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Issue Date: Vol. 42, No. 11 / September 25, 2002 - October 24, 2002 , Posted On: 9/25/2002


The Demand For Quality Coffee Survives Economic Doldrums


Emily Jed
Emily@vendingtimes.net

U.S.A. - The distinctive selling point that built the modern office coffee service business almost four decades ago was the offer of restaurant quality brewed fresh in the workplace. Offering small paper-filter bottle brewers in offices and supplying the coffee in nitrogen-flushed fraction packs, the pioneer OCS operators provided drip brewing to a market that had been confined to soluble or, at best, percolated coffee. In those days, "restaurant coffee" was a term to conjure with, a symbol of quality to consumers who, for the most part, still brewed their coffee at home in traditional three-section drip pots.

Today, the strong and still growing appeal of specialty coffee has given the resurgent coffee service business a new quality symbol to offer its workplace clients. The attraction of nearby gourmet retail coffee shops has made today's office managers keenly aware of the morale and productivity benefits of making comparable hot beverages available in the workplace. Thus, they again have become receptive to the OCS operator's classic sales pitch: excellent coffee is one of the cheapest and most prized benefits that can be offered to employees.

This new receptivity to the quality argument has enabled office coffee service operators to take their businesses to a whole new level by bringing the "coffeehouse experience" to the breakroom.

Office coffee service operators are giving employees reason to spend their breaks in the breakroom by offering gourmet coffees, teas, espressos and cappuccinos, as well as a range of allied products that rival (and sometimes exceed) the selection available at the coffee house down the block or across the street. And managers who understand the real cost of employees leaving the workplace to seek out a quality cup of coffee have a new appreciation of the value of a professional break management service.

QUALITY AWARENESS

To the long-time observer, a striking result of this new quality awareness is the transition of single-cup fresh-brew equipment from its perennial place in a rather narrow market niche to a mainstream service concept. Although small single-cup machines featuring essentially the same brew systems as full-sized vender date back to the dawn of full-line vending, the low-price imperative of the old industrial workplace kept most operators from perceiving what might be done with them in upscale office markets.

A few hardy designs, such as the Coffee-Mat "Junior," achieved modest success when deployed by forward-thinking operators who recognized that they could not be marketed like vending machines in a factory break area. Innovators familiar with the small-site services offered by operators in Canada and much of Western Europe, however, noted that the U.S. market presented some unique obstacles to countertop fresh brew equipment that was performing well elsewhere.

These hazards included the emergence of a large coffee service segment wedded to low-cost pourover bottle brewers, and to competing primarily on price; the historical focus of vending operators on large industrial locations, which often prevented their seeing the profit potential in much smaller sites with more upmarket tastes; and the ready availability of old soluble-coffee venders run by very small, often hobbyist operators. As long as the decision-makers in the workplace market did not demand quality, OCS operators could avoid investing in any equipment that had moving parts and that required intelligent maintenance, while vending operators could ignore low-traffic sites as inherently unprofitable.

The renewal of public demand for quality coffee, its growing availability through gourmet coffee shops, and the ever-stronger insistence by employees on obtaining good coffee, even if they had to leave the building and cross the street to get it, overcame this impasse during the last decade. The appeal of a cup of fresh coffee, brewed automatically to the patron's taste and delivered at any hour of the day or night was attractive to a growing number of clients with 24/7 workforces. Modern domestic designs appeared, as did proven single-cup brewers from nations where they long had been popular. Among designs most noted for bridging the gap between a vending industry that was taking a new look at smaller sites and a coffee service industry confronting a new demand for quality and convenience was the original Zanussi "Brio." In addition to its ability, novel in European equipment of the day, to brew coffee to a soluble solids percentage and portion size familiar to U.S. patrons, its automatic cup mechanism provided the control over consumables demanded by many locations.

The demand for quality coffee met by these changes in equipment and sales doctrine has survived the first-generation commercial Internet collapse two years ago, and the ensuing economic sluggishness.

