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Convenience is a fast growing channel for coffee, and coffee is one of the fastest growing categories for convenience. According to the latest AACS survey, hot beverages enjoyed sales growth of 19% in 2003. But the categoryís share of total sales is still less than 0.5%. That means strong growth off a very low base.
What it lacks in size, hot coffee makes up in margins. The cost of ingredients (coffee, chocolate, sugar, milk, cups, stirrers, tea bags) ranges from 20 cents to 45 cents per cup, depending on the type of machine. You can charge between $1.00 and $2.50 depending on the quality of the coffee. That means a gross margin of up 80% and definitely over 60%. Even though this does not take into account the capital cost of the machine, it is still very attractive and the motivation behind many upgrading their coffee offer.
ìRetailers see the attractive margin and get excited,î says Mark Childs, National Business Manager, Coffex.
Thatís OK. You should get excited. But then slow down and think about it. Like any other line of stock, getting it right is the key.
Whatís more, it is becoming the ìhave-to-haveî in C-Stores. Nearly all Tier 1, and 75% of Tier 2 stores, offer hot beverages.
The coffee decision is really two decisions ñ equipment and coffee.
In equipment, technically there are two options: instant or soluble, which is fairly straightforward, or the second option ñ roast and ground coffee beans, which can be a little more complex depending on the type of machine involved. Bean-to-cup machines grind fresh beans and make an espresso-style coffee then blend it with powdered or granulated milk. Super-automatic machines also use fresh beans to make an espresso coffee, but also fresh milk drawn from a nearby refrigerator.
There is a definite trend away from instant and more towards ground, particularly in the city and suburbs. A major reason for the change is that customers have become more educated and sophisticated in their coffee tastes, thanks to the proliferation of specialist coffee outlets such as Starbucks and Gloria Jeanís.
ìWhen people buy take-away they are looking for something better (than soluble coffee) ñ they are looking for roast and ground,î says Wendy Clifton, National Sales Manager, Food Service, Lavazza.
ìConvenience stores are competing with cafÈs and instant coffee canít do that.î
Daniel Binder, Managing Director of Soche, which sells and services super-automatic coffee machines, agrees.
ìCoffee is becoming a very big scene in C-Stores as the consumer becomes more sophisticated,î says Daniel Binder.
ìIt is part of a total offer that includes a decent cup of coffee,î says Mark Childs.
This is borne out by the AACS Survey of 2003 that found 46% of Tier 1 C-Stores and 26% of Tier 2 C-Stores offer espresso coffee in their specialty food service range. The majority of offers are self-serve, unless you are operating a high-turnover cafÈ or roadhouse that can justify the extra staff.
Machine prices range from $2,000 to $3,000 for instant coffee and milk powder; a little more expensive, $3,000 to $4,000 for bean-to-cup with milk powder; and anywhere between $6,000 and $16,000 for a super-automatic.
This is what that margin has to cover before you take a profit, and this is what makes it a numbers game. You must realistically project volumes to start with. Too small a machine is as much a problem as too big.
Maurizio Marcocci is a Director of Crown Coffee International, which is an importer, marketer, and distributor (sales and service) of espresso equipment and automatic coffee vending machines. He says that for coffee to work at its very best for the retailer, each individual site needs to be assessed.
ìWe consult to potential clients to assess their needs regarding coffee sales. We look at their demographics to find out what their local buyers are likely to spend on a coffee ñ are they $1 a cup instant coffee drinkers or customers who prefer a brewed coffee and will spend between $2 and $2.50?
ìOnce that is worked out, we tailor a solution for the retailer, then sell and service the equipment for them.î
ìWe need to work together to promote coffee sales harder in C-Stores, and to build the interest in coffee in the route sector,î says Mike Koolen, Managing Director, Espresso Essential.
Espresso Essential imports, roasts and manufactures coffee, related products and equipment. It sells fully automatic espresso and cappuccino makers for every sort of outlet except traditional restaurants and cafÈs, aiming very much at C-Stores, service stations and offices.
ìWe have a lot planned over the next two years to promote coffee and we want people who sell our product to work with us to encourage people to try the product,î says Mike Koolen.
Choice of machine is one of the big issues for the retailer. The other is how best to invest in that machine. Like so many pieces of equipment today, there are plenty of deals available to get that piece of machinery on to your site. However, the experts suggest that some of the lease deals may lock you into agreements you cannot service.
ìOur advice is to buy the machine outright and then you can budget properly for all the makings,î says Maurizio Marcocci.
ìWe acknowledge that leasing can be attractive when cash flow is difficult but it usually means a deal which bundles the machine with so much coffee and you may not be able to sell that much product. Do a deal on the machine and pay it off and do your product buying separately.î
Once you have the machine, the old computer anagram, ìGIGOî applies. Surely you remember ìgarbage in, garbage outî from school days.
The leaders in coffee in the channel are Nestle, Lavazza, Coffex and Mocopan. All agree that a good brand that the customer recognises will sell itself. More importantly, suppliers of the top brands will provide ongoing support through training, auditing, quality control and marketing. Coffee suppliers can help you avoid the pitfalls. In particular, counter staff need to be able to maintain fresh ingredients and a clean machine.
