Coffee Service In Micromarkets Can Determine Patron Loyalty

DALLAS -- Freshly brewed specialty coffee is an opportunity many micromarket operators underestimate and overlook. Those who have established successful hot beverage programs in their self-checkout stores say coffee is a top seller that drives loyal, repeat traffic and generates incremental sales. A panel of operators at the National Automatic Merchandising Association's Coffee Tea & Water convention here discussed their approaches to selling fresh-brewed coffee in their micromarkets and why it should be a mainstay.

Moderating the discussion was Mike Tompkins, president of Coffee Product Associates (Bloomingdale, IL). Panelists were Chuck Walton, Ace Vending (Phoenix); Dave Carroll, Southern Refreshment Services (Tucker, GA); and Mike Coffey, Canteen (Charlotte, NC). Also on the panel was J.M. Smucker's Kathleen Chase, who offered a supplier's perspective. They began by providing an overview of their companies and their involvement with micromarkets.

Ace Vending's Walton recalled flying home after meeting with Avanti at its Tukwila, WA, headquarters three years ago, being sold on the concept and immediately identifying three vending accounts that could be converted to the self-checkout model.

"At first, we were going to convert existing vending accounts, but then we decided to use micromarkets to grab new market share," Walton said. That approach has proven successful. The Arizona vending company now has more than 130 Avanti micromarkets on location and installs a new one every week on average.

Thirteen of Ace Vending's micromarkets are in locations that it previously served with vending machines, and sales at those sites have at least doubled since the switch, according to the operator.

Walton said theft is minimal in Ace Vending's micromarkets, with product shrinkage hovering around 1% across the board. "There are bullet holes in the door at one location where there are many migrant workers and people on parole," said Walton. "But theft is just as low there, or even lower, because they value, protect and police their micromarket! It's restored my faith in humanity."

Ace Vending has 16 vending, seven OCS and six micromarket routes, which generate $700,000 each on average.

Not unlike Ace Vending, Southern Refreshment Services has been averaging one new micromarket installation a week, Carroll reported.

He recalled the initial difficulty he had convincing Southern Refreshment owner Dan Hart to get onboard with micromarkets. "The concept didn't sit well until I took Mr. Hart out to a micromarket and he saw a guy drop 20 bucks -- and he didn't get change," Carroll shared. "I told him that it doesn't give change -- that money on his card is in your pocket until he uses it. Then he was sold. Now we're installing them as fast as we can get them in."

Southern Refreshments has determined that $800 a week, or $40,000 a year, is its sweet spot for micromarkets. If sales fall short of that range, the account compensates the company for the difference. The location also absorbs the cost of shrinkage and spoilage that exceeds Southern Refreshments' 1% threshold.

Cofffey said Canteen opened its first micromarket in November 2011 and now has 1,100 of them in operation. The vending giant places about 60 of the self-checkout stores each month. Coffey said Canteen expects to double its deployments this year as it continues to build route density. About 60% of its installations are at new accounts and 40% are converted from existing vending locations.

Chase markets J.M. Smucker's coffee program to convenience stores, and said she sees synergies that can carry the success in that retail segment over to the micromarkets.

"Coffee is a habitual purchase that drives traffic," she said. "It makes more profit than gas and cigarettes, and customers also buy more items. C-stores invest a lot in labor and equipment to keep coffee fresh and convenient and let customers customize their drinks with flavors and creamers. They focus on having a bright, fresh and clean atmosphere."

Micromarket operators are in a prime position to bring that experience to customers who already value and seek it, Chase said. "Meet customers where they are," she advised. "Single-cup products are very popular. We have other customers who use Douwe Egberts liquid coffee concentrate, which is fresh, hot and ready to go without having to brew it by the pot."

Chase noted that coffee captures 1% of dollar sales in micromarkets, compared with 6% to 7% in vending.

"We see a lot of potential in the coffee space with micromarkets and it's so underpenetrated," she said. Coming from the c-store segment, Chase is of the opinion that micromarkets offer a better consumer experience than vending and therefore believes operators can sell more coffee at higher prices in markets than they can in machines.

Since most locations likely have office coffee service, a branded program can help operators differentiate their micromarket offerings. "Specialty coffees, like lattes and cappuccinos with real milk that aren't offered in the employee's OCS become worth paying more for," the Smucker official suggested. "Iced coffee attracts a younger crowd and is trendy, especially if you're in a 'hip' area. And you can provide it all, ready to go 24 hours a day."

She noted that the peak hours for micromarket traffic are between noon and 2 p.m., and that it can make a lot of sense to offer iced coffee as another option for that daypart.

Walton said Ace Vending generally operates micromarkets in locations with a minimum of 150 employees, but it will consider smaller workplace populations at accounts where it also secures the office coffee service business.

"When we pitch micromarkets, we tour prospects through existing ones and it's a very effective way to gain business," he said. "We also pitch accounts where we already have OCS."

