5
6
5
1
23%
45
4
0
72
0
4
6
6
5
1
20%
38
4
9
71
6
7
4
5
5
4
23%
33
3
8
68
7
6
5
6
6
3
*Of this, almost half was whole bean coffee.
accounts that are primarily vending accounts. The vending
report does not include OCS business handled by dedicated
OCS organizations within vending companies, or in partnership with a vending company.
Cartridge systems dominate single-cup
Single-cup brewers continued to increase in
2006/2007, posting an even bigger percentage point gain
in unit placements (43.5 percent) than in the prior year
(41.5 percent), as indicated in chart 10.
Cartridge-based single-cup systems dominated the
growth in single-cup units for the sixth consecutive year.
These units are more compact than the hopper-based systems, and require a lower initial investment.
In 2006, some of the key manufacturers of cartridgebased systems introduced lower cost models, making them
more economically feasible for smaller locations. They also
expanded product offerings, allowing them to meet more
customer tastes.
The main factors fueling the growth of these systems
are their quality, user-friendliness, product variety, and
proven reliability. These units deliver consistent quality
control.
Another factor is the commitment the key manufacturers of these systems have provided through field sales and
technical support.
Maintaining control of cartridge sales proved problematic for some OCS operators, since the Internet made
it possible for unauthorized providers to sell discounted
cartridges. It forced some operators to monitor sales and
demand that customers honor purchase agreements.
One way some operators were able to enforce purchase
agreements was to charge a machine lease fee if the account did not purchase a minimum amount of cartridges.
The manual pod single-cup systems introduced in
2004, designed to offer the same benefits of cartridgebased systems at a lower cost, have not proven successful,
mainly on account of poor reliability.
The manual pod system manufacturer that sold the
most units also makes pods, thereby emulating the proprietary cartridge model except for the fact that the machine
will accommodate other roasters’ pods.
Homeowner models: no impact
The introduction of homeowner single-cup brewers in
the last two years did not affect the OCS industry in any
measurable way. Some OCS operators sold brewers and
cartridges to customers for their own personal use.
The homeowner market witnessed the same dual reaction to cartridge-based and manual pod systems as the
OCS market, with consumers, as commercial users, opting
for the latter. Cartridge-based systems (sold mainly in highend department stores and specialty stores) increased 50
52
Automatic Merchandiser AMonline.com 07.07
State of the Coffee Service Industry
All single-cup formats grow
While cartridge-based systems have dominated the
growth in single-cup activity, the more established hopper
based systems also posted growth in 2006/2007. The bean
grinding capability of some of these units proved a strong
selling tool. Some units feature more than one bean hopper
for different types of coffee.
Water soluble and liquid concentrate single-cup systems
also continued to gain placements in 2006/2007.
Some operators found it more economical to provide a
water-soluble, single-cup system next to a traditional batch
brewer than introducing a more expensive fresh-ground
single-cup system.
Liquid concentrate systems proved useful in catering
situations, where speed of service is a big concern. Brewer
manufacturers introduced more liquid-based systems for
foodservice applications in recent years, some of which
found their way into OCS locations.
While single-cup continues to “steal the show,” traditional
glass bowl systems posted their first increase in several years
in 2006/2007. This came totally at the expense of gravityfed, airpot and thermal brewers, as indicated in chart 9.
OCS operators have long noted that the decision to use
a thermal/airpot or glass pot brewer is oftentimes a matter
of personal preference.
Airpot and thermal systems offer the benefit of being
able to keep coffee warm for a longer time without burning
the coffee, thus reducing waste.
However, some customers enjoy the sensation of seeing
coffee brew into a glass pot. Some also find the glass pots
easier to clean than metal or plastic thermal containers.
Brand marketing still lacking
The survey once again found that the majority of operators do not have brewers that promote a specific coffee
brand, as indicated in chart 8. This is because most operators want the flexibility to switch coffees in the same brewer.
However, the growth of single-cup systems that require
a proprietary cartridge could give more operators an opportunity to promote the coffee brand on the brewer.
OCS operators underutilize opportunities to promote brands
at the point of sale in comparison to retail channels. Quickserve restaurants, convenience stores and specialty stores all
use in-store marketing tools to promote coffee brands.
Chart 8: Branded Brewer Perspectives
Operate brewers that specifically
promote coffee brands
2%
Believe branded equipment
improves sales, 2006/2007
Don’t
Know
Yes
36%
64%
No
No Opinion
30% 68%
Yes
No
27%
No
33%
40%
Yes
2006/2007
2005/2006
Chart 9: OCS brewer count, 4-year review
● Plumbed-in & Pourover
● Airpot & Thermal 10
● Single-cup
18% 63%
19%
18%
15% 67%
2005/06
2006/07
10%
15%
75%
2003/04
17%
19%
64%
2004/05
Continued
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07.07 AMonline.com Automatic Merchandiser
53
© 2007 F. Gaviña & Sons, Inc.
percent while manual pod systems (sold mainly in mass
merchants and supermarkets) declined 50 percent, according to Homeworld Business, a retail trade publication.
state of the coffee service industry
Product mix holds steady
The overall product mix did not change significantly in
2006/2007, as indicated in chart 7. From 2001 to 2005,
the survey reported a decline in private label as a percent
of total sales. This was attributed to the increase in recent
years of cartridge-based single-cup brewers, most of which
do not use private label coffee, and an increase in the availability of specialty retail brands.
