Variety and customization help coffee sales to continue to grow.
By Anne Baye Ericksen, Contributing Editor
Whether it’s the desire for a jolt of caffeine in the morning or craving a specialty hot beverage as an afternoon pick-me-up, coffee remains a top beverage choice for consumers.
The 2014 National Coffee Drinking Trends (NCDT) survey, produced by the National Coffee Association USA (NCA), reveals that more people (61%) opt for coffee than soda (41%) on a daily basis. Plus, nearly three-fourths admit to drinking coffee—anything from a cup of fresh brew to dressed-up espressos, cappuccinos and lattes—at least one a week. What’s more, the NCDT states 30% of coffee drinkers prefer an out-of-home preparation instead of fixing it themselves.
The annual National Coffee Drinking Trends study showed 59% of Americans drink a daily cup of coffee, down from 61% in 2014 and 63% in 2013, which opens the door for those convenience stores that are upping their coffee game with more varied hot beverage options.
However, the crowd of coffee-selling retailers seems to expand daily, attempting to grab more share of the robust market. Specialty coffee shops earned more than $19 billion last year. Starbucks leads the pack, operating more than 11,000 storefronts in the U.S. while Dunkin’ Donuts maintains an excess of 10,000 stores.
Even fast food restaurants have elevated their coffee capabilities and have promoted their efforts in national advertising campaigns. At home and in the office, pod systems have dominated the market. All these factors add up to greater competition for convenience stores’ caffeinated and decaffeinated business, both hot and cold.
However, a few changes taking place might shift consumers’ coffee habits somewhat. Coffee commodities rose 50% between 2014 and 2015. Starbucks announced at least a five-cent hike on drinks this summer.
Given the fluid coffee market and changing economic factors, convenience stores that are offering more choices by the cup, such as Wawa Inc., are well-positioned to attract new customers.
ENTER THE C-STORE
“Whether [the commodities] price hike will drive traffic to c-stores or changes the value position of coffee shops remains to be seen,” said Howard Telford, senior beverages analyst for Euromonitor International.
“While we have had a significant increase in coffee pricing this year versus last year, we have elected not to pass on those cost increases to our customers this year,” stated Mendy Meriwether, brand manager of fresh beverages for Wawa. The business, based in Wawa, Pa., operates 765 stores in six states and sells more than 190 million cups of coffee per year.
“Coming off a tough winter, overall coffee sales have been doing well thus far. We do not see a slowdown in overall coffee consumption; however, we do see different shifts from hot/iced/specialty and retail throughout the year.”
Also, the pod craze appears to have hit a ceiling. According to Euromonitor, the segment peaked at more than $4 billion in 2014, but sales of Keurig 2.0 machines released last year fell relatively flat.
“Retail coffee has been solid for consumers who use it in the home, but pods have been the main driver in volume and sales. That kept the momentum, and then last year there was a slowdown and that has impacted the forecast,” explained Telford.
FINDING A NICHE
Despite competition for coffee drinkers’ dollars and loyalty running high over the past several years, coffee remains a reliable revenue source for c-stores, accounting for 77% of hot dispensed beverages, according to the National Association of Convenience Stores (NACS).
“It’s just harder for convenience stores to differentiate themselves,” Telford noted. “Convenience stores are not competing with Starbucks, but rather McDonald’s and Dunkin’ Donuts. McDonald’s and Dunkin’ Donuts are making investments for quality, so that’s a competitive space.”
However, the current market environment also uniquely positions convenience stores to entice people away from specialty shops, which may be on the decline already. According to NCDT findings, out-of-home preparation at cafés/coffee shops/doughnut shops dropped from 12% in 2014 to 9% this year.
“There are different ways to differentiate coffee sold through this channel,” Telford said. “There are four [priorities] with coffee: convenience, consistency, choice and value. C-stores do a great job with convenience and people look at c-stores for the value end of foodservice coffee. C-store companies also are getting better with consistency. One trend we’ve been seeing generally is the fact that c-stores are using pod-based systems. That’s one of the things that will provide more consistent and fresh-brewed coffee.”
“Finally, choice means having different kinds of blends and flavors,” Telford continued. “That’s one of the areas where c-stores can add value.”
Many stores have expanded their coffee selections beyond a small counter in the back or off in a corner with a few dispensers. Rather, c-store owners and operators have positioned large dispensary stations front and center to draw attention as customers walk through the doors. And of course, larger stations mean greater selection of hot beverages.
At Wawa stores, customers can choose from regular traditional blends to varying roasts. There are also a plethora of lattes, hot chocolates, macchiatos, chai teas and cappuccinos that come with their own flavor menus, including mocha, vanilla, white chocolate and salted caramel, to name a few.
“And pumpkin season is quickly approaching, which is always a highlight in our offerings,” Meriwether said. “Flavors continue to be a successful component with innovation resulting in greater excitement and growth in the category.”
In fact, coffee customization comes in many flavors.
“Our customers continue to love the ability to customize,” Meriwether said. “Adding soy milk to our condiment island and full-serve arena has really captured a different audience. It is critical that you offer options that satisfy the needs of all customers. Sugar in the raw, skim and soy milk options continue to grow in [their] importance in the category.”
Customization also can apply to featuring local, artisan or selective roasts of coffee beans.
“Our launch of Signature Blend coffee has been a positive complement to our portfolio. A smooth, rich brew made with 100% premium Arabica beans has really resonated with our customers and has attracted new users to the category,” said Meriwether.
In fact, a Market Force Information consumer poll declared Wawa tied with Sheetz as a customer favorite for quality coffee.
Indeed, it appears java fanatics won’t settle for any old beans. According to NCDT, one-third of coffee drinkers choose a gourmet blend at least once a day, up 3% from previous studies. More specifically, 42% of respondents between the ages of 25 and 39 poured themselves a daily cup of gourmet coffee. Among those aged 40-59, 34% had a daily gourmet java.
“There’s generally a higher expectation for hot beverages that forced foodservice to invest in coffee. There’s a price premium, and that’s been a driver for many independent coffee shops,” said Telford.
Another consideration regarding coffee habits is that Millennials and younger Generation Y members started drinking lattes and macchiatos at a younger age compared with when their parents and grandparents began drinking coffee straight-up black or with a splash of cream and a spoonful of sugar.
These specialty concoctions were their introduction to coffee rather than purchased as a dessert drink or occasional indulgence.
Although market analyses indicate the younger demographics segment is gravitating more toward traditional brews, premium beverage options still appeal to them, especially cold versions during hot summer months.
“For example, Starbucks Frappucinos, distributed by PepsiCo, is a billion-dollar brand. That’s becoming a big part of the mix,” Telford said.
“Iced coffee and iced latte performance continues to be strong,” said Meriwether. “They’re still second to hot, but I anticipate this category to continue to grow with increased penetration from our Millennials.”