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Issue Date: Vol. 46, No. 3, March 2006, Posted On: 3/25/2006


NBPA CONVENTION: Operators And Suppliers Examine Portion-Pack Brewing Opportunity


Tim Sanford
Editor@vendingtimes.net
ATLANTIC CITY, NJ — Proprietary portion-pack and open-system pod brewers have been attracting international attention for the past several years, and many coffee service operators have experimented with the growing number of machines entering the market. In concept, single-serve cartridges offer the promise of wide selection, easy preparation and minimum waste. Pods add the ability to purchase product from a variety of suppliers, while removing the assurance of proven compatibility between equipment and product.

The National Beverage & Products Association 21st annual convention featured a two-part investigation into the present state of the portion-pack single-cup question. A suppliers’ forum was held on the eve of the show, and a facilitated round-table workshop the next day gave operators the opportunity to compare notes and trade views on the viability of one-shot cartridge brewing in OCS.

NBPA president Jay McMenamin introduced the supplier forum, pointing out that single-cup coffee is not new to OCS. Although some sort of cup-at-a-time system has been available to small-site refreshment providers for more than half a century, McMenamin observed, the technology has improved in recent years – and, perhaps more importantly, consumer demand for greater selectivity, higher quality and enhanced convenience has strengthened dramatically. For those reasons, he said, it seems likely that the single-cup category represents the main growth opportunity for OCS at present.

Participating manufacturers and roasters had been invited to set up tabletop displays in the meeting-room, and to make short presentations about their products. First to speak was Dave Manley of Keurig Inc. (Wakefield, MA).

Manley explained that Keurig, which introduced its proprietary brewing system in 1998, marked two major milestones in 2005. "Thanks to our operator clients, we shipped our one-billionth K-Cup in November," he reported. "Today, the office market consumes about 1.2 million K-Cups a day.

"Second, the number of Keurig installations exceeded 125,000 last year; we surpassed our main competitor for portion-pack single-cup placements," Manley added.

Keurig has thrived because of the excellent operators with whom it has partnered over the past eight years, the speaker observed. "We’re very selective about the operators with whom we work, and the ones we’ve chosen have done very well," he reported.

What differentiates Keurig from its competitors is that it works with a number of product suppliers – nine roasters, at present – to offer customers about 110 varieties. This selectivity is similar to (or better than) an "open" system, Manley noted; "We’ve increased gross profit for our operators by maximizing value for patrons."

The company’s most recent supplier partnerships are with R. Twining & Co. Ltd. (Andover, England), the world-famous British tea producer founded in 1706, which has developed five K-Cup teas including the industry’s first decaffeinated black teas (two varieties), and with Ghirardelli Chocolate (San Francisco, CA), a producer of quality chocolate since 1852. "We’ve wanted a premium cocoa in our system, and we’re not quite there yet," Manley reported. "But Ghirardelli has developed a special 40g. cocoa packet that can be emptied into a cup, then mixed with hot water by initiating an 8-fl.oz. brew or by using the hot water faucet on the brewer. You mix it with a spoon, not a stir-stick – it’s too rich for a stick – and you get a result that has exceeded our expectations."

Another recent partner, Tully’s Coffee (Seattle, WA), is a dominant force in the Northwest, outselling the other leading gourmet brand in Seattle. Ten Tully’s coffees now are available in K-Cups, including a 11.5g. French roast and the first Kona coffee for Keurig. "And the best days are ahead," Manley summed up.

An audience member asked what Keurig requires in an operator. Manley explained that "We’re looking for people presently active in OCS or an allied business who have a customer base and who can bring us – and you – incremental business."

Next to speak was Keith Enscoe of Grindmaster, who introduced local representative Louis Sabers, Repco of New York & New Jersey (Sussex, NJ), and reviewed Grindmaster’s advances in single-cup brewing.

"It has been exciting to watch the growth of single-cup coffee," Enscoe reported. "We have a full line of brewers; for single cup, we’re looking at pods. They’re not proprietary, so more roasters can supply them, and the cost to you is somewhat lower.

"This business has developed more slowly than we had anticipated," the manufacturing veteran continued. "Our roaster partners, and independent packers, have done a good job of promoting it. We think that your customers want a choice of good-quality products, fresh, fast and on site."

Grindmaster presently offers two pod brewers, an automatic/pour-in convertible model and a compact pour-in unit at a lower price point for smaller sites and multiple installations at larger ones, Enscoe explained. "And we’d welcome all of you as customers," he added. To encourage adoption of its brewers by coffee service operations, Grindmaster has equipped them with internal brew counters that operators can use to correlate their unit sales with the number of cups brewed by a client. This is a practical approach to detecting the use of supermarket coffees in the operator’s equipment, Enscoe pointed out.

