Fixing Profit Leaks in the Coffee Category

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Fixing Profit Leaks in the Coffee Category

By Burke Hodge, The Coffee Consultants - 11/03/2011

As the cost of raw coffee hovers around $2.50 per pound, and with speculators predicting the market to remain above $2.20 per pound well into next year, operators are faced with some tough decisions on how to mitigate lost profits caused by the staggering cost fluctuations.

In the past, operators have had the luxury of raising retail prices to cover cost increases when it came to the hot beverages category. However, over the past three years, most convenience store operators have priced their hot beverage products competitively with local QSR (quick-service restaurant) chains, leaving little if any room to raise retail prices. This narrows the options for recouping lost profits and heightens the need to find profit leaks within the category.

One of the most overlooked places to find a profit leak is in shrink. Shrink is the percentage of loss of product between brewing and point of sale. The main culprits behind coffee shrink are improper dayparting and too broad of a coffee offering. It is not uncommon for these culprits to generate a combined shrink rate of 30 percent or more. To put that into perspective, a well-managed coffee program should not exceed an 8-to-10-percent coffee shrink rate.

Recently, I worked with a client who was very concerned about the price increases he had taken from his roaster. The client was looking for ways to recoup the cost of the increase through sales, but could not raise his retail prices and remain competitive in the regional market. We began looking for ways to recoup the cost through profit leaks.

His sales reporting showed that he sold an average of 120 cups a day per store across his chain of 15 stores. Additionally, he offered his customers eight coffee options, including a decaf and three flavored choices. The client felt that the coffee options he offered were necessary to keep his customers happy and be competitive with the coffeehouses and QSRs near his stores.

After my review was complete, I found that his daypart strategy, combined with his broad selection of coffee options, was creating a shrink factor of 35 percent. This equated to a profit leak of more than $32,000 per year. This amount far outweighed the 14-percent increase my client incurred for coffee from his roaster.

Establishing an effective daypart strategy and offering the right coffee mix is a solid first step to abating profit leaks in the category. In order to establish an effective daypart strategy, an operator must first focus on offering the right coffee mix.

Statistically, 75 percent of brewed coffee sold in c-stores is regular blends or roasts (light, medium and dark roast selections). The remaining 25 percent is made up of flavored and decaf coffee sales. There are many opinions regarding what coffee to offer customers. I often advise clients to offer one light or medium option, one dark roast, one flavor and one decaf option.

The top-selling coffees are usually a house or private blend, single origin such as Colombian and French or another dark roast. Hazelnut and French vanilla are the two most-popular flavored coffees. I suggest keeping one as a permanent option and rotate the other with a seasonal or regionally preferred offering. Unfortunately, flavored and decaf coffees are the largest contributors to shrink, but removing them from your coffee lineup entirely would be a mistake.

Operators who have an extensive coffee lineup are usually the first to challenge the reduced lineup methodology. They fear if they reduce their lineup, customers will retaliate by complaining or worse yet taking their business elsewhere. These are legitimate concerns and they deserve special attention. I suggest removing one slower-selling coffee to start, then move to the next, giving your customers time to adjust slowly to the changes. Continue this until you have reduced the shrink to a comfortable level. I am confident you will find that the concerns will soon vanish and your profits will increase.

Once you have figured out the right coffee mix, you should then focus on your daypart strategy. Statistically in c-stores, about 70 percent of coffee is sold during the hours of 6 a.m. to 11 a.m. It is during these hours that you should brew your full lineup and in full batches.

I recommend reducing your brewed lineup to one light or medium option, one dark option and one flavored option and reduce the batch sizes by half after 11 a.m. All other coffee should remain brewed on demand; this means only brew as a customer requests. Doing so will reduce your coffee shrink and help keep your coffee fresh, as you will likely need to brew a little more often.

Adjust your daypart according to your customer trends. For example, if in the late afternoon you find that your coffee sales pick up slightly, you may want to introduce the decaf and flavored options back into your lineup. However, I would still recommend only brewing half batches to reduce shrink.

Fixing profit leaks within your current daypart strategy and coffee lineup will help reduce wasted profits, often offsetting any price increase you have taken due to the unstable coffee market.

Burke Hodge is a coffee industry expert with nearly two decades of experience. He is the president of The Coffee Consultants, an industry-specific consulting firm that specializes in helping clients revitalize their current coffee programs to meet consumer demand. You can contact Hodge at [email protected]

Editor's note: The opinions expressed in this article are the author's and do not necessarily reflect the views of Convenience Store News.