ATLANTIC CITY, NJ - The explosive growth in single-cup coffee brewers, especially those using portion-packed cartridges or pods, has been a principal topic of conversation in the coffee service industry since the last years of the 20th Century. This trend was explored in depth at the education program of the National Beverage & Products Association's 2005 convention here.
The program led off with a series of facilitated round table idea exchange sessions. Pat Birmingham of Aramark (Pennsauken, PA) served as moderator.
While methods of producing one cup of coffee at a time have been around since the immediate postwar years , they have ranged from single-serve packets of instant coffee and soluble "in-cup" coffee systems to downsized fresh-brew vending machines , Birmingham pointed out that the current upward spiral began around 1998. "When it started, did you think it was just a fad?" he asked the participants.
"The first generation of these new brewers offered us the ability to get as much as 45¢ for a cup of coffee, and we were ecstatic," the moderator recalled. "As the second generation appeared, we began to see machines taking up space in our warehouses. Leases weren't what they had been, and per-cup prices were going down. We're now seeing the arrival of a third generation, primarily using pods, and matters have become more difficult."
He instructed each table to choose a spokesperson, then to constitute itself as a coffee service company and develop a strategy for competing in a market characterized by strong client interest in single-cup equipment. The first things to decide, he explained, would be approaches to pricing the service, leasing policies, and equipment inventory management.
PLAN FOR CHANGE
"How will you position your company to move from the status quo, with all its problems, to a potentially more favorable environment?" he asked. "Remember that the economy was good in 1998, and not good in 2001; did you go back to airpots then? Now we're in an economic recovery, or so we're told."
After thorough discussion of the situation, the table captains reported the conclusions of their groups.
The first table was upbeat about the impact of the new pod systems. Operators now using one of the proprietary single-cup programs, like the Keurig coffee system, will find that pod brewers offer "another piece of the puzzle," providing additional ways to meet specific market needs and constraints. The key will be identifying the right pricing structure.
The second discussion group consisted of operators serving an urban market, which has its own peculiarities. The table captain noted that coffee service operations generally do not discard equipment, but try to find profitable uses for it as it ages. Thus, there is a danger that the successive waves of new brewer types can shorten the useful life of equipment. "We have to get our investment back more rapidly," the spokesman emphasized. "This will require a disciplined approach to price. We need to target our market, and not worry excessively about our competitors."
The third table, whose constituents were heavily involved with vending, suggested that the greater complexity of single-cup brewers demands that greater attention be paid to technical training and effective service policies. It also calls for more diligent education of customers in correct use of the equipment.
The next table captain reported general agreement that the proliferation of single-cup equipment designs means that operators must proceed slowly and methodically, testing new models carefully. "We think it will take about two years to get a good machine that works reliably," he said. "Pods will increase the competition, but also will open new markets. Some of us have residential accounts, which can be a whole new area of growth. But we have to crawl before we can walk; you can lose your shirt on equipment."
Birmingham agreed. "The equipment has to work reliably, or it will damage your reputation," he pointed out.
The fourth table captain suggested that the answer to strategic positioning for any given company will depend on the conditions prevailing in its market area. "Can you lease? Do you have the time and the personnel to service the equipment? What kind of investment must you make? There's no one right answer," he pointed out.
The fifth group concluded that customers want the newest thing available, and at present, that means pod brewers. What is yet to be determined is which machine to offer them. "I'm a small operator; I haven't access to the Flavia or Keurig systems," the spokesman reported. "Pods are a good basis for me to get into single cup , to go after your business!"
The next table spokesman raised another issue. "We love pod systems, but we don't know where to buy the pods," he said. This will become clearer with time, he predicted, and his table's strategy will be "proactive defense," adding proven pod brewing equipment as a new tier within the existing line.
The seventh discussion group defined the question as, "Are you going to play, or aren't you? If you decide to play, then go slow and make sure it works. Be selective about your clients; you have to choose. We also need to put pressure on the manufacturers," the spokesman suggested. "We have to tell them that they can't make all the money; we have to make some, too."
The following table captain reported that most of her group has single-cup equipment of one kind or another on location. The new generation of brew-by-pack equipment offers a fine alternative to the classic vending-derived designs, which can work effectively in high-volume environments but not in smaller sites. "We've gone from $1-buyout leases to fair-market leases, and we have a trade-in program. With pods, you have to know your customers and you have to know your equipment," she added. "Pod systems work well in upgrading older accounts."
ASKING THE RIGHT QUESTIONS
The eighth discussion group proposed some useful ways in which to look at the new technology. "What product will you buy, and how will you position it? Should it be something unique to our company?" the spokesman asked. "We're engaged in testing to determine the best answers. Should we place the equipment on a rental basis? We're open-minded about that. Eight out of 10 of the machines we've put out on test are still out; the customers love them," he added. "We've gone up against the proprietary systems, and we've beaten them. We've got pod brewers in convenience stores and restaurants. I'm positive about this," he emphasized. "I think it's the most exciting thing that's happened in 20 years, and not only in OCS; in foodservice and at retail, too." He observed that an effective way to get trial is an update of the earliest OCS technique: "Tell the prospect you're conducting a test of a new kind of brewer, ask whether they're willing to participate, and offer them the first order of pods for free."
The final table captain suggested that operators who succeed with pods will do so by combining boldness with prudence; "Look both ways before you cross the street," she urged. "And let's worry about the customer. In the United States, per capita coffee consumption went from four cups a day in the 1950s to fewer than two cups today. The coffee business did something wrong," she pointed out. "And we agreed that you shouldn't buy from people who aren't willing to work with you."
After a break, the round-table workshop resumed by taking up a second topic: how to compensate the sales force when it has been given the new systems to sell. Birmingham again set the stage.