Dick Crichton of Java Trading Co. (Renton, WA), whose company offers a wide variety of premium coffees including its popular "Java One" pods, noted that there are about 48 pod brewers on the market today, and perhaps twice as many under development. Also noteworthy is the emergence of new market segments, he added; the company has seen growth in office coffee service but also in theaters and niche foodservice establishments like submarine-sandwich and cookie shops. Locations of this type certainly can become OCS clients, he added.

"I like non-proprietary pods," Crichton emphasized, "and this format is growing. Technology today allows the right brewer and the right pod to produce an excellent cup of coffee."

Java Trading Co. champions the idea of a "universal" pod that can work well in the majority of available machines. "We know what size pod works in nearly all those 48 brewers," the speaker explained.

In reply to a question, Crichton reported that industry communication has improved greatly and this has aided product development. "At first, we worked with manufacturers, almost always ‘on the Q.T.’ – we couldn’t talk to anyone about what anyone else was doing," he said. "Today, there’s a growing call for uniformity, and we’ve conformed to that demand. We’ve changed our grind, we’ve changed the filter-paper we use, and our pods will work in a brewer that costs $15, or one that costs $900."

Crichton told another audience member that the "Java One" program now includes both black and green teas in pods. Packing herbal teas in filter pods is more problematic, because of the need for a substantial bed to allow proper infusion, but progress is being made.

Responding to another question, the speaker observed that the tea business has proven surprisingly strong. "Tea now represents 25% of our volume, or a little more," he said. "This is partly because we pack great tea, and partly because our competitors generally don’t offer it, so more people use ours." Sale of pod teas tracks national trends, he added; demand is greatest in the Northeast and lower in the Southwest, more green teas are sold on the West Coast, and so on.

An audience member asked how customers who use tea bags, and like them, can be changed over to unfamiliar pods.

"I’m not sure," Crichton replied. "But I can tell you that tea pods are selling, even in the hotel in-room segment."

A Keurig representative in the audience reported that 10% of K-Cup sales are teas, and tea bag users don’t seem to have a problem with the portion-pack concept.

Discussion turned to the desirability of a standard pod size, and Crichton reported that a 60mm. diameter pod containing 9g. or a bit more roast ground coffee has proven satisfactory in the general market.

Regarding Internet marketing strategy, Crichton explained that Java Trading Co. does not sell its products directly online. "Operators sell for us," he continued, "and all but one are OCS operators."

And those operators are doing a good job; "more than a quarter of all our pod business is done over the Internet," Crichton reported. "We don’t have a great website."

An audience member observed that he thought the supermarkets would drive pod sales, but experience has shown that the Internet is the primary driver.

Crichton agreed, and suggested that this phenomenon is partly the supermarkets’ fault. Attempts to channel access only to products a retailer wishes to sell, in today’s market, simply shifts demand to alternate sources of supply; "If people can’t buy what they want locally, they’ll order it online," he said.

Tim Cook of Reunion Island Coffee (Oakville, ON, Canada) explained that his company was founded by a coffee industry veteran whose original vision was to supply specialty coffees in whole-bean form, and back them up by developing an in-house marketing department that works with customers to develop a variety of sales aids. That approach has worked very well, Cook said, and the company now is meeting the new demand for pods as well as beans.

Reunion Island has undergone a year and a half learning curve, during which the company’s coffee experts tinkered with the size of the pod and the thickness of the grounds bed. "What we’ve found is that the pod needs to be optimized for different kinds of coffee." At present, the company offers some 38 pod choices, he noted.

An operator in the audience wanted to know more about Reunion Island’s marketing support.

"Well, we do ‘corporate makeovers,’ for example," Cook replied. "We can make a small operator look like a national. And we’ve found that the second greatest marketing tool is the coffee packaging. We can help you find customers, too."

Rounding out the supplier forum was Steve Wall of Baronet Coffee (Hartford, CT), who explained that the company is 75 years old and still family-owned. Recognizing the opportunity, Baronet made a substantial investment in pod-forming equipment, and that investment is paying off. The company presently supplies 10g. pods that match up well with competitive pods and other single-cup systems, he said; but, in his view, 12g. pods are the coming thing. While still experimental, the heavier pod has proven capable of delivering up to 16 fl.oz. of brewed coffee with bulk density equal to that brewed from a 21/2-oz. fraction-pack into a 60-fl.oz. decanter.

The company’s retail line is marketed under the "Baronet" brand, and its "One Cup" line is supplied to its distributors. Distributors also can avail themselves of the company’s private-label program, Wall explained.

"We’ve done a lot of market testing," he concluded, "and it’s not hard to sell pods."

IDEA EXCHANGE

On the following day, convention-goers took part in a round-table discussion of the present state of the single-cup question. McMenamin introduced the session by observing that pod brewers have been in the spotlight for several years, raising widespread expectations that they would achieve rapid penetration of the office market. This does not seem to have happened with anything like the speed predicted, he pointed out, and urged the discussants to consider the question: If pod brewers are not yet prevalent, why not?

