Breakfast Battle Brewing

Bundling with Bakery

Rick Lawlor, vice president of retail sales and marketing for Hess Corp., said his company began growing breakfast sales when it added an old favorite for customers who want a sweet with their coffee: doughnuts.

“There are a number of ways we’ve been growing our breakfast business, the most significant being our exclusive Dunkin’ Donuts self-serve program,” Lawlor said. “In January 2008, we began rolling out Dunkin’ Donuts coffee, baked goods and hot chocolate at many Hess and Hess Express locations, and our customers love the product and the convenience. It allows us to provide a one-stop shop for commuters and fuel customers.”

Lawlor said Hess stores have seen a significant increase in its breakfast business at the 300 locations where it installed the Dunkin’ Donuts program. As a result, it plans to continue rolling out the concept across its entire network of stores up and down the East Coast.

“With today’s customers demanding value, quality and convenience, our plan was to find the best offering we could to meet their needs,” Lawlor said. “Dunkin’ Donuts allows us to offer a meal solution throughout the day, plus it’s a really strong brand that can draw customers on its own. It’s the best of both worlds.”

While U.S. economic conditions are still relatively cool, the coffee wars have reached a boiling point as McDonald’s, Dunkin’ Donuts and Starbucks are all stepping up their brew programs to target convenience store customers’ shrinking disposable income.

More than 150 million Americans (18 and older) drink coffee on a daily basis, with 65% of coffee drinkers consuming their hot beverage in the morning, according to the National Coffee Association (NCA) and Specialty Coffee Association of America (SCA).

More importantly, coffee is not an impulse purchase in convenience stores, as nearly 96% of customers intend to buy a cup of coffee prior to walking in, according to Willard Bishop, an industry consultancy. If a customer comes in for coffee, the average visit is about two minutes, which makes the location of other merchandise located near the coffee bar a good way to increase the customer’s purchase amount.

Some retailers are finding that customers will typically purchase bottled water or a grab-and-go breakfast item with a cup coffee, or a packaged snack item, such as an energy, protein or granola bar.

Competitive Insights
About 95% of all convenience stores sell coffee. However, with quick-service restaurants (QSRs), such as McDonald’s, Burger King and Dunkin’ Donuts, as well as drug store chains, such as Walgreens, making solid strides in the coffee business, the competition is having a tremendous impact on the typical convenience store coffee island.

While breakfast may be the most important meal for customers, it’s proving to be pretty good for retailers as well. Open Pantry is attracting morning customers with its new John Morrell breakfast program.

“What we wanted to do is bring in complimentary items that would really take that roller grill from being just a lunchtime thing to an 18-hour program,” Fiene said. 

Retailers such as New Jersey-based Quick Chek Food Stores rely on successful marketing efforts to generate coffee loyalty. The convenience retailer—with nearly 70% of morning customers leaving the store with a cup of coffee — jumped on the opportunity to promote loyalty and the value of its coffee program prior to the arrival of McDonald’s McCafé espresso-based coffee program, a concept the QSR has been testing since 2007 that launched nationwide last June.

Also building on value and choice, East Coast retailers, such as Wawa, Sheetz and Royal Farms, offer customers extensive offers at the coffee island in flavorful blends (Kona, Dark Roast, Colombian, Hazelnut, French Vanilla, etc.) that rival a typical coffeehouse program. These retailers also feature a proprietary coffee program that increases brand awareness and loyalty among customers.

Customization is another key ingredient to a successful coffee program. It’s not uncommon to find a variety of milks, creamers, sweeteners, flavor shots and toppings, such as whipped cream, cinnamon and hazelnut, featured at the coffee bar.

Like Starbucks and Dunkin’ Donuts, some convenience retailers also make their coffees available for purchase so customers can enjoy their favorite blends at home, including seasonal blends like pumpkin spice in the fall or gingerbread in the winter.

McDonald’s, warned Jim Callahan, director of marketing for Geo. H. Green Oil Co. in Fairburn, Ga., is aggressively promoting its coffee program with the sole intent of stealing convenience store customers.

“We have to protect our market share because McDonald’s is investing in coffee to the win the battle with c-stores, not to just be competitive,” said Callahan, who oversees 48 stores.

Indeed, McDonald’s is off to a good start. The hamburger chain reported strong first quarter profits in April, led by increased beverage sales in the U.S., where same-store sales rose 1.5% during the quarter and 4.2% in March. According to analysts, McDonald’s got a boost from its McCafé coffees and other beverages.

The fast food chain encroached further into Starbucks Corp. territory this quarter by introducing lower-priced frappés designed to compete with Frappuccinos. McDonald’s has had success with its foray into coffee despite early complaints about the cost to franchisees, who were squeezed by the economic downturn.

Morningstar analyst R.J. Hottovy expects McDonald’s’ higher-margin coffee business to keep growing. “The coffee market is large enough to support two major players, or more,” he noted.

“We saw consumers come out of hiding in March,” added Hottovy, who expects the chain’s overseas growth to remain robust because its menus overseas successfully cater to local tastes.

To push back against McDonald’s, Starbucks in March said it was ready to resume its restaurant expansion in the U.S.

Both Starbucks and McDonald’s are stepping up the pressure on convenience stores with items like branded coffee mugs, which come with 99-cent refills. Internally, McDonald’s officials said operators could see a 15% spike in coffee sales by participating in the program.

Leveraging the Competition
Sometimes it makes much better economic sense to put your competition to work for you instead of using your energy to battle them. That’s essentially the decision Scott Shealy, vice president of Asheville, N.C.-based Citizens Fuel Co. made almost two years ago when he elected to put Dunkin’ Donuts in three of the company’s 10 Citistop stores.

Citistop locations are among the few Dunkin’ franchises in North Carolina that offer the complete Dunkin’ line, which now includes a complete breakfast menu, Fair Trade-certified espresso drinks, flatbread sandwiches and personal pizzas, as well as doughnuts and an extensive beverage list.

The decision has proven to be a wise one, especially given today’s tight gas margins and growing gas sales competition from a large regional grocery chain and Wal-Mart.

Interestingly, in one of Shealy’s stores, the Dunkin’ franchise is alongside the convenience store, meaning customers can walk through an interior door to the coffee house. Given the easy access, you’d think all the c-store coffee-drinking customers would walk a few steps to buy their morning cup of Joe, but some continue to buy their coffee in the Citistop store, ignoring the much larger coffee menu nearby.

“It goes to show that if you create a good coffee program, which we think Citistop has, customers will remain loyal no matter who moves in next,” Shealy said. “Throw in our c-store promotions and a strong condiments bar, and we’re sure we can compete with anyone, even ourselves.” CSD

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