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Feeling the Heat

There's good news and bad news in the coffee category these days.

The bad news is a double whammy is impacting convenience retailers' sales and margins in this all-important area of the store. With unemployment at record highs, once-core customers are out of work and no longer making their usual morning commutes -- or their daily java stops. Coupled with that is the increasing coffee competition c-stores are facing from quick-service restaurants, doughnut shops and gourmet coffee houses.

The good news, though, is c-stores are holding their own. Coffee servings across all U.S. convenience stores were up 2 percent in 2009 vs. the prior year, and the channel is holding steady in its share of total restaurant coffee servings. In 2009, c-stores held an 8 percent share of brewed coffee servings, and a 9 percent share of specialty coffee servings, according to market research company The NPD Group. That's compared to c-stores' 2008 share of 9 percent brewed, and 8 percent specialty.

"We've got our challenges cut out for us," said Bonnie Riggs, NPD's restaurant industry analyst. "We're going through the most prolonged downtrend ever seen in the restaurant industry. But c-stores are holding up better than others. C-stores have done some pretty aggressive promoting of their products -- specifically foodservice and beverages -- and they will have to continue to do so; the forecast [for 2010] is more of the same."

In spite of all the negative projections, Brian Matlock, director of foodservice for Rockland, Mass.-based Tedeschi Food Shops, is optimistic. He said the chain had a great year in 2009, and he expects an even better performance this year. "Of course, we can't let our guard down for a second," he said. "This isn't the time for complacency."

That's why for the last year, the 189-store convenience retailer has taken "a back-to-basics approach" in its coffee program execution, narrowing the offering and focusing on quality and consistency. Currently, 161 Tedeschi Food Shops have a Green Mountain-branded program, while the rest feature either Honey Dew Donuts or Dunkin' Donuts.

"We gave managers flexibility in bringing in products, but some stores had 16 to 17 coffee varieties [going at one time]," Matlock explained. In April 2009, the chain narrowed the program to eight core varieties, with a focus on light, premium and dark roast blends.

"Sometimes, less is more," he noted. "When we looked at the demographics for our markets, it was apparent that six out of 10 people coming in for coffee were looking for a core blend. The rest was being divided between decaf and flavored."

In addition to SKU adjustments, Tedeschi Food Shops concentrated on improving quality and consistency by re-energizing its foodservice training programs and reworking the company's standards manual and store-level checklists for the coffee section. The changes made are showing some success so far, according to Matlock.

"We have been able to maintain our market share in coffee, and that was key for us. A lot of our competitors were deep discounting last year. There was a time when some were selling their coffee below 99 cents, others were at 79 cents and some were even giving it away. We were able to hold our market share in cup sales despite this, so I look at it as a win for us," he said. "If your offering is compelling enough -- if you have what the customer wants -- you don't have to deep discount to drive volume."

Like Tedeschi Food Shops, 31-store NOCO Energy Corp., based in Tonawanda, N.Y., is feeling the heat from competitors, specifically Dunkin' Donuts and Tim Horton's.

Terry Messmer, director of merchandising for the chain's NOCO Express convenience stores, said a new coffee shop seems to be popping up on every corner. "We're in a highly competitive market, and that's our biggest struggle," he explained. "It seems every day a new Tim Horton's is opening up here."

According to NPD's research, competition from burger chains, such as McDonald's, is the biggest threat to the coffee category in convenience stores -- not surprising since the heaviest users of both c-stores and fast-feeders have been the hardest hit by the down economy.

In 2009, burger chains' share of total restaurant coffee servings was 16 percent of brewed servings, same as it was in 2008. However, burger chains' share of specialty coffee servings increased to 11 percent in 2009, from 9 percent the year before.

"Two share points is quite a jump," Riggs said, noting the market is not growing, which means the share is being cannibalized from elsewhere in the industry.

This intensified competition has NOCO Energy rising to the challenge. After an extensive selection process, the company recently switched coffee suppliers for its proprietary Nickel City Roast program, which is offered at 29 stores and features a house blend, medium roast, dark roast and a flavored selection. (NOCO's other two locations have Tim Horton's, and therefore, no proprietary hot beverages.)

NOCO selected a local company, McCullagh Coffee of Buffalo, N.Y., because "they stood out as really wanting to be a partner in helping us grow the Nickel City brand," said Messmer. The newly supplied coffee was rolled out to stores in mid-October.

In addition, for the morning rush, when NOCO Express stores do the majority of their coffee business, the chain switched from airpots to glass pots. "When you're talking to all the different suppliers, the consensus is if you want to be in the coffee business, glass pots are where you have to be. So now we do glass pots from 6 a.m. to noon, and from noon on we switch to thermal pots with a hold time of about four hours," Messmer said.

NOCO also isn't overlooking the power of promotions, and runs a different coffee special each month. In October, the convenience store retailer donated 10 cents of every cup sold to the local chapter of the Susan G. Komen Breast Cancer Foundation. In November, it launched an everyday combo deal of a 16-ounce coffee and breakfast sandwich for $2.59. And in January, customers could get a 24-ounce coffee and a newspaper for $1.99.

These promotions are helping to boost the coffee category, Messmer said. And to further create buzz, NOCO is advertising Nickel City Roast on its 20 billboards in the Buffalo market. This is the first time the chain's billboards have featured coffee.

"We have to let people know we serve a hot cup of coffee that's fresh and convenient. Coffee is very profitable, and we're making a conscious effort this year to focus on [it]," he said. "Yes, we have a lot of competition, but all we can do is put our best foot forward."
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