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Issue Date: Vol. 47, No. 2, February 2007, Posted On: 3/15/2007


Office Coffee Service Open Forum Probes Refreshment Service Trends

ORLANDO, FL — The role of professional office refreshment services in a fast-changing market was the topic for the always-popular OCS Open Forum panel-audience discussion at the National Automatic Merchandising Association National Expo here. Moderated by Steve Hyde of Newco Enterprises, the panel included Pete Doherty, Diedrich Coffee Inc.; Con Foley, Gold Cup Coffee (Tampa, FL); Jim Nelson, Everpure; and Tom Steuber, Associated Services (Oakland, CA). The session was introduced by Jim Dalley of Procter & Gamble, which sponsored the program.

Hyde led off by asking Foley how an operator can determine what accounts want and how to satisfy those needs profitably.

“A new client starts out by thinking of us as a coffee supplier,” the Gold Cup president replied. “For that reason, people call when they’re dissatisfied with the present  coffee service in their places of business. They want coffee. They’ll take your brochure, but they’ll just stick it into a drawer.

“So we re-sell a new account, four or five months later, after the route salesperson has built rapport,” Foley explained. “By then, they’re ready to come to us for non-coffee products – and those often are our higher-profit items.” Gold Cup offers some 1,000 SKUs, he added.

An operator in the audience asked how the company carries 1,000 different line items on its trucks.

“The driver loads the truck for the customers to be serviced on that particular day,” Foley explained.

Associated Services’ Steuber observed that, in the metropolitan San Francisco market, “we can’t park long enough to pull everything from the truck; we have to get them to order in advance. But our customers want us to manage their inventories for them, so we have to balance the two.” To make most efficient use of the truck, it is helpful to focus on a few items at a time, he added; “We’ll say, ‘sell paper towels!’”

Hyde asked whether the panelists pay their drivers a “spiff” on the featured item, such as the paper towels in Steuber’s example.

“Often, we do,” Steuber replied. “And we ask the suppliers to support it.”

Foley explained that his drivers’ commissions increase as their sales volume increases, and Gold Cup makes a distinction between coffee and non-coffee items. “And we, too, work with our suppliers to give drivers incentives,” he said.

An audience member asked the panel for opinions on two related questions: (1) who is the decision-maker in the account? And (2) how is it important to that person to keep employees on the premises when they take a break?

“Those aren’t simple questions,” Steuber acknowledged. “In a small office, it’s often the receptionist; in a mid-sized company, it’s usually the office manager. In a large company, it can be hard to tell who makes the decision – several people may be involved in it.

“But the real decision-maker is the one who brings you in,” the panelist pointed out. “You may never see him or her again. You get a telephone contact, which may be the mailroom clerk. This person usually is uncomfortable ordering something new, if it’s expensive, but often will buy an additional $3 item if he or she is eased into it.”

“I agree,” Foley said. “And you have to watch out when someone changes; we try to find out when that happens, and to make our route driver aware of everyone in the location.”

Turning to the second question, Foley stated: “Yes, we must give the employer the coffees, and the variety, that will keep employees from going across the street. We will add things, like snacks, to keep them in the workplace.”

Another audience member asked whether single-cup brewer placements really are increasing and, if so, how operators are placing them, and why clients want them.

Doherty replied, “Single-cup has been our fastest-growing product line for years, and it’s not slowing down. It used to appeal to a niche – lawyers and so forth – but it isn’t a niche any more. The demand will level off eventually, but we don’t know when.”

The Diedrich executive recalled that, when he was an operator, he learned that the decision-maker often is not a coffee drinker. “What you have to do, then, is identify the influential coffee drinker or drinkers,” he explained.

Hyde agreed that the trajectory of the single-cup phenomenon can’t be forecast with any assurance, but the concept will be around. “In 10 years, it will be huge,” he predicted.

The industry discussion of why pod technology has not taken the market by storm, as some had thought it would do, should not distract operators from the steady growth of the single-cup segment as a whole, Hyde added. “The problem with pods is getting the right pod for the right machine,” he pointed out. While this has proven more intricate than some had anticipated, “nobody is giving up,” the Newco veteran emphasized.

“If anyone had said, 10 years ago, that people would be willing to pay 50¢ for a cup of coffee in an office, we’d have said that was ridiculous,” Hyde added. “Like imagining that consumers ever would pay $2 for a bottle of water!”

Another audience member asked for opinion on the ancient question, equally vexing to vending and to coffee service operators: “How do you stop them from buying coffee on their way in to work?”

Steuber replied that it is very difficult to do that. “You can offer the same coffees, but they’ll still stop off on their way in; it’s fun to go to a coffee shop,” he pointed out.  “All we can do is give them high-quality options for other parts of the day.”

Hyde agreed that the competitive appeal of the coffee shop is attributable as much (or more) to the “experience” than to the products. If one must accept that many customers are going to buy carry-out coffee before they get to work, one need not accept their going out for another cup later. “Is it possible for us to replicate that experience in the office?” he asked.

