Turning Coffee Insights Into Category Profit

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Turning Coffee Insights Into Category Profit

By Angela Hanson, Convenience Store News - 05/02/2013

JERSEY CITY, N.J. – Coffee is a category of opportunity for smart convenience store retailers, but navigating its challenges takes effort and strategy, according to the panel of experts who spoke during yesterday's Convenience Store News webcast, "Coffee and C-stores: From Insight to Action to Profit."

Hosted by CSNews and sponsored by the National Coffee Association (NCA) with support from Mother Parkers Tea and Coffee Inc., the event offered an hour-long, data-rich presentation designed to educate c-store retailers on the latest coffee category trends. The panelists included:

  • Graham R. Hill, director of knowledge management for NCA;
  • Jerry Morrow, director of c-store sales, Mother Parkers;
  • Samuel Nahmias, executive vice president and chief operating officer, StudyLogic; and
  • Lisa Berry, director of client development, The NPD Group.

While discussing national coffee drinking trends in 2012, Hill noted that last year, the NCA updated its sample size in order to more accurately reflect the population of the United States. While this makes it difficult to compare more recent data to pre-2012 findings, the NCA's overall research shows that coffee consumption is stable, but up from 2012.

This is a contrast to certain other drink types, such as soft drinks and bottled water, whose consumption has decreased in the last year. Espresso-based and frozen coffee segments in particular saw a significant increase in penetration.

C-store retailers need to consider demographics when planning their coffee program. Consumers in the Northeast and West regions of the U.S. show higher coffee penetration, with Westerners more likely to purchase gourmet coffee beverages. Hispanic consumers are the most likely to consume all coffee types, followed by Caucasians and African-Americans.

Most coffee drinkers go middle of the road when it comes to size, with medium (approximately 12 ounces) being the most popular option at 31 percent, followed by small (8 ounces or less) at 27 percent; and large (approximately 16 ounces) at 10 percent. The 3-ounce espresso-size cup, added by the NCA just this year, was favored by 4 percent of those polled.

Single-cup brewing systems such as Keurig remain a niche product, but one that grew to 12-percent ownership in 2013, the highest level since the product was introduced eight years ago. Retailers should keep this in mind, as single-cup systems "could fundamentally alter coffee preparation habits," Hill said.

Following Hill, market research and business intelligence firm StudyLogic's Samuel Nahmias offered an industry overview of the U.S. coffee market. Total coffee growth is increasing compared to total beverage growth. From 2002 to 2012, coffee grew 107 percent in dollar sales, while beverages in general grew just 60 percent. From 2011 to 2012, coffee grew 4.5 percent in dollar sales, while overall beverages grew 2.9 percent.

Nahmias noted, however, that some of this growth is due to the increasing cost of coffee, which has prompted retailers to charge more for a cup. Actual unit growth is increasing, but not as quickly. Coffee unit sales grew 67.7 percent from 2002 to 2012 (vs. 55.3 percent for overall beverage growth). Comparing 2012 to 2011, coffee unit sales grew 3.8 percent (compared to 4.1 percent for general beverage growth).

While all categories of the coffee market have grown, their distribution has evolved significantly. Hot brewed coffee no longer dominates more than half the market, slipping from 56 percent share in 2002 to 35.3 percent share in 2012. All other categories have increased their share, led by specialty blended coffee rising from 14.7 percent share to 19.2 percent over that time period.

Iced espresso drinks and iced brewed coffee also edged upward to reach 5.8 percent share and 7.5 percent share, respectively. Hot espresso drinks are the second most popular at 32.2 percent share.

"Consumers have a wider variety of coffee products to purchase," said Nahmias, explaining the change in purchasing habits.

Coffee shops remain the most popular place for consumers to purchase coffee, followed by burger restaurants and convenience stores. Most notably for c-store retailers, the convenience channel is experiencing growth in the coffee market for the first time since 2008. It is a very brand-driven market, with a small number of vendors accounting for 67 percent to 80 percent of market share, depending on the type of coffee drink.

Pennsylvania-based Wawa Inc. is the leader in the c-store segment for most coffee types despite its lack of a national presence. Nahmias attributed this to Wawa’s strong focus on coffee. He also noted that having a made-to-order/barista coffee program can have a major effect as c-stores that offer this setup have nearly three times the average annual store volume for total hot beverages sold.

Getting into tactics, The NPD Group's Lisa Berry advised retailers on ways they can drive sales growth, boiling it down to three options: reach more customers; get customers to shop more often; or get customers to spend more money. Ideally, she said c-stores should do all three.

Among emerging convenience consumer trends, both students and the growing U.S. Hispanic population offer opportunities. Additionally, a shifting restaurant landscape has allowed c-store operators to capitalize on consumers' desire to purchase more food away from home. Gasoline sales can also be a traffic driver, but retailers must decide whether to offer a fuel discount program or find other ways to provide value to discount-oriented consumers, Berry said.

Other sales drivers are features of the c-store itself, including cleanliness, friendliness of staff and other attributes.

Rounding out the presentation, Mother Parkers' Jerry Morrow emphasized the need for retailers to act on the insights shared in order to boost profits. Understanding the market is not enough without capitalizing on it, he added.

Coffee can have a big impact on other c-store categories, too. "When you own the morning, you own the day," Morrow said.

To truly improve, c-stores need to invest in their programs and the coffee culture needs to be built and maintained. It also can be difficult to compete without newer, updated assets. He suggested retailers focus on custom blends, value pricing, "on trend" limited-time offers, loyalty recognition and continuous improvements. He also recommended they rely on manufacturers, researchers and suppliers who have information that might be unfamiliar to retailers.

Coffee programs should be designed to maximize time spent within the store. Customers generally choose their brew quickly, but at self-serve stations, they are likely to spend more time customizing their drink. With 79 percent of consumers "adding" to their coffee, c-stores should pay attention to the condiments they provide and offer portable condiments for on-the-go customers. Condiments are "a revenue generator, not an expense," Morrow stated.

Ultimately, Mother Parkers has found that the key to success in coffee is commitment. Dedication to the program should be top down, from ownership and management to store employees. C-store operators must always keep in mind that foodservice is about hospitality, and their employees are their brand.

Click here to access the full webcast on demand.