Coffee Sales Percolate Despite Rising Prices

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Coffee Sales Percolate Despite Rising Prices

By Laura Liebeck - 08/15/2011

C-store retailers are getting innovative to overcome increased commodity costs

Rising coffee prices have jolted retailers into paying more attention than ever to the daily grind. After all, each cup sold pours more profits to the bottom line. However, recent increases in commodity costs have pushed up retail prices, challenging convenience retailers to get more innovative with their hot dispensed beverage programs.

Coffee experts across the country are predicting that the rising prices for green, unroasted coffee will continue, forcing retailers, including convenience store operators, to reassess their offerings and make adjustments to extract as much margin as possible from each cup of coffee sold.

For some operators, becoming savvy about the commodities market is as important as the kind of coffee they offer. The 80-store Nice N Easy Grocery Shoppes chain in Canastota, N.Y., helps control coffee costs by buying in "quarters" rather than a year in advance, said Executive Vice President, Foodservices Jack Cushman. He also buys the chain's coffee on a "good to cancel" basis, meaning his order is good until it is canceled. "We try to buy when [prices are] cheaper," he added.

Nice N Easy has been purchasing coffee this way for the past six years, so the company can stay ahead of the pricing curve and best manage costs. Cushman, who has an undergraduate degree in economics as well as a Ph.D. in Hotel, Restaurant, Institutional Management and Dietetics, said he pays close attention to world economic news, the fluctuations in the dollar, global demand for green, and the weather in the world's coffee-producing nations.

Cushman is optimistic about coffee's future, as he's feeling prices will come down by the winter to the $2.20- to $2.10-per-pound level, compared to last spring's $3.32, a multi-decade high that had since eased to $2.63 per pound in mid-July.

Even with Cushman's close attention to world markets, Nice N Easy, like many retailers, hiked coffee prices by a dime per cup this year. The good news is the company got "zero customer complaints and no pushback at all," he said.

Ensuring quality and value is a constant balance for all c-stores, and Nice N Easy worked with SureShot Dispensing Systems to better curtail its waste, moving away from carafes to the company's dispensing machines. This move has helped the chain better maintain margins, manage labor costs and serve its customers. Currently, Nice N Easy is evaluating cost-cutting opportunities for its coffee cups and is testing additional flavored coffees to expand its selection. "We want to look at all of the things you have to look at to keep the price in check," said Cushman.

ECONOMICS IS KEY

Coffee is a global commodity consumed worldwide. As a crop, it is affected by climate changes in the key coffee-producing nations, especially the largest ones — Brazil, Vietnam and Columbia. Labor and geopolitical issues, demand and speculative money flow are also factors that can impact coffee.

Coffee is the No. 2 traded commodity in the United States behind oil, and the price fluctuations ripple throughout the economy. Like oil, demand for coffee is also affected by a host of issues, including a rising demand in China.

Given that coffee is a major contributor to a retailer's gross margin, Brad Westen, sales executive with Paramount Coffee, a full-service coffee roaster, suggested retailers strike a balance between raising prices to cover rising costs and upgrading selection and equipment to grow their business.

This is a time to innovate and upgrade, according to Westen. "The coffeehouses are driving the industry. If you want to get a piece of the pie, you have to give the customer the perception that this isn't just gas station coffee," he said.

Many c-stores are heeding that advice and making their coffee programs destination spots, going head-to-head with coffeehouses on product quality, value and "accessories." As such, the "coffee bar layout" is rolling out across the country and the usual cream and sugar offerings have been expanded to include various lighteners, flavorings and sweeteners, all comprising what is now referred to as condiments.

"We take coffee very seriously," said Paul Servais, retail foodservice director at 373-unit Kwik Trip Inc., now at the halfway point in its three-year program to update the chain's coffee bars. This retrofit includes additional signage, new graphics, more counter room for customers to prepare their coffee and an expanded condiments selection including a flavor station, honey and some different sugars for greater customization.

Under the banner, "Great Coffee My Way," Kwik Trip charges a flat cup price for each of its 12-, 16-, 20- and 24-ounce hot beverages regardless of the variety or customer customization. This includes cappuccinos, which constitute 40 percent of the chain's hot dispensed beverage sales, with 10 flavors including hot chocolate. Customized coffee mixing is a growing part of Kwik Trip's business.

"Coffee is a big part of our food category," stressed Servais. "It is a traffic driver and a big profit center. The margins help with the store's profitability."

At Casey's General Stores, Vice President of Foodservice Darryl Bacon said the 1,645-store convenience chain continues to add coffee bars to its units, offering flavored syrups, bulk creamer, urns vs. pots, and additional coffee varieties. Bacon said Casey's is expanding its sweetener options, too, offering limited-time-offer flavors.

While the retailer upped coffee prices a dime per cup in February, it did so to match competitors and has not experienced pushback. In fact, Bacon said since the price adjustment, Casey's has recorded an increase in its percentage of larger cup sizes.

Casey's also has been watching its cappuccino sales rise this year and is supporting the uptick with a broader in-store selection. As many as eight cappuccino flavors per outlet are now available, with one rotating new flavor each quarter. The chain offers up to six coffee options per unit, with a rotating quarterly flavor. Syrups are available as bulk and portion-control creamers.

At Pennsylvania-based Wawa Inc., the chain's recently instituted coffee makeover was undertaken to reflect the company's coffee commitment.

"We recognize that customers are very concerned about value in these tough economic times and we try to focus on a total value proposition — quality of the coffee, assortment, condiments, cleanliness, price, friendly service, etc.," said Mike Sherlock, director of foodservice. "We view our coffee program as a strategic category and have invested heavily in the offerings and store environment over the past 18 months, with a transition to thermal carafes to enhance the quality; improved in-store graphics; a focus on assortment with the right mix of varietals and flavors; and condiment choices."