In 2006/2007, private label coffee posted a slight
comeback. This can be attributed to price increases by
national brands; OCS operators usually have more leverage
buying private label coffee.
Private label coffee is not only more profitable; it also
allows an OCS operator to provide a proprietary product,
thereby strengthening his customer relationship.
“Other coffee” sales, which include whole bean coffee, flavored coffee, liquid-based coffee and varietals, also
gained in the last 2-year period. This, too, can be attributed
to the gain in single-cup systems which offer more product
variety.
Coffee remains the mainstay of the OCS business, but
it has declined as a percent of total sales, due partly to the
increased variety available in single-cup systems. The noncoffee segment that posted the greatest gain was “other hot
beverages,” which include teas, hot chocolate and chais.
The gain in these products can be traced to the growth in
single-cup systems.
Teas have posted gains in all retail segments, largely on
account of their association as a healthy product. Health
and nutrition issues have become increasingly important to
refreshment service providers.
Chart 10: Estimated single-cup brewer placements in the U.S., 6-year review
Each number represents total accumulated placements as of the given date.
Marketer
Product(s)
2001/2002
2002/2003
2003/2004
2004/2005
2005/2006
2006/2007
Aquabrew
Caféjo
0
0
0
1,700
5,250
11,250
Bodecker Brewed
Bodecker
0
0
0
0
300
2,100
Café Excellence LLC
Café X Milano
0
0
130
146
250
250
Cafection
Avalon
13,000
16,000
19,500
22,500
24,350
28,150
Crane
Café System/Genesis
11,000
12,000
12,000
12,000
11,150
12,150
Filterfresh
Filterfresh/Keurig
26,500
30,000
35,000
40,000
33,337*
33,337*
Flavia
Flavia
32,000
40,000
62,000
90,000
140,000
250.000
G.P. Rossi
Robopod
0
0
350
400
1,000
0
Keurig
Keurig
30,000
33,000
60,000
93,651
140,000**
192,080
Kraft
Gevalia
1,200
1,300
1,600
2,200
3,500
3,500
Newco
Smartcup
Rheavendors
Lionness, Cino
Saeco USA
Saeco, Estro
Sara Lee
Starbucks
VE Global
Solutions
VE Global
Solutions
0
0
0
300
1,000
1,800
516
1,000
1,500
2,694
3,194
3,644
8,000
13,000
18,000
20,000
22,000
24,200
Douwe Egberts
0
0
200
500
775
775
Starbucks
0
0
NA
1,300
2,000
5,000
Venus, Cypris, Juno
1,000
2,400
3,600
5,000
9,500
12,500
Brio,Colibri,
Koro, Korinto
8,000
10,000
12,500
25,000
34,000
42,000
Other
0
0
3,600
3,800
5,800
5,800
Total
129,732
143,400
217,900
309,221
437,784
628,536
* Does not include 14,750 Kuerig units Filterfresh operates.
54
Automatic Merchandiser AMonline.com 07.07
** Includes 17,000 homeowner units
State of the Coffee Service Industry
Allied products also increased as a percentage of sales
in the last 12-month period, largely on account of price
increases. Many of the allied segments – creamers, paper
goods, Styrofoam and plastic products – posted bigger perunit cost gains than coffee did, resulting in a bigger share of
total sales.
Cause driven coffee evolves
OCS operators have also begun to recognize rising consumer interest in coffee-related environmental and social
issues. This translates into a growing interest in products
that benefit the physical and social environments.
While the demand for environmentally and socially beneficial products isn’t strong, operators found that offering
these products can win extra sales.
Environmentally beneficial products include recyclable
packaging materials. As local governments have mandated
waste recycling, more businesses are interested in purchasing recyclable products, even if they cost more. Several
operators noted that recyclable filter papers, packaging
materials and other products have become popular with
customers.
Cause-driven coffees also fit into this category. Organizations such as the Rainforest Alliance focus on conservation and ecologically-friendly farming, in addition to fair
working conditions. More and more coffee roasters have introduced products that are certified by these organizations.
Overall consumption of cause-related coffees have
increased significantly in recent years. While most OCS operators have not reported this to be a big seller, those that
went out of their way to offer these products found there is
a market for them. Roasters have added more cause-related
OCS coffees in recent years.
Some OCS operators believe that being knowledgeable
about such products enhances their professionalism.
Future promises more growth
Single-cup continues to drive the OCS industry’s sales.
Given the fact that only a minority of locations are served
by single-cup systems, it’s a good bet that these units will
continue to grow in the next few years.
In order for operators to gain the full benefit of state-ofthe-art brewing systems, they need to continue to invest in
training and in salaries. OCS operators are learning they need
to invest aggressively to provide the best quality service to a
consumer that is better educated than ever about coffee.
The OCS industry, launched as a work site convenience in
the 1960s, has grown into a specialized service. OCS operators
have to improve their professionalism to compete against other
retail channels that continue to increase coffee sales.
Marketplace
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