ìGood suppliers will also help you choose the right coffee for your situation,î says Ron Gardner, Director Food Services, Nestle Australia.
ìFor example, a premium coffee is not necessary in all situations, but good quality is.î
ìThe key is dealing with a company that is not just flogging product,î adds Wendy Simpson, of Cerebos Food Service which now owns the traditional Melbourne-based roasting specialists, Mocopan Coffee.
ìYou need a ëcoffee consultantí who looks at your business and demographics and helps you choose the right product for your customers to help you grow the business.
ìFind a company you can work with, a name you can trust. You need someone who does more for you - and with you - than just selling the machine and the products and walking away. Find someone who advises you on how to start up the business and then build it, someone who helps you with advice on the new trends.î
So, even though machine and coffee are separate decisions, they should be made together and that means using suppliers that can work together for the best solutions for you.
Here are some examples of what works (with a little bit of what doesnít).
Coffex supply La Cimbala M50 machines to selected 7-Eleven city stores. The machine dispenses a range of coffees, hot chocolate, and tea. It grinds fresh beans espresso style in doses through an internal brewing head and steams fresh milk siphoned from an accompanying fridge. At over $16,000 each, these machines are not cheap and have been placed in stores where the turnover justifies them.
ìWhen you consider you can either have staff that do the work or have a super-automatic machine that replaces staff, it is a good investment,î says Mark Childs.
ìAlthough the machines are programmed for self-cleaning, they still need attention ñ wiping down, regular de-scaling and regular checks that everything is working perfectly. Coffex train staff and provide back-up and support.
ìLa Cimbali is a traditional top-end espresso machine, and we are national and international suppliers. We also distribute soluble and bean to all outlets not just to our machines. Quality is the key. Coffex source beans from 20 countries through two brokers with assured quality. We roast 400 kg of beans every 15 minutes and are ISO 9001 accredited. We also supply the full range of equipment.î
Companies like Coffex realise that the channel has changed from being about petrol to being about a convenience food offer.
ìThere was a time when being in a service station would diminish your brand but now good quality coffee sits well with the other product range,î says Mark Childs.
When Shell approached Lavazza looking for an improved coffee offer, it opted for self-serve bean-to-cup machines, dispensing premium quality beverages. Lavazza supplies the fresh beans that are ground in the machine for a single shot of espresso. This is blended with granulated milk for a good quality cup of coffee.
ìShell identified that good quality coffee is a growth market in convenience with the consumer becoming more educated,î says Wendy Clifton.
ìLavazza is a market leader and a recognized brand. We supply the coffee beans, chocolate, tea and powdered milk. Quality is critical. Lavazza set up an auditing process to maintain and improve quality. Retail staff use audit kits and send information back to Lavazza. We also do regular business reviews and promotions.
ìWe are now looking at how to design a convenience offer for the broader market.î
Andrew Murray is Director, Convenience with Northern Marketing. He manages the store offer for a network of 22 sites in northern NSW. The coffee offer was installed in 19 of the stores about 12 months ago, and comprises a bean-to-cup machine using fresh beans and powdered milk.
Andrew Murray says this has been a mixed success, and his story highlights some of the things you need to take into account.
ìWe are in the process of changing coffee suppliers,î says Andrew Murray.
ìWith the current supply we have to grind the coffee very finely to get the flavour and this means the steamer runs for much longer than normal. The steam causes problems with the powdered milk. So, we are looking for a stronger coffee that will taste good from a coarser grind that uses less steam.î
The other issue for Northern Marketing was reliability and the cost of maintenance. Their new machines come with a four-year maintenance program.
ìOne of our main drivers was a reduction in maintenance costs,î says Andrew Murray.
Interestingly, not all of Andrewís customers were happy with the change. Some customers were not happy with the move away from soluble coffee.
ìI am not sure if we have gained enough new customers to compensate for the ones we have lost,î says Andrew Murray.
ìA good quality powder may have been a better solution. I think we need to remember why we are here ñ to be convenient. Customers donít come to our stores for our coffee. Iíd like to think we can offer a good coffee when they are here.î
Even though most agree that the best tasting coffee is made with fresh beans and milk, this is only true if they are always fresh.
ìIf your machine is dispensing a proper, quality coffee, it wins the customers ñ the smell will sell,î says Mike Koolen.
But, beans can go stale if they are left in the machine too long unused. The coffee might taste great when the machine is first installed, but could taste foul a couple of months if the beans are rancid.
Caltex went back to dispensing soluble coffee from a simple machine and developed an effective marketing plan. The greater part of the 7-Eleven network maintains a consistent offer with soluble coffee. Only high turnover city sites are offering the Coffex premium cuppa. Like cafÈs that turn over 50 to 60 kilograms of coffee each week, the machines are continually grinding and using fresh beans. Many C-stores and route outlets donít get close to this level of output.
This issue is compounded with fresh milk. If the milk is sitting in the tube before the foamer for hours and is no longer fresh, not only does it taste bad, but it can do real harm.
Donít let this put you off. The key is to get the best set up for your store, and there are many willing suppliers out there to give you guidance. Do your homework and choose wisely.
ìIt will be scary if someone gets it right, and they are next door to me,î declares Andrew Murray of Northern Marketing.
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