"Imagine that you have a sales representative who comes to you and says, 'I can put out 10 machines; the prospect is ready to sign right now. But they won't pay a lease, and they think the kit price is a bit too high. If we cut it by $5, we can go ahead with the installation.'
"Now, imagine that the sales rep can get your terms and your price, but will then run out the door and leave your operations people to resolve all the unanswered questions and problems," he continued. "Or that you train them well, and then they leave.
"How do you compensate these people?" the moderator asked. "Straight salary? Salary plus commission? And how do you calculate that commission?"
He instructed the table groups to consider the question, "Your company has no sales force, and it's time for you to build one. How will you do it? How will you compensate your sales representatives? You have to take into account the satisfaction of the sales personnel and the satisfaction of the customers. And your compensation program must make provision for a sale that doesn't stay on the books."
Again, the table groups engaged in extensive discussion and their captains offered summaries of their conclusions.
The first group's spokesman proposed that the best approach to building a sales team is to keep things simple. "You want the right people," he said. "We think the best way to find and keep them is to offer an initial guarantee, perhaps a base salary plus 'draw,' and then add to that , an up-front placement/opening commission, and a residual commission for maintaining the account. Remember that the goals you set and the incentives you offer for attaining them must be realistic. Remember, too, that you always get what you pay for!"
VOICES OF EXPERIENCE
The second table captain, a very successful veteran of the coffee service industry, reported much difference of opinion among his group. He described the system his company uses to compensate its sales force, which ranged from 10 to 12 representatives. "We provide base pay, and we pay commission on the first four months' gross sales at a new account," he reported. "We add an incentive payment if they meet the quarterly goal. And we have a telemarketing group to help our field sales force; if the sales representative makes a sale with the assistance of our telemarketers, the sales rep's compensation is lower."
Another industry pioneer explained a rather different way of rewarding success. His "category managers" receive a base salary plus a commission on a new account's gross sales for the first year, as well as 3% of any annual increase thereafter. The salespeople, one tier down in the table of organization, also receive a base salary and a commission calculated on the first year's gross sales. Both also receive an automobile allowance, which is greater for the category managers. "Look at the 'profit hurdle,' tie it into expected sales, and base your commissions on that," he suggested. And remember that the route driver is the basis of our business , but that may be ending."
Birmingham agreed that the traditional "route driver" is evolving into a "route sales representative."
The next table group exhibited considerable difference of opinion on the best kind of sale compensation package, its spokesman reported. In general, there was agreement on paying some sort of base salary plus commission on new business plus a residual, he explained. In determining the commission rates, the participants agreed, the cost of the equipment and the payback time needed to recover that cost must be taken into consideration.
The fourth table captain reported his group's consensus that a major problem with building a sales force is the tremendous turnover of personnel. "You have to get your customers involved; the salespeople must be loyal to them," he said.
The fifth group emphasized that good sales representatives are the lifeblood of a coffee service company, and the key to their effectiveness and longevity is good training in profit relationships. "Give them guidelines, and offer them a percentage of the gross profit plus a residual," its captain advised.
The sixth spokesman reported that his group agreed that there are two related points to keep in mind: compensation and continuity. An approach to addressing these is to calculate commissions on a sliding scale: for example, a representative who brings in $3,000 might get 3% of that for 12 months, while one bringing in $4,000 would receive 4%, and so on up. A quantity bonus also can be paid. A mechanism for "passing the torch" from the new-account salesperson to the customer service representative also is needed, with a residual payment to the former , who, after all, will always be available to the client.
The next group recommended paying less attention to "what they're paid" and more to "what they earn." The table captain noted that his salespeople average $65,000 a year in income; anyone who thinks that's too high should figure out the costs involved in hiring and training replacements. "I have a training manager who rides with a new sales representative for 30 days," he added. "We put a lot of money into good training." Compensation is based on a base salary, "placement awards" and residuals, which come into effect after six months. The base salary increases annually. "In a bottled water and coffee service operation with residential business, we need units and we need dollars," he added.
The captain of the eighth table offered a summary of a plan that called for a base salary and compensation based on yearly sales, higher for new business and lower for retention. A tier system, to offer greater rewards for higher volumes, also is a good idea; three tiers might be a reasonable starting-point. A quarterly performance bonus is sensible, and by the same token, provision must be made for alternatives if a sale falls through; perhaps chargebacks.
The ninth table agreed that the compensation system should be a component of an overall company culture that stresses cultivating resources from within, offering people a reason to stay with the organization and to prosper with it. "As a small company, we look to develop sales talent among our route drivers and our customer service representatives," the spokesman reported. "The people who are in regular contact with prospects and customers have to bring the culture of our company into the field with them, and it's hard to get new people to do that." A compensation package designed for this purpose might include a structured base plus benefits (such as health insurance), a car allowance, and incentives for superior performance.
The last group was made up of 10 participants and expressed 10 opinions, its captain said. "Do you pay on gross profits? Do you pay on new accounts? Does your commission method contain a 'price escalator' that recognizes, for example, that the per-envelope price of specialty coffee is higher than that of regular coffee? But we all agreed that, whatever you do, everything depends on good training."
Birmingham agreed. "Never set someone up to fail," he urged. "Train for success, and you'll build retention."
Speaking from the audience, NBPA vice-president Len Rashkin (Bellmore, NY), a 40-year veteran of the OCS business who now serves as an industry consultant, pointed out that the gross profits that can be anticipated will differ from rural to urban markets. "I think the key is, first, to get a machine in, even at a low gross profit, and then to focus on building allied-product sales," he suggested.Birmingham added that another point to consider is the treatment of lease payments. "Do you pay the sales representative a percentage of the revenue from the lease?" he asked. "If you do, remember that most accounting programs treat a lease payment as 100% profit, because they're not set up to take equipment depreciation into account."