The Coffee Battle Brews

Convenience store operators need to focus on meeting consumer demand for a quality cup of coffee as McDonald’s, Dunkin’ Donuts, Starbucks and Caribou all announced plans to step up their brew programs to reel in consumers during a tough economy.

About 54% of the adult population in the U.S. classify themselves as coffee consumers, according to the National Coffee Association’s (NCA) 2009 National Coffee Drinking Trends (NCDT) market research survey.

“Consumers still see coffee as an integral part of their everyday lives,” said Robert Nelson, president and CEO of the NCA. “Even if economic conditions cause some to alter their coffee choices, they are nonetheless continuing to enjoy coffee at levels very much on par with recent years.”

As consumers alter coffee choices, 5% more are making coffee at home compared to last year. Responding to this trend, Starbucks now is offering Via instant coffee to establish a place with home-brewing consumers. Meanwhile, other companies are offering promotions to pull coffee drinkers back into their stores.

Prices also are fluctuating in a down economy. “The average quarterly retail price for a pound of roast-and-ground coffee decreased by 10 cents, or 2.55%, in the fourth quarter of 2008, moving to $3.91 from $4.01 in the third quarter,” the NCA reported.

Fierce Competition
The coffee war escalated last month as McDonald’s embarked on a national advertising campaign to position its McCafé line at the front of consumers’ minds. An estimated $100 million is being poured into the McCafé ad campaign, which will reach consumers through TV, print, radio, outdoor billboards, the Internet and sampling.

At the same time, its primary coffee competitors have their own promotions brewing. Dunkin’ Donuts began promoting its 99-cent lattes and 50-cent iced coffees last month, in an attempt to keep customers from migrating to the fast-food giant.

In addition to its instant coffee launch, Starbucks is offering an ad campaign of its own, touting quality. “Beware of a cheaper cup of coffee. It comes with a price,” one recent Starbucks ad warned. Caribou is targeting price-conscious consumers with the Monday blues by offering a medium cup of Caribou blend coffee for $1 on Mondays.

All represent tough competition for c-stores coffee sales.

“What McDonald’s is doing with coffee is something c-stores should be looking closely at, especially with the expansion of the McCafé line, which targets c-stores on the coffee side and Starbucks on the cappuccino and latte side,” said David Bishop, managing partner of Balvor in Barrington, Ill.

Quick-serve restaurants (QSRs) are more of a competitor to c-stores than Starbucks because, from a demographic standpoint, both QSRs and c-stores are focused on the working class and on the middle to upper middle-aged consumer base. Meanwhile, younger and upper income consumers tend to gravitate toward a Starbucks or local coffee house, Bishop added.

Households that make less than $30,000 tend to buy much more heavily from a QSR. About 51% of consumers in this demographic would buy from a QSR versus about 28% from Starbucks, according to a Social and Demographics Trend Research Survey Pew Research conducted last October. Of households that make more than $75,000, 48% opt for Starbucks versus 34% for QSRs. In addition, 18-29 year olds preferred Starbucks to QSRs 49-36%, while the 50-64 year olds preferred QSRs to Starbucks 43-33% and the 65-plus age bracket chose QSR to Starbucks 48-18%.

C-stores are fighting back to keep their core customers from straying by investing more in hot dispensed beverage programs and recognizing them as a critical component of the morning daypart.

Targeting the Starbucks consumer and those in search of a stronger, dark brew, 7-Eleven recently added Brazilian Bold to its coffee bar and earlier this month announced a new iced coffee program. The new coffee is the same price as all other 7-Eleven hot dispensed beverages and offers a value-priced alternative to coffee houses and doughnut shops brews.

“We learned that many young coffee-drinkers prefer a strong, rich flavor, so we developed a coffee to fit that flavor profile,” said Paul Pierce, 7-Eleven’s senior director for merchandising. “Brazilian Bold scored just as high as strong flavors from national competitors in the taste tests we later conducted.”

Brewing a Strategy
Before making changes to the coffee bar selection, it is important to understand the needs of the consumer and tailor coffee offerings accordingly. Talking with consumers is the first step.

“We listen to our customers and what they’re looking for,” said Paul Servais, retail foodservice director for Kwik Trip Inc., which has 353 stores in Wisconsin, Minnesota and Iowa. “A lot of people have switched to dark roast and the Kona-type blends, which are a little bit stronger coffees.”

But that doesn’t mean the mild blend is out of style. Some retailers opt for mild blends as opposed to strong or robust blends because the mild blends tend to have a more favorable age profile when mixed with sweeteners, creamers or added flavors, Bishop noted. “Operators must consider what they are offering in their store as well as what consumers prefer in the market,” he added.

Many of Servais’ customers also are looking for flavors. To meet this need, Kwik Trip offers eight flavors of coffee daily, including chocolate macadamia nut and hazelnut, which all are very popular in the morning daypart.

In addition to speaking directly with consumers, using store checks to see what is selling and gathering information from suppliers can help determine the types of coffee offered already successful in the market place.

Kwik Trip works with its vendor to determine options, but also relies on the individual stores to decide what works in their area. “Our managers have some latitude. If a cinnamon coffee doesn’t sell at one store, they don’t have to carry it,” Servais said. “Store by store, if we’re not carrying the customers’ preferred flavor, they’ll let you know, and if you start hearing it enough, you start carrying it, “

Once you know what consumers want, using limited-time-only  items is a way to drive new flavors for two to three months, whether to create excitement with a holiday flavor or to test out new blends before adding them to the line. Some 29% of retailers have increased the use of limited-time-only items compared to last year, according to a Convenience Store Decisions/Balvor Foodservice Retail Survey in March 2009.

Rewards
Since coffee is typically a planned purchase, c-stores tend to reward customer loyalty with club or punch cards that offer a free cup of coffee after a certain number of purchases. Some 26% of retailers increased the use of punch cards for hot dispensed beverages compared to last year, according to the CSD/Balvor survey. Rewards cards spur increased store visits, build brand loyalty and grow incremental sales as customers make additional purchases. One way to encourage additional purchases is with bundle meals, offering coffee with a muffin or breakfast sandwich.

“Consumers have come to trust that they can get a quality cup of coffee for a reasonable price at c-stores,” Bishop said. “While just having a good price won’t be enough to beat the competition, a low price combined with high quality drives sales. Offering quality is critical for any retailer to benefit during the downward market.”

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