While many operators from coast to coast are feeling the ripple effects of downsizing and cutbacks resulting from the persistent economic slump, they report that most offices are unwilling to compromise the quality of coffee to which their employees have become accustomed.

Dave Hart entered the market as a coffee service operator at the right time in the right place when he founded Coffee To You llc three years ago in San Jose, CA.

The 26-year industry veteran was confident he could succeed in the booming high-tech Silicon Valley market, drawing on his background in a variety of positions in vending and coffee service, and with a large equipment manufacturer.

"In January 2000, it was a very vibrant market; it was growing like crazy," he recalled. "High-tech businesses were very generous when it came to refreshment service. An account or two popped up every week. I could hardly go a day without getting a phone call. The 'dot-com' boom propelled me into business. If I started the same business in January 2002, I'm not sure I would have made it."

Hart has built Coffee To You's customer base of 40 substantial accounts, all of which are white-collar office locations, primarily in the high-tech sector.

While the "dot-com" implosion nearly three years ago and the ensuing economic slowdown, have caused some former clients to close their doors, Hart is holding his own.

"With companies downsizing and shrinking, you go into survival mode," he commented. "The layoffs directly affect our business. It's a chain reaction: fewer people consume less coffee, sugar, creamer, cold drinks..."

A number of Coffee To You clients have cut back on their previous "sky's the limit" approach to refreshment service by discontinuing free soft drinks altogether, or providing them at low prices through a subsidy. "Most of them still provide free hot beverages, although some have shifted away from the very high end whole bean coffee to more economical fraction packs," Hart told VT. "But it's still gourmet coffee."

Hart has sought to distinguish his company from his competitors by specializing in providing freshly roasted coffee in 2-lb. or 5-lb. bags, in either whole bean or ground format. While he endeavors to steer clear of the traditional fraction-pack business, he does provide it to clients who ask for it specifically. At least 80% of his customer base opts for the freshly roasted, bulk packed product.

The company purchases its coffee from two regional roasters who roast and ship it the same day for ultimate freshness. The coffee packages bear the roasters' names, which is a selling-point for Coffee To You's sophisticated consumers, familiar as they are with the high-quality local brands.

WASTE CONTROL

Hart equips locations that choose whole-bean coffee with grinders holding 4 to 5 lbs. of coffee, and charges them a usage fee. "There is little waste with the fresh coffee, because they can grind very precise quantities, and brew just what they need; they can store any surplus in the refrigerator or freezer," said Hart. He added that high-volume accounts that go through two or three pounds of coffee a day can just seal it up and store it in the breakroom cabinet overnight, at ambient temperature, without flavor degradation.

When Hart takes on a new account, he conducts an initial tasting session, brewing anywhere from six to eight coffees and inviting all employees to vote for their favorite. "The contact tallies it up and we pick one or two blends," said Hart. "We encourage them to change their coffee every few months, to have fun with it. It's better that they not get stuck in a rut with one coffee forever; changing the coffee periodically keeps their enthusiasm and interest level up."

Hart has seen little demand for flavored coffees, and since the majority of Coffee To You customers prefer liquid creamers to powdered, those who do like flavored beverages can prepare them to their specific tastes by adding "International Delight" portion-pack flavored creamers.

While Coffee To You's high-end customer base possesses sophisticated tastes, the company has found that a good range of options, from basic to gourmet, remains a key to success. "You can't lock yourself into one group with OCS. I prefer to provide higher-end coffees, but I offer something in every price level," Hart explained. "Most of my customers opt for the higher end, but there are those who don't, so I offer anything that anyone might want."

To ensure the integrity of the finished product, the operator only uses thermal brewers, the majority featuring digital controls for precise maintenance of temperature and water throw.

Hart also considers himself lucky to be able to offer the "Keurig" single-cup system as an option to his clients. His Keurig locations usually request Diedrich coffee, a favorite in the Bay Area, which is available in several varieties in Keurig's proprietary "K-Cup" portion packs.

