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[12 comments]

CSD: The Coffee Battle Brews

July 9, 2009

By Erin Rigik

Through a special arrangement, presented here for discussion is a summary of an article from Convenience Store Decisions magazine.

Convenience store operators need to focus on meeting consumer demand for a quality cup of coffee as McDonald's, Dunkin' Donuts, Starbucks and Caribou Coffee all announced plans to step up their brew programs to reel in consumers during a tough economy.

The coffee war escalated in May as McDonald's embarked on a national advertising campaign to position its McCafé line at the front of consumers' minds. At the same time, Dunkin' Donuts began promoting its 99-cent lattes and 50-cent iced coffees. In addition to its instant coffee launch, Starbucks is offering an ad campaign of its own, touting quality. "Beware of a cheaper cup of coffee. It comes with a price," one recent Starbucks ad warned. Caribou is offering a medium cup of Caribou blend coffee for $1 on Mondays.

C-stores are fighting back to keep their core customers from straying by investing more in hot dispensed beverage programs and recognizing them as a critical component of the morning daypart.

Targeting the Starbucks consumer and those in search of a stronger, dark brew, 7-Eleven recently added Brazilian Bold to its coffee bar and earlier this month announced a new iced coffee program. The new coffee is the same price as all other 7-Eleven hot dispensed beverages and offers a value-priced alternative to coffee houses and doughnut shop brews.

"We learned that many young coffee-drinkers prefer a strong, rich flavor, so we developed a coffee to fit that flavor profile," said Paul Pierce, 7-Eleven's senior director for merchandising.

Kwik Trip Inc., which has 353 stores in Wisconsin, Minnesota and Iowa, offers eight flavors of coffee daily, including chocolate macadamia nut and hazelnut, which all are very popular in the morning daypart. In addition to speaking directly with consumers, using store checks to see what is selling and gathering information from suppliers can help determine the types of coffee offered already successful in the market place.

Once you know what consumers want, using limited-time-only items is a way to drive new flavors for two to three months, whether to create excitement with a holiday flavor or to test out new blends before adding them to the line. Some 29 percent of retailers have increased the use of limited-time-only items compared to last year, according to a CSD/Balvor Foodservice Retail Survey in March 2009.

Since coffee is typically a planned purchase, c-stores tend to reward customer loyalty with club or punch cards that offer a free cup of coffee after a certain number of purchases. Some 26 percent of retailers increased the use of punch cards for hot dispensed beverages compared to last year, according to the CSD/Balvor survey. One way to encourage additional purchases is with bundle meals, offering coffee with a muffin or breakfast sandwich.

Discussion Question: How can convenience stores better compete in the coffee category with quick-serve restaurants, doughnut shops and coffee chains? What advantages do c-stores have that they should be emphasizing more?

Discussion Questions:

While we value unfettered opinion, we urge you to show respect and courtesy for people or companies about whom you comment. Keep in mind that this is a public, professional business discussion. RetailWire reserves the right to edit or refuse the publication of remarks that we deem unsuitable. We may also correct for unintended spelling and grammatical errors.

Instant Poll:

Of the three major chains, which is most vulnerable to competition from c-stores for coffee sales?

Comments:

Our research has indicated that there are many elements that are going into the consumer's perception (and the actual quality) of a retailer's cup of coffee. Most people think the quality of the coffee is determined simply by items such as the quality of the water (filtered, etc.), the type/grade of coffee used, the "throw/drop" or amount of the coffee used, etc.

However, our research indicates there is much more to it. There are those that have more to do with the physical plant ranging from curb appeal to color schemes used on the building to its internal decor. Some other physical aspects have to do with the actual layout of the coffee area. There should be brew, services, and condiment areas that are sequenced to allow a smooth traffic flow.

The list continues with one of the main items being cleanliness. We work with our clients to explain that c-store clean is not restaurant clean. The cleanliness we are referring to includes everything from the coffee area to all aspects of the store including its help.

While the list is far too long for this discussion one final aspect that impacts the consumers perception of quality is the cup itself. Most people in a c-store environment want a cup that does not require a sleeve or the searching through several sizes to find the right lid.

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Steve Montgomery, President, b2b Solutions, LLC

C-stores can definitely compete in this arena, but they should be utilizing their uniqueness and their strengths to gain a competitive advantage. They should feature and emphasize the following:

1. Create your own flavor, just the way you like it (Many people like self-serve).

2. Fewer lines than at a Starbucks.

3. Lower pricing.

4. They should sell Coffee Cards that carry a dollar value, and provides a free cup when you pay for 10. Then place a POS machine near the coffee, allowing people to pay for their coffee without having to stand in line at the register.

5. Rotate flavors on a monthly basis, similar to the way they sell Slurpees. Keep the customer wanting more, and coming back to experience discovery.

6. Create a coffee Slurpee; something the other companies don't have.

These are simply some of the things that C-stores can do to help differentiate themselves from the other retailers and QSRs that are offering coffee drinks. If they play to their strengths, they should perform well.

Joel Warady, Chief Marketing Officer, Enjoy Life Foods

This is a huge opportunity for c-stores. Consumers are getting tired of paying $3 plus for a quality cup. Starbucks and Caribou are vulnerable.

C-stores have the pro of convenience. What they need to target is the overall experience. Coffee must be hot and always available, the stores must be clean (common problem with c stores) with quick checkouts. The progressive, innovative c-store may do a coffee window drive thru, which would be a hit!