Single-cup coffee is a top-five seller in Ace's micromarket business, according to Walton, who underscored the importance of having a hot beverage program in self-checkout stores.

But with the opportunity come some challenges and workarounds. Coffee portion packs with barcodes are easy to check out. Keurig K-Cups, however, prompt customers to use the "no scan" button to select the K-Cup and pay, Walton explained. And if operators opt to sell and scan cups, he warns not to use barcodes to avoid spilling when customers scan them.

The Arizona vending company also has countertop bean-to-cup machines in some micromarkets, but limits them to locations where the volume is high enough to support the labor involved in maintaining them.

When Ace Vending sets up a market, its staff is onsite to upsell the specialty coffee, inform customers that it's separate from the location's office coffee service and costs money, and walk them through preparing it and checking out.

A selling point that Ace Vending pitches to potential micromarket locations is that they can lower their OCS bills by making specialty coffee available for sale to their employees. Many of them will choose to pay for a more upscale product, even if there's free coffee in the same room.

"Customers say they pull over on the way to work and pay $4 for a 'foofoo' coffee and see paying $1 in the micromarket as a bargain," he said. "The free coffee they get through OCS is not usually the best, so it's a value to pay for an upgrade at the micromarket."

Walton said he recognizes iced coffee as an opportunity to sell into more dayparts, but has found Arizona's hard water to be a hindrance to ice machines. "You also need a drain in the floor and the machines have lots of moving parts," he said. "If they insist on having one, we make them buy it."

Southern Refreshments' Carroll said Starbucks' Interactive Cup machines, a bean-to-cup coffee design, deliver the coffeehouse experience in its micromarkets. Keeping them clean is a challenge, but in high-volume sites, a Southern employee is stationed there three to five times a week to tend to the task.

Keurig's portion-pack machines are also an effective hot beverage solution for the unattended stores. However, like Walton, Carroll said the lack of barcodes on K-Cups is a challenge not only when customers check out, but also in terms inventory management. "It's difficult to restock and know what's been used if there's no barcode," he said. "We really need barcodes on K-Cups."

He added that coffee is the No. 1 issue with health departments in unattended retail, and that it's important for operators to know what's acceptable and what the rules are, which differs by market.

Walton emphasized that when it comes to OCS, there's no one-size-fits-all selection that will please an entire employee base, which is where the opportunity lies for micromarkets.

He noted that in large locations, hosting 500 or more people, there are almost always coffee connoisseurs, and Ace Vending tailors its micromarket offerings to attract that group.

In micromarkets in blue-collar locations, Southern Refreshments sells K-Cups for 75¢ apiece, which brings in $800 to $900 incremental sales a month. In white-collar locations, a cup of coffee brewed by a Starbucks bean-to-cup machine sells for $1.50, which brings in the same incremental revenue.

Mike Coffey said coffee is the No. 1 sales unit in Canteen's micromarkets, even in locations in which complimentary OCS is available to employees. He emphasized the importance of creating the right experience to draw customers to micromarkets on a daily basis to harness the opportunity. "If it's not great right off, just like with vending, you will not get that very loyal repeat customer," the Canteen executive cautioned.

Smucker's Chase reiterated that micromarkets are underused and underpenetrated when it comes to selling coffee. "Use your micromarkets to draw in traffic, like c-stores, and create a new habit by giving them something special," she suggested. Tompkins asked the panelists whether they see an opportunity to bundle coffee with other products to promote sales.

Walton said Avanti's "Buy 4 get one free" feature makes it easy to promote anything from candy and snacks to coffee. "Or you can bundle a sandwich and chips with a free water, which is something employers are often willing to subsidize because they're pushing health," he noted.

Southern Refreshments' Carroll emphasized that the industry has a long way to go when it comes to merchandising micromarkets and coffee in them, since most operators feature an average 300 to 400 SKUs in the mini convenience stores.

"Maybe we can sell them a thermal cup with a barcode that they scan to get a discount on coffee," he suggested.

"Are bundles a deal or suggestive selling?" Coffey asked. "At Starbucks, the No. 1 thing bought with coffee is bottles of ambient water, because they're merchandised right at the counter. Product placement and positioning are critical to success in micromarkets, too."

Walton said Ace Vending had viewed coffee as an afterthought in its micromarkets, which is a challenge his company is working to overcome.

"We were so focused on getting markets out, and our attitude was 'we do coffee, too,'" he said. "Now we've focused a sales group on coffee and we're finding a way bigger space in micromarkets than we thought. We're late to the game and playing catch up in how we merchandise and push products."

Carroll emphasized that Starbucks and Wawa put forth great effort to create an experience around coffee and operators need to follow their lead in their micromarkets. "Creating a similar experience in unattended environments is not as easy, but it's essential," he advised. "Start by not using Styrofoam cups, commit to a brand and market the experience."