"I was fortunate to get in with Keurig. It definitely gives me a competitive advantage," he told VT. "I've had nothing but positive response to it from my customers. You can't argue with the convenience and the quality. And it's also a huge benefit to have popular local roasters' brands in the 'K-Cups.' It sells itself."

Hart has also placed a number of Nuova Bianchi espresso machines at his accounts, in response to customer requests for effort-free espresso in the office. The seven-select machines automatically grind and dose each cup, and use a premium dehydrated skim milk that creates a rich froth. Hart reported that his customers are pleased with the quality of the product and the convenience of the brewing system.

Hart thinks demand for espresso might be on the upswing, although it's too soon to tell. "I placed a few machines a while ago, and then I didn't have a call for one for four or five months. But in the last few months, I put two out and I have three more lined up," Hart told VT. "One thing I see is that, if they're giving their employees espresso, they're usually taking something else away , maybe they'll start charging for cold drinks. Nowadays, management often tries to balance it out; a couple of years ago, expense was not an issue."

Hart offers a variety of allied products including "Bigelow" and "Good Earth" teas, single-serve packaged soups and oatmeal, and microwaveable popcorn. He endeavors to limit the menu to the most popular items.

Coffee To You strives to make sure its customers always have enough products in stock by encouraging the majority of them to fax in their orders; the company delivers the product the next day. At other accounts, route sales representatives visit weekly or bi-weekly, take inventory and restock accordingly, so clients need not concern themselves with ordering; the service promises that they never will run out of product. Coffee To You's trucks are stocked with every item any account might need, and the trucks receive fresh coffee every day.

Hart has placed some canned cold drink vending machines to meet customer requests, but he subcontracts any snack and food business to an area vending operator. Coffee to You has no plans to pursue vending as an adjunct to its OCS business.

"I have been on the vending side of the business in years past, but my main passion is to provide the best quality regular and espresso coffees possible. And now I'm getting into water filtration, which is a growing and exciting part of the business; I really like OCS," said Hart. "Vending has tremendous potential today, and it's come a long way, but it's very capital intensive. I want to focus on what I know best."

And while he sees growing demand for more or less turnkey gourmet coffee programs from several sectors of the foodservice industry, Hart plans to stick with building his established white-collar office clientele. "Restaurants are a whole different ball game. I'll let the roasters have that business," he commented.

On the other hand, smaller retail operations that cannot benefit from roasters' HRI programs may be a viable market for expansion, Hart noted. "I recently put an espresso machine and coffee service into a small convenience store. It's quite a different market and very competitive. I don't know that it's something I'll aggressively pursue, but I'll give it a try," he said.

REACHING OUT

Neal Atkisson of Better Brew (Chantilly, VA) has a different philosophy: If restaurants want gourmet coffee, why shouldn't they buy it from him? Atkisson has served the greater Washington, DC market for 22 years, and offices, restaurants and country clubs make up 97% of the company's 600-plus accounts; blue-collar industrial sites and convenience stores comprise the remaining 3%.

Restaurants and country clubs account for 12% of Better Brew's business. and while Atkisson finds the restaurant and country club market a lucrative adjunct to his core office clientele, he is careful to pick and choose the establishments he serves. "I generally don't like to sell to a restaurant that's just opening because I know it has an 80% chance of closing; then you have to hunt down your equipment, and it's more of a headache than it's worth," he explained.

The operator has also opted not to pursue espresso in offices or in the many restaurants he serves. "If they have the equipment in place, I'll sell them the espresso, but I don't want to invest in the equipment," he reported. "I was offered the contract for a large restaurant chain, and part of the deal was to put espresso machines in 12 locations. At $2,000 per unit, it's not worth it. It's a lot of work, and inevitably, they're not going to clean the frothers; it's expensive and time-consuming when the equipment breaks down," he commented.

Like Coffee To You's Hart, Atkisson told VT that the economy has impacted his business, but it is rebounding.

