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Issue Date: Vol. 43, No. 11, November 2003, Posted On: 12/9/2003


NAMA Panelists Offer Operators' Viewpoint On Single-Cup Brewers


Tim Sanford
Editor@vendingtimes.net

WASHINGTON, DC - Small-site single-cup coffee brewers have been around for as long as their full-sized fresh-brew coffee vending stablemates, but only have attracted mainstream industry attention over the past decade. The reasons for this, and the interrelationships among technology, operations and marketing, were explored by an expert panel at the National Automatic Merchandising Association National Expo here.

The seminar was opened by Kraft Foods' Phil Nicholson, who reported that he had completed the Master Brewing certification workshop held the day before the Expo opened and found it a great educational experience. He introduced moderator Ken Shea, a coffee and OCS veteran who now heads up Ken Shea & Associates. Panelists were Con Foley, Gold Cup Coffee (Tampa, FL); Randy Parks, Pro Star Services (Dallas, TX); Patti Sorkin, Newtech Beverage Systems, who earned her spurs as an OCS operator in the Philadelphia market when the industry was in its infancy; and Bob Wilson, Standard Coffee Service (New Orleans, LA).

Shea led off by pointing out that the new generation of small-site unit-portion coffee brewing designs may be grouped into "brew-by-pack" concepts, as implemented variously in the Keurig, Kraft "Gevalia," Mars "Flavia Beverage System" and others; and "single-cup" machines, a term he would restrict to those which are loaded with roast coffee in bulk, and that prepare it by the cup, as a vending machine does. These include the familiar equipment lines offered by Appart LLC, Cafection Enterprises, Crane National Vendors, and many other manufacturers around the world.

The two types together represent about 5% of coffee brewing equipment on location, Shea said; but they do 10% of the total volume. There is a place for both approaches, he added.

Noting that a leading manufacturer has claimed greater profitability for the "brew-by-pack" design and that Gold Cup has reported good success with its Keurig brewers, Shea asked Foley for his views.

The Florida operator replied that the gross profit potential is, indeed, attractive, but is not always attainable. The very high cost per cup can make these systems difficult to sell to "experienced" locations that have become accustomed to spending $23 for a kit, unless they can be convinced of the greater appeal of wide variety and easy cup-on-demand brewing without waste. If the location can be persuaded of this , and accounts without previous experience with professional coffee services usually are easier to persuade , the profit potential is alluring.

"It's a finite market," Foley pointed out. "Five percent of locations sounds right, and the penetration is increasing. More equipment is coming along, and the math does work."

Shea asked Patti Sorkin, an early advocate of single-cup brewers during her leadership of Blue Ribbon Coffee, whether a complete coffee service can be built entirely on single cup.

"If you want to build a sizeable business, you have to offer other options," she replied. "Brew-by-pack and single-cup are fantastic, but they're not the whole answer. If an account does conferences and meeting, or takes depositions, then cup-on-demand brewing is a distraction; an airpot or some other thermal server is preferable. The client will tell you what's needed; and, in order to keep the account, you will provide it." And, to an operator familiar with conventional brewers, single-cup systems appear to require a lot of maintenance.  "You need a technician," she pointed out.

Shea noted that, partly for these reasons, many operators have used the cup-on-demand systems defensively, to meet a particular account request or to respond to competition. He asked Parks for his opinion on this approach.

TAKING IT TO THE STREETS

On the contrary, the Texas operator replied, he sees the new technology as "a fantastic opportunity" and, in selling, tries to lead with the single-cup option. "We do a needs analysis for them, and we always try to stay on the cutting edge," he said.

Shea asked Wilson to summarize the pros and cons, and to comment on the challenge of conducting a demonstration with a cup-on-demand machine.

"It can be tough to demo," the Standard Coffee executive replied. "You can't carry it in under your arm!"

Overall, he said, the concept has been a learning experience for manufacturers and operators alike. "We started with the hopper-based kind, about 10 years ago," Wilson recalled. "The machine wasn't quite ready, and neither were we. And we put them in the wrong places, supermarkets; they were difficult to support. Today, the technology is much better."

Shea pointed out that an element in favor of a well-working brew-by-pack machine is that once it's on location, people want to keep it there; therefore, much of the selling challenge is to persuade a prospect to try it.

He asked the panelists whether they have been successful in getting rental income from the new generation of brewers. "If you have been, tell me how," he asked, pointing out that the OCS industry seems to have missed out on this opportunity during the 1960s by proceeding to install for free what they might have charged for , an oversight that the office equipment business did not commit.

Foley agreed. "We do try; we always try, but our forefathers blew it," he replied. "Xerox certainly won't lend you a copier if you promise to buy the paper for it! And brew-by-pack does give you the opportunity to do it, just as refrigerators do. You'll rent a refrigerator to the client, with the idea of trying to sell it to them five years later, or taking it back and renting them a new one. You can do that with brew-by-pack machines. Once it's in there, it's hard for the client to give it up, and I'll charge for it if I can. If the competition won't let me, I adjust the product pricing." The ability to charge rent for a costly piece of equipment can be a great help in meeting return-on-investment objectives, Foley added.

Shea asked the audience for a show of hands to indicate how many operators have succeeded in charging rent for all their brewers (a few have), and how many have managed to rent at least half of their installed equipment (again, a few are doing this).