The seminar-goers at each table were invited to devote 15 minutes to each of two questions. Every table was instructed to choose a moderator to summarize the results at the end of each period. The two questions were:

(1) Are pod systems relevant to your business? Are you placing them? Do you use any single-cup equipment? Why?

(2) Are pod systems irrelevant? If you’re not placing them, why not?

After trading views on relevance and use, the table moderators reported the conclusions of their discussion groups.

The first table agreed that pod brewers are relevant, and the participants reported placing some. "We’re dipping our toes in the water," the moderator reported. "The coffee is good, but there still are equipment issues, so we’re easing into it."

The second table moderator concurred. "We’ve decided that pods will be an important part of the business. The open-system approach promises more product variety and a wider range of brewers. The availability of product increases every week," he summarized.

The third table moderator demurred. "Of four operators here, two tried pod systems and bailed out, because of the equipment; they’re now looking. The other two are waiting for ‘Wow!’ equipment."

The fourth table found the pod concept relevant, although perhaps more in retail than in the workplace. "Do we use them? Yes and no," the moderator continued. "Most of us do use a single-cup system, and those of us who don’t see a problem with the present generation of pod brewers are placing them. We expect strong growth."

At the fifth table, six of the eight operator discussants agreed that pods are relevant, even though not everyone is using pods at present. Three of the eight are, in fact, placing pod systems, although only one is going full speed ahead. And four of the eight are running some single-cup equipment.

The sixth table was unanimous. "Pod systems are relevant; we’re all placing them," the moderator summarized. "We think we have to continue with pod brewers, even if we’re not crazy about them."

The seventh table moderator reported that, of five operators taking part in the discussion, one is strongly involved in pods, one is "sort of" involved, and three are not. "But the roasters report growing pod volume; they are relevant," he added.

At the eighth table, of seven operators, five use the Keurig single-cup system, one uses pods, and one does not place any single-cup brewers. "Pods are relevant," the moderator continued. "We have to sell what our customers want, and they like variety; they’re also excited by new technology in their offices."

The first 15-minute discussion suggested operator objections to the present state of the art in pod brewing; the second elicited details. After trading views on factors that make pods irrelevant, and reasons not to place them, the conclusions again were reported by the table moderators.

The first table agreed on five disincentives: there is not enough price differential between pods and K-Cups to warrant making a change; there is no standard-size pod; pods require handling by the user, which may cause concern about hygiene; customers are not asking for pods; and, "If you’re successful with another single-cup brewer, why in the world would you increase the complexity of your equipment mix, and potentially obsolete the machine that’s succeeding for you?"

The second table raised one objection: "The coffee’s not strong enough."

The third group expressed concern about the reliability of the equipment, the lack of standards, and the lack of marketing support. "Keurig and Flavia help us with marketing and training," the moderator noted.

The fourth group defended pods. "We do want to make a profit, and that’s hard to do with the proprietary systems," the moderator said. "With pods, we can."

The fifth table moderator reported that the group generally likes pods, but reminded their colleagues that selling them requires effort. "It does take time to educate employees to use them," he noted.

The sixth table returned to the objection that people are not asking for them, and added that some operators had bad experiences with the first brewers to become available, while others with longer memories recall the teething problems of the first Keurig brewers, eight years ago. Thus, watchful waiting seems warranted.

The seventh table objected, again, to the lack of size uniformity among pods. The moderator, however, dismissed hygiene as an issue: office workers have been handling paper filters for bottle brewers since the mid-’60s without any health problems.

McMenamin then asked for specific recommendations. "Do we need a standard-size pod?" he asked.

In the ensuing discussion, it was pointed out that different roasters invested, over the years, in pod-forming equipment that met one or another specific need, and they now are reluctant to retool to a new standard size. A consensus does seem to be emerging in favor of a 60/61mm. pod, usually containing 9g. of coffee but sometimes more, especially in the Northeast. Roasters in the audience said that they certainly will produce pods that their customers want.

The NBPA president invited comment on the charge that there is insufficient price differential between pods and proprietary portion packs.

"Not so," an operator replied. "There is enough difference. We want something in the 28 to 30¢ range, and the pod may be it."

The majority appeared to agree; one audience member said that the price differential between pods and Keurig K-Cups is around 21%, which is enough.

Most operators also agreed that pod systems do deliver a very good cup of coffee. One audience member added, "Now, if we can just find the equipment..."

McMenamin asked whether a fair summary of the situation would be, "We think there is a place for it, but we can’t get equipment that works." If that is a fair summary, he continued, "I ask: is this based on current knowledge, or on bad experiences you had a year ago?"

"It’s getting better, but it’s not there yet," an operator replied.

"The equipment for large offices isn’t here yet," another amended. "There is good equipment for smaller offices. You all want those ‘big hit’ accounts, but there are more small offices; go get them. You can get a rental on this lower-cost equipment; and I say, go for it!"


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