"Business was going real well through 2000, but it took a downturn in 2001 with the 'dot-com' meltdown," Atkisson told VT. "We had one customer who ordered $40,000 per month from us; it took two 18-foot riders each week to make the deliveries. They were giving away soda and juice to 800 people , but they mis-stated their earnings, and suddenly had to switch to vending, to cut costs. We lost $350,000 in sales at that one account."

Atkisson considers himself lucky that only 2% of Better Brew's client base has reduced the services they provide their employees because of the economic downturn. "There are some companies that have to cut services anywhere they can. A lot of them are forced to go to vending; and some just can't provide any coffee service at all," said Atkisson. However, most continue to find a premium coffee service well worth the modest expense.

Industry consolidation among operators has also impacted Atkisson's ability to compete for some larger accounts in his market. "We recently lost a $10,000-a-month account to a national operating company; that's a disadvantage to being small," said Atkisson. "But a compensating advantage is that I've had some customers for 20 years. They enjoy the relationship they have with a small operator, and many are very loyal."

Better Brew offers its customers 40 SKUs of private label coffee from roaster Paul de Lima (Syracuse, NY), encompassing a wide range of origins, blends, flavors and package weights.

Better Brew's private label comprises more than 50% of the company's coffee sales. More often than not, according to Atkisson, when he has the opportunity to sample his own House Blend, Colombian, Kona and French Roast, he gains a private label customer. He added that there is still high demand for gourmet branded coffee, such as Starbucks, as well as for mainstream national brands, such as "Folgers" and "Maxwell House," which have devoted followings.

"In general, people are moving to higher package weights, towards more gourmet coffee," commented Atkisson. "About 25% of our brewers are thermal, and we're moving more in that direction to better accommodate the heavier coffees."

KEEPING UP APPEARANCES

Atkisson believes his company's expertise in refurbishing equipment has been a key contributor to his profitability. "We have a technician who worked for 20 years at Coffee Butler, running their equipment division," he said. "Our operations manager is an excellent mechanic. And we have another technician who has been with me for 16 years, who worked for Standard Coffee in New Orleans for 10 years."

"Many operators don't take the time to 'delime' and clean their equipment," Atkisson charged. "We take out the whole tank and rebuild the solenoids; other operators often just throw it out if it doesn't work. I've had equipment in service for 22 years. I've seen operators who would just as soon buy new equipment as repair the old , and the cost eats them alive; they go bankrupt. I have no debt; all my equipment is paid for."

Atkisson is enthusiastic about the future of portion-pack single cup brewers, once he can include them in his offerings, but for now Better Brew provides single-cup coffee to a half-dozen customers with "Café System 7" machines, which he regards highly for their quality and convenience.

"I was at a trade show when the Keurig system first came out, and I thought: 'Who is going to pay 40˘ for a cup when they can pay 50˘ for a pot?'" recalled Atkisson. "As it turned out, that was very short-sighted of me. But now that I want Keurig, or Flavia, I can't get it because the exclusive rights belong to different operators in my area." All is not lost, however; he is looking at Cafection Enterprises' new "Avalon B-Puck" unit-portion brewer.

Atkisson added that Starbucks also entered into exclusive agreements with a few operators in select markets when it first entered OCS, and later realized it was limiting its potential penetration of workplaces. "Now VSA distributes Starbucks, and since we've been able to sell it, we're one of the top 10 Starbucks users in the Southeast," he reported. "I hope Keurig and Flavia say 'Hey, why should we limit our exposure?' If they do, I'll be ready to go with their machines. The market loves and demands portion-pack single-cup machines."

For the non-coffee drinker, teas are increasingly popular, and Better Brew offers a well-rounded lineup from Lipton and Tetley to Bigelow and Celestial Seasonings, as well as private-label iced tea for restaurants.

Better Brew offers its customers a total of more than 700 items, ranging from cold beverages and snacks to cleaning items and first-aid supplies. "We'll buy any oddball item for one customer, if we have to," said Atkisson. "We special-order nacho chip trays and 'Java Jackets,' for example, each at the request of only one client."