Susan Rider, President, Rider and Associates, LLC

One of the bubbles of the past 10 years has to be the specialty coffee business. From a commodity that was passed over as a 50 cent drink, to the exuberant accolades heaped on Starbucks as they came to town with their $4 espresso drinks, I'm wondering if the fad is passe. It's no longer new or trendy. It has returned to more of a commodity.

While McDonald's coffee program makes sense as they transform to a place for breakfast rather than dinner, Starbucks is trying to find how to be profitable--something Diedrich's, Gloria Jeans and Tullys have never found.

McDonald's has been lowering the price, with better drive in locations. Can C-stores be happy playing in the backwater of a burst bubble? Maybe, but will it lead to profitability is the bigger question.

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Bob Phibbs, President/CEO, The Retail Doctor

I'm seeing more and more C-stores putting in small coffee shops with free refills and WiFi. To me it seems that coffee is a tough market to be in. With so many offices, gas stations, health clubs, and hotel lobbies giving away coffee for free, why would someone chose to pay for it? Personally I choose to buy coffee where there are plenty of free newspapers and WiFi.

David Livingston, Principal, DJL Research

Thanks to Starbucks, Caribou and other specialty coffee shops, coffee is mainstream and in high demand. I was surprised McDonald's and Burger King took as long as they did to catch on and develop a better cup of coffee.

C-Stores have a huge advantage over Starbucks, McDonald's and other retail locations when it comes to coffee. The primary reason is the C-Store customer is very loyal and their visits per week are high. They visit up to 5 times each week to pick up cigarettes, breakfast, lunch, snacks and to fill up on gas. If C-Stores can focus on delivering a better than average cup of coffee it will be one more item that their customers will come back for.

Mobil gas stations started serving Green Mountain coffee years ago in Connecticut and it was a hit. While traveling in New England I knew I could stop at a Mobil and expect a good cup of fresh coffee.

Price point will be another advantage that C-Stores will have over Starbucks and Caribou. That said these specialty coffee houses offer a very different coffee drinking experience that will continue to allow them to charge a premium over C-Stores, Dunkin' Donuts and fast food chains. I do believe that we will still see prices drop or not increase at these specialty coffee shops over the next two years due to market pressures.

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John Boccuzzi, Jr., Managing Partner, Boccuzzi, LLC

As a consumer, there is just absolutely nothing that is more satisfying than that first cup of coffee made EXACTLY the way you like it. Taste and quality trump all other factors for me. So, I pick the brand I like, buy it and make it at home, so it's exactly right every morning. I really miss it when I am traveling. It just can't be replicated at retail for me.

That said, the closest version of an acceptable coffee retail experience is Dunkin' Donuts. Good product, good prices, usually friendly folks and nice, clean atmosphere. I think it's odd that people would want to linger around a c-store and check-email and read the paper, but then again I don't live in the car or do a lot of highway travel. I do like that c-stores are focusing on an experience in general and would love to see one of them focus on a natural area for nutritious food and bev "easily found" since it's usually a needle-in-a-haystack search for good4you food.

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Anne Howe, Senior Vice President, Shopper Solutions, part of Acosta Mosaic Group

The coffee wars are somewhat erroneous. The core Starbucks consumer is not buying lattes and cappuccinos at McDonald's or 7-Eleven. There is definitely competition in the Northeast between Dunkin' Donuts and Starbucks, as with the case of other premium coffee chains vs. Starbucks in other parts of the country, and the world.

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David Biernbaum, Senior Marketing and Business Development Consultant, David Biernbaum Associates LLC

First, C-store operators need to recognize that it's not just about the coffee. McDonald's and Dunkin' Donuts are offering coffee and a meal (I guess donuts count as a meal), so to compete successfully against these alternatives, the c-store needs to offer appealing and fresh food choices. Wawa generally does this. 7-Eleven generally does not. Starbucks offers an experience, which few c-stores can match.

Those who think Starbucks is at risk of being a passing fad must not have noticed how many teens and pre-teens are lining up along with the young professionals and us aging boomers to buy Starbucks.

Russell Jones, Director, Alix Partners LLC

The ready-to-eat, ready-to-heat Grocerant sector is booming and convenience stores are garnering attention, customers and market share. It is now becoming about points of distribution. SBUX made a big mistake when they dropped food. They are now trying to play catch up in the ready-to-eat sector. They just may not; others have focused on the Grocerant sector and continue to gain consumers.

Steven Johnson, Grocerant Guru, Foodservice Solutions

Of the three major chains, which is most vulnerable to competition from c-stores for coffee sales?

That depends on your definition of Coffee. If you are talking about a cup of drip coffee, then the c-stores would be competing mostly with McDonald's, in my mind. It's not likely that Starbucks would have to worry a whole lot about competing with the c-stores because they serve more espresso drinks than they do "brewed coffee." And for the Starbucks customer like me, going to McDonald's for a latte is like shopping at J.C. Penney when you really want to shop at Macy's.

'3642245'

Coffee, like c-store visits, is very much a function of habit.

C-stores have two major advantages working in their favor: 1) customers are already in the habit of coming in; and they have a much broader assortment than any QSR, SBUX, CBOU or DD.

Given our purview of loyalty marketing, which is often better defined as habit, we would suggest that continuity and frequency-focused initiatives are better than variety and trying to compete head-on. For variety and trial we would seek to get coffee drinkers purchasing in other categories as a benefit for coffee consumption as that habit can lead customers to other categories and generate incremental sales and visits.

The question is whether they can take advantage of them through promotions and loyalty marketing.

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Phil Rubin, CEO, rDialogue

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