An audience member asked the panelists for their informed judgement about running a pro-forma profit-and-loss projection on a single-cup machine, if it is to be placed on free vend or if it is to be coin controlled.

Foley replied that he looks for a volume of six to eight 200-cup boxes per month; at that level, he said, Gold Cup can make money, especially if it the machine can be rented.

"I never looked at it that way," Sorkin said. "I looked at the overall invoice, including allied product sales." A piece of equipment that seems marginally profitable when narrowly considered, in isolation, can be encouraging strong ancillary sales and thus making a real contribution to overall location profit, which is the important number, she suggested.

VOLUME ESTIMATE

Parks noted that, with a per-cup profit figure (say, 20), the P&L calculation is straightforward. If one is charging rent, that, too, is easy to figure in. As for coin control, he said, one must lower one's sales assumption, since consumption always drops in a vending scenario.

Wilson agreed that people consume less if they are asked to pay for it. Standard Coffee looks for a minimum usage of 50 cups per day for cup-on-demand equipment, he reported.

Another audience member asked about the relationship between equipment cost and establishing a realistic and desirable return on that investment.

"We don't look at it the way Patti does, although she's right," the Texas operator responded. "We do look at a single-cup machine as a standalone profit center, and we loot at gross profit dollars, not gross profit percentages."

When these numbers are satisfactory, the concept works very well. "Older operators often complain about the proprietary packaging in brew-by-pack systems, grumbling about losing control of their product sourcing," Parks added. "But I recognize that the suppliers need us. It certainly has been good for me."

Shea asked the panelists for their views on what operators need from equipment manufacturers.

Sorkin suggested that the single greatest thing a manufacturer can do is provide intelligent support for an aggressive demonstration program. "I'm a great believer in demos," she said. "And I'd urge the manufacturers not simply to offer prizes for doing demos. Sure, everyone wants prizes. But I applaud Keurig , I can't speak for other manufacturers , for its willingness to work the street with you. They've brought in biscotti, they've provided tablecloths; they help you make the client feel special. They'll work trade shows with you. What I'd recommend to equipment manufacturers and roasters, is that they include sales training expenses in their marketing budgets."

Shea asked Parks, who uses the "Flavia" system, whether any of his brew-by-pack accounts has ever wanted its previous brewer back.

"Not one," Parks replied. "Every now and then, they may become alarmed at the cost, and consider giving it up; but it's very hard to give up."

Shea agreed that "invoice shock" can set in when a client sees monthly coffee cost rising from $150 to $300 or more.

"If it does, that means you haven't done a good job of selling," an audience member objected.

Shea asked whether the 5% penetration figure represents the limit of the market niche for cup-on-demand systems. "Have we hit the wall?" he wondered.

Wilson replied that his current brew-by-pack and single-cup systems have suffered from the timing of their introduction. "By the time they really impressed me, the economy had tubed," he said. "Of course, in a down economy, there are clients who are willing to pay more to maintain staff morale. But I think that when the economy picks up, many more locations will want the technology."

Sorkin said that she doesn't think the wall is anywhere near being hit. However, she said, operators and their sales forces do tend to seek the path of less resistance, and management must make a continual effort to maintain enthusiasm for selling single-cup service. "You have to motivate, whether you can do it by giving frequent 'attaboys' or whether you have to provide some dollars, too," she urged.

Shea reverted to Parks's observation about the reservations expressed by old coffee service operators concerned over proprietary product formats and limited choice. "Is the lack of a private-label option a problem, or might it be an opportunity?" he asked.

"It's not an issue," Foley replied. "This is quality coffee." Prestigious brands, from Green Mountain to Diedrich/Gloria Jean's, are available for the Keurig system, he pointed out; and all of them are excellent.

Sorkin agreed. "Right now, cobranding is where it's at," she emphasized. "Consumers are brand-conscious, and brands sell."

Foley pointed out that operators have not experienced really major green-coffee price spikes since the last Brazilian frost, some 10 years ago. "And the green bean market actually has been depressed for the past two or three years," he added. "But, when it does happen again, let's all remember that the processors have assured us that most of the cost of brew-by-pack coffee is in the package, not the contents. I expect that to be reflected in the price!"

Parks observed that green coffee price surges always are well-publicized by the news media, and represent an opportunity for the operator. "You can go out and get your margins back," he emphasized.

An audience member observed that he has changed over to airpot brewers, and now is pondering the single-cup opportunity. "Should I go after the same customers again, and try to persuade them that even greater convenience is worth an even greater price?" he asked.

"You may not have an option," Foley replied. "If you don't try to persuade them, somebody else probably will."

Sorkin sees no harm at all in making the attempt. "If you have a good relationship with your clients, and if you've educated them well, then if you want to bring in a single-cup system, why not try it?"

Speaking from the audience, Frank LaRusso of Flavia Beverage Systems pointed out that there is a difference between hopper-type and brew-by-pack single-cup systems, in terms of the product variety that can be delivered by each, and the need for category management that arises. "How do you 'upsell' your existing customers?" he asked. In vending, it is well-known that brands sell. As vending and coffee service become more and more intertwined and communication increases, he expects coffee service operators to discover the same thing.

A Keurig representative agreed, noting that the Keurig approach is to partner with premium roasters with strong brand identities.

Shea concluded the session by suggesting that the technology can produce greater gross profits for operators, and the way to reap those dollars is by developing effective marketing programs for the new equipment types.

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