Other allied products with wider appeal include Land O' Lakes "Mini Moos" and "International Delight" flavored liquid creamers, the demand for which has grown dramatically over the past four years, according to Atkisson.

WHAT WORKS'DEPENDS

Better Brew has also been successful at marketing its private-label powdered creamer and sugar to keep its name prominently in view, and to build allegiance among its customers.

Atkisson has no plans to add bottled water coolers to his equipment and service menu, because of the logistical difficulties that attend water distribution. However, he has a number of customers who don't want water coolers but who desire pure water for brewing coffee in areas remote from potable-water mains. He sells these clients cases containing two disposable 21D2 gallon water containers with a spout on the bottom. Better Brew also is expanding into point-of-use water filtration.

A significant number 20% of Atkissons clients go beyond the basic coffee, tea, creamer and sugar and buy cold drinks, as well as snacks, for their employees. Better Brew offers a wide range of top-brand soft drinks, alternative beverages, juices and packaged snacks to meet this demand and build incremental sales.

Better Brew has shifted to more pre-call selling than it did in its early days. "I previously believed that pre-writing helped develop better rapport with customers," he observed; and perhaps it does. However, over time, he has found that the cost of pre-writing is so much higher than that of pre-calling that the added personal contact often is not worth the differential. "With a small account that does $50 or $75 a month, I often encourage them to choose pre-call. But if I'm in Washington on Mondays and they keep calling on a different day for deliveries, I switch them to a pre-write system," he told VT.

Like Coffee To You's Hart, Atkisson has no plans to diversify into vending. "I've seen too many people make the transition from OCS into vending and nearly go bankrupt; and I've seen successful vending operators try their hands at OCS and fail," he commented. "Maybe it's short-sighted of me, but I choose to stick with what I know best. When U.S. Office Products entered the coffee service business, and Allied bought Gold Cup and promoted themselves as a one-stop office refreshment and office-supply shop, I considered selling office products. But I'm glad I didn't, because it isn't the competitive problem it was three years ago."

Atkisson sees himself gaining competitive advantage over the years, in many ways, but losing the competitive edge in others. "Competition is easier today, because there are fewer operators. And coffee prices have dropped a lot, which has made it more profitable," he said, on the plus side. "We recently got an account with 25 machines because we were able to go in with a very low price, and still make a 50% margin on the coffee," he commented.

On the downside, the single-cup, portion-pack brewers have made it harder for Atkisson, from a competitive standpoint. "It was a level playing field, and now it's skewed to my competitors' favor," he summed up.

Elliott Slutzky of Coffee Unlimited (Chicago) has catered to the sophisticated tastes of clients in high-rise office complexes in metropolitan Chicago for the past 30 years, and his approach is to offer whatever the client desires, as long as it can be done profitably.

"I started in OCS and evolved into vending, so that's the way I sell," Slutzky told VT. "I lead with coffee, when I approach an account; and we let them know that we do vending , soda, snacks, food. We offer water coolers. We handle paper goods; we carry six brands of paper towel. My principle is to give them what they want. You have to do it all these days, especially if you want the larger clients."

COFFEE WISH BOOK

Coffee Unlimited has a 24-page catalog featuring some 1,000 items. Included in the company's offerings is enough coffee and equipment variety to suit any taste, budget and environment.

"I'm a veteran Keurig distributor , I believed in it from day one , and I lead with Keurig; I lead with gourmet coffee in general, whether it's 'Starbucks' or 'Torrefazione-Italia,' 'Green Mountain' or 'Gloria Jean's,'" commented Slutzky.

According to Slutzky, Chicago has always been a big branded coffee market. "We have our own private label 'Chicago Coffee Co.' line, but I think on the East Coast the majority is private label, versus here where it's much more the gourmet national brands that drive the market.