Foley agreed that the problem is partly insoluble – “there’s a lifestyle dimension to stopping off for coffee, and people will do it” – and partly a question of how much the employer is willing to spend to keep the staff on site. “We do what we can to offer variety and quality,” he said. “But if the employer won’t stand the cost, and wants to offer one coffee only, then it’s harder to keep the employees in.”

A CUP AT A TIME

A seminar participant expressed some doubt about the position of single-cup coffee. “Is single cup a fad? It depends on whom you ask,” he observed. “Those who manufacture single-cup brewers and products say it’s here, and those who don’t say it isn’t going to happen at all. I say, you have to ask your customers.”

Gold Cup’s Foley concurred that customers certainly govern the speed with which the concept is accepted, and noted that it’s impossible to predict that speed. “I find that demand is rising,” he reported. “And I know pod producers who haven’t yet got the return on the investment in the packing equipment; but I think they will.”

Hyde pointed out that those with reasonably long memories will recall the time, not so very long ago, when many operators said, “Airpots will never work in offices; the glass bowl is here to stay.”

Foley is confident that single-cup coffee will become more competitive, and applicable to smaller and less affluent offices, as interest grows and everyone gains more experience.

“I don’t try to demo pod systems, at present,” he explained. “I don’t have a machine I’m comfortable with, yet, but I’m looking. Our routepeople can’t deal with explaining 50mm. pods and 60mm. pods and so on and on. The policy is to tell our clients, ‘We do have single-cup equipment available; ask us if you want to know more about it.’” Many of his clients who have asked for a single-cup program also continue to keep an airpot system on site, he added.

An operator in the audience asked about using demos to upsell existing clients who seem satisfied with conventional brewing equipment.

“We talk to our clients on sales calls,” Steuber replied. “Sometimes they will tell us what they want. More often, they’ll say something like ‘We’re looking to move up; what can you show us?’ And our salespeople do try to steer them in the direction of higher-priced solutions.”

The West Coast operator added that he has tried pod systems, and some of the equipment is good. At present, though, he is waiting for the client to ask for it because somebody has a pod brewer at home. “I may yet hear that, but I haven’t heard it yet,” he said. The company was an early adopter of one of the proprietary “brew by pack” systems, and it is “entrenched” among the sales force. This alone has maintained good momentum, Steuber said. “More and more of our customers are relying on single cup, and fewer also have airpots,” he summed up.

Doherty added that, as a roasting company, Diedrich is seeing not only an increase in the sale of coffee packaged for single-cup brewers, but also whole-bean sales as more consumers have grinders at home. Whole beans are not gaining popularity as fast as single-cup packaging, but it does tend to validate the point that freshness and quality are important to contemporary consumers.

Returning to the question of dissuading customers from stopping off for coffee on the way to work, Doherty said that emphasizing quality and variety is the most effective approach.

He also believes that pod systems are attractive and workable. “Our largest proprietary single-cup customer also is our largest pod customer,” the Diedrich’s executive added. “That’s a company that covers all the bases!

“We have 10 pod brewers lined up on a bench,” he reported. “We’re waiting to see what the popular pod sizes will be. A standard will emerge, and the segment will grow,” Doherty predicted.

Diedrich’s has a national sales leads program, he added; “We’re getting leads from very small towns, and very small companies: they want single cup.”

An Open Forum participant observed that “We’re in a service industry, and we can’t sell anything to a client until we find out what will solve that client’s problem. If a single-cup coffee is the solution, then you’ll place it.”

SERVICE, SERVICE, SERVICE

Another operator suggested that a deterrent to the widespread adoption of pods is the concern that a client will say, “I like this brand, so I’ll bring in my pods from home.”

Hyde observed that, a quarter of a century ago, office supply stores added fraction-packed coffee of the sort previously available only through coffee service operations. “And everyone said, ‘We’re doomed!’ – but we weren’t. This is a service business.”

Steuber objected that he is concerned, just the same. “I have to trust my supplier to charge a reasonable price in other channels,” he pointed out, “and I’m happy that the equipment isn’t 100% reliable; that’s why my clients need me. Coffee isn’t all we sell, but it does get us in the door.”

Foley agreed that the ability of anyone to buy premium coffees in portion packaging over the Internet is an issue, but too much can be made of it. “Twenty years ago, I saw hot chocolate in local supermarkets for $5, and I was charging $10 for it,” he recalled. “My customers always have been able to buy anything I can offer them for less, somewhere else. But they buy from me because of convenience and service. If I find them buying on the Internet, I’ll tell them, ‘I can match that price for the coffee, if you’ll pay me $500 for the machine.’ They must understand what it is that we do for them, and we must be willing to walk away from the ones who don’t understand it.”

“If you’ll get them the product they want, they’ll pay for it,” an audience member agreed. “And a much greater volume will go home from the office, than the other way around.”