"Our job is to give them what they want," said Slutzky. "The retail gourmet shops are driving the brands to the office. Years ago, people bought Hills Bros. coffee at the supermarket, which drove the demand for fraction-packs in the office. Even before that, people always asked for 'Maxwell House' and 'Folgers' because it's what they drank at home."

He added that he still has customers who are so loyal to those national brands that they'd rather brew two bags to get the soluble solids and flavor up to contemporary levels than switch to another coffee. "I tell them 'Look, I've got other options that will allow you to use just one bag and develop the same flavor,' but they don't want it. If they're happy, I'm not going to argue with them."

For customers who do want guidance in choosing a coffee, Slutzky is happy to conduct taste tests and offer recommendations based on the location's budgetary guidelines.

"I've handled products from El Dorado Coffee Ltd. [Maspeth, NY] for 15 years, and I often recommend it as a good middle-of-the-road option. It's not pricey and it's not cheap, and you get a nice 2-oz. bag that makes a great pot of coffee," Slutzky told VT. "We've also had success with 'Superior Metropolitan' coffees from Sara Lee Coffee & Tea."

The industry veteran told VT that Waterbury, VT-based Green Mountain Coffee has built a strong and devoted a following in the Chicagoland area by being the first roaster to pack its coffees in Keurig's proprietary "K-Cups." The success of Green Mountain coffees in those "K-Cups" has led to significant sales of the company's fraction packs as well.

"As successful as it is, the Keurig system is not for everyone; some people want to batch brew. To be successful in OCS, you need different equipment , thermal, glass bowl, single cup," said Slutzky. "I often select equipment based on how it will fit in the location; there always are size, space and shape considerations. If it has to fit under a standard breakroom cabinet, for example, then it has to be no taller than 17 ins., and so it probably has to be a bottle brewer."

Slutzky added that he's been experimenting with the new metal airpots by Newco, the size and shape of a glass bowl. "The limitation of the metal construction is that you can't see the product," he pointed out. "But the containers do offer the benefit of thermal properties, and the machine can fit under a cabinet, so it can be the answer," said Slutzky. "I love thermal brewers , I was one of the first Café 98 dealers in Chicago , but you don't always have 26 ins. from the top of the counter to the cabinet, so you have to go with a lower profile."

And not all customers want thermal brewers. "Some customers love glass bowls; they go through enough coffee that they don't mind dumping out a little when they're done," said Slutzky. "Some large companies have housekeepers assigned to the job of brewing coffee, and glass bowls are the way for them to go. Otherwise, I lean towards airpots, or the metal bowls, or single-cup brewers where they just press a button. Single cup is the biggest innovation I've seen in coffee service."

SOLUBLE SOLUTION

Slutzky presently runs about a dozen of Nestlé's "Nespresso" pod espresso machines in the field, but he has found that the majority of his customers, at present, prefer soluble espresso-based beverages to the "real thing." Authentic Italian espresso and the specialty drinks derived from it impose a degree of logistical complexity.

"The first issue is always having fresh milk in the office. I can get it to them, but then there's just no way that it's easy to froth milk in the office; they're not barristas and no one cleans the nozzle. It's more hassle than it's worth to most people during their busy work day."

A great alternative, according to Slutzky, is the "Nescafé Lioness," and he has 50 of these branded soluble-product machines on location throughout the city. While the soluble product may not be "authentic," he said, "it's delicious; and the customer has only to push the button and be done. They can have hot chocolate, French vanilla , whatever sweet, creamy beverage is their favorite. Sometimes I install both a Keurig system and a 'Lioness,' and they just love the combination of the two machines," he reported.

Tea is gaining momentum in Slutzky's market at the fastest rate he has seen in 30 years. The company carries a variety of lines, including Lipton, Bigelow, Celestial Seasonings and Starbucks' "Tazo."

"We also offer Japanese green tea in three brands; people like green tea because it's known for its medicinal qualities, including lowering cholesterol and aiding digestion," said Slutzky. "Everyon


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