“Right; the business owner is taking it home, and we’re locked in,” another operator concurred.

Turning to the question of cost control, a seminar participant recalled that adding a fuel surcharge to offset high gasoline prices had been a hot topic at the previous Open Forum, and asked the panelists for their present thoughts on containing delivery expenses. “What are people doing now, with gasoline prices fluctuating? Do we call the ‘surcharge’ something different?” he wondered.

Foley explained that his company has collected more than $100,000 in fuel surcharges. It is necessary to be flexible in doing this, he added. “I adjust the surcharge for the customer, depending on where he is. And some customers won’t pay it, but they will pay a bit more for the products they buy.

“This time around, we’ve had less ‘pushback’ from our customers than we did in 2000-2001,” he continued. “The last time, we dropped the surcharge from the invoice when the price came down. That was a mistake,” the Gold Cup president observed. “We have to stay flexible and recover the added cost; a ‘fuel adjustment’ seems the best way to do it.’

Steuber explained that Associated Services adds a “delivery charge” which can be negotiated with the customer, and adjusted as necessary.

An audience member asked whether anyone had tried a “loyalty” program in office refreshment service, analogous to those widely used by supermarkets and discount drugstore chains, or to the airlines’ “frequent flier” incentives. If this could bolster customer retention, it might be worth doing.

“I don’t think incentives really are the issue,” Foley replied. “We have lists of customers who have been with us for five, 10 and 15 years; we send them cards and gifts on the appropriate dates, and I sign the cards. We appreciate their business, and they know it. We lose customers when they merge or go out of business, and there’s nothing anyone can do about that.”

THE FILTER FACTOR

Regarding opportunities in adding pure water service to an office refreshment program, a seminar participant asked for opinions on the extent to which water filters are a factor in obtaining new accounts. “And do customers resist changing the cartridges? For that matter, what cartridges are used – polyphosphate,or what?”

Everpure’s Nelson replied that, with a few distinguished exceptions, operators regarded water filters as a necessary evil, to be installed when necessary to get or to keep an account or to reduce service calls for equipment in hard-water areas, but an inconvenience and an extra cost. “Today, point-of-use water treatment has become a profit center,” he explained. “Operators are selling premium water. It isn’t about ‘lime scale’ any more; you can sell ‘premium water to brew our premium coffees.’ Today, 30% of brewers are equipped with a filter that the customer is paying for.

“Your customers don’t care much about equipment maintenance,” the water treatment expert explained. “They’ll let the operator worry about that. The idea is to get them to pay for the water treatment system that protects your equipment.” The growing demand for pure water has made this increasingly easy to do.

Hyde pointed out that today’s consumer is more than willing to pay for excellent water and, if the operator can provide that, the customer surely will pay a fair price for it.

Steuber explained that Associated Services has a good program in place. “I think customers want it – why wouldn’t they? – and if the cost is reasonable, they’ll pay for it,” he said.

Hyde asked how the operator can determine what sort of filtration system is needed for a particular location.

“You should ask your water treatment system supplier for guidance,” Nelson recommended. “Once you understand the specific problem and the solutions to it, you figure out how to market a suitable system. And, if something doesn’t work, go back to your supplier and ask for something different.

“I have 22 different ‘lime scale’ inhibitors on my price-list,” he pointed out. “Water is variable; don’t get mad if your supplier doesn’t get it just right on the first try. Ask them to help you; they can.”

Hyde wrapped up the Open Forum by asking Doherty to define “gourmet coffee.”

“Ask your customer,” the Diedrich executive recommended. “‘Gourmet’ is what he or she thinks it is!”

“Okay: the client or prospect tells you, ‘I’m a gourmet coffee drinker’,” Hyde suggested. “How do you deal with that?”

Steuber replied that one must find out what is meant: “Is ‘gourmet’ coffee flavored coffee, or what? Ask them what they like,” he advised.

An audience member asked for opinions on the evolution of the market for flavored coffee: in particular, has the proliferation of flavor additives – flavored creamers and the like – reduced the demand for coffee flavored by the roaster?

Steuber replied that, in his Northern California market, the combination of an upswing in portion-packed single-cup systems and the greater variety of flavorings has cut into the sale of flavored coffee in fraction packs.

Foley reported the same trend in Florida, and regards it as a good thing. “With fraction packs, if the decision maker liked hazelnut coffee, everyone had to wait until he finished the pot; there are more options now,” he observed. “I tell our drivers, ‘Give them the first box of flavored creamer; just leave a box on the counter. The next time, they’ll buy it.”

A final question dealt with the number of accounts served by one driver in a day.

Steuber replied that there are a lot of variables; on average, perhaps 15 in a city and 25 in a suburban area.

Foley noted that a great deal depends on the company’s operating procedures, what the route driver is expected to do during the stop. If the driver must clean and service equipment and accessories in addition to delivering product, it might be possible to serve 20 rural accounts in a day, but it would be difficult to visit more than five or six in a metropolitan area.


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