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Testing Your Hot Dispensed Beverage IQ (CSD, Feb 14)

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With convenience stores putting so much focus on the coffee category, consumers stop to buy coffee at c-stores more than they fill up their cars. Can your stores compete with industry leaders?

With convenience stores putting so much focus on the coffee category, consumers stop to buy coffee at c-stores more than they fill up their cars. Can your stores compete with industry leaders?

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  • 1. Foodservice Testing Your Hot Dispensed With convenience stores putting so much focus on the coffee category, consumers stop to buy coffee at c-stores more than they fill up their cars. Can your stores compete with industry leaders? Beverage IQ By David Bishop, Managing Partner, Balvor LLC M ost convenience store retailers appreciate the value that hot dispensed beverages provide. Retailers also recognize the importance of offering a quality product at a competitive price that is merchandised in an effective way that improves speed of service. Beyond those elements there are the operational imperatives of consistently executing every day in a clean store and with a friendly smile. These are just some of the variables that go into building a successful hot dispensed beverage program in convenience stores today. This marks the seventh year of the Balvor/Convenience Store Decisions Foodservice Survey and the focus of the 2014 survey is on the hot dispensed beverage category. Given the increasing competition that retailers face and the latent potential this category possesses in driving other foodservice segments, coffee has emerged as a crucial component of an effective foodservice program. The survey raises various questions to consider and shares insights and perspectives on each. Although this really isn’t a test, the results ascertained in this year’s survey should be used as a method to challenge the way you manage the foodservice business. Questioning why we do what we do is one of the best ways to improve the desired outcome. What are your cup sales per store Per day? If you don’t know, figure it out as it’s probably the most important metric for this category along with penny profit per cup and cup sales growth. If you know this important number, then you can understand where your stores fall against our industry benchmarks, which are listed in the table below. Keep in mind that although the industry average hovers around 150 cups per store per day, there’s a wide variation amongst retailers as you can see from the distribution of chains. Cups Sold Per Store Per Day Sales Segments % of Chains Cumulative % 49 or less 25% 25% 50 - 99 20% 45% 100 - 149 15% 61% 150 - 199 14% 75% 200 - 249 7% 82% 250 - 299 7% 89% 300 - 349 2% 92% 350 - 399 4% 95% 400 - 449 2% 98% 450 or more 2% 100% Source: 2014 Balvor/Convnenience Store Decisions Foodservice Survey 44 Convenience Store Decisions l February 2014
  • 2. foodservice Mastering the coffee category can help grow breakfast sales, as well as sales in other retail segments, making it all the more crucial that retailers take their coffee offering seriously. There are many factors that can affect this performance metric, ranging from proximity to a primary competitor, intensity of competition amongst retailers within a market or operating in geographies with lower consumer demand for coffee. Regardless, the benefit of knowing your cup sales per store per day is that it can guide how you manage and grow the category more profitably. For instance, lower-volume retailers may want to evaluate manufacturer- or wholesalerbranded programs as many are turnkey with flexible options based on variables like available space and current sales levels. Their resources and expertise can help drive stronger results than attempting to develop your own program. from the chain over the same period. We’d characterize these two segments as heavy users who are likely very loyal to the chain. Interestingly, only 3% of the customers bought once in the past seven days. This low percentage may indicate that How well do you know your customers? Who are they? How often do they buy from you? Do they buy other things? the chain may want to consider more aggressively promotThese are just a few simple questions that can shed light on ing its program outside of the store with signs or couponing. possible opportunities to explore or areas to address that This could help build interest and drive trials, assuming there’s an effective promotional message, which ideally will can lead to incremental sales growth. Balvor recently completed in-store intercepts with hot lead to repeat purchases that grow the base business. Beyond getting more customers through the doors more dispensed beverage customers at a regional convenience store chain that consists mainly of either commuter or neigh- often, it appears that hot beverages could be a gateway to borhood locations. Here are a few things that we learned generating incremental purchases of ancillary products. We found that a customer buying a hot beverage only once from these customer interviews. The habit-forming nature of coffee purchases at this con- in the past seven days purchased an average of 2.1 items. venience chain is evident when looking at the distribution However, the average number of items in the basket grew of purchase frequency among coffee buyers. For instance, as the hot beverage buying rate at the chain increased, as 70% of the customers reported buying coffee from the chain the chart below illustrates, peaking at three items for the between four and five times during the past week, while most frequent coffee buyers. In terms of cross-merchandising, breakfast-related fresh another 5% indicated six or more hot beverages purchased 5 Number of Coffee Purchases In The Past Week 3 % 6+ times % 1 time Average Transaction Size 3.0 Items 2.7 Items 22 % 2-3 times 2.6 Items 2.1 Items 70 % 4-5 times 6 Source: Balvor, 2014 Source: Balvor, 2014 46 Convenience Store Decisions l February 2014 4-5 2-3 Hot beverages purchased per week 1
  • 3. foodservice Top quartile retailers selling more than 200 cups of coffee per store per day, offer an average of five brews. foods, such as doughnuts, muffins and pastries, not surprisingly had the highest affinity with hot beverages overall. As customers became more frequent coffee buyers at the chain, so was their likelihood to have a breakfast food item in the basket. This suggests that a strong hot beverage program can help strengthen sales of complementary categories. How much variety do you need? Managing coffee variety Average Number of blends PEr Store 5.2 4.2 3.7 is critical to profitability as too much can lead to unnecessary product waste even with declining brew schedules and soft 3.1 heat technology. Additionally, too broad of an assortment can take much-needed storage capacity away from the top-selling blend, leading to service delays and frustrated customers. Convenience retailers offer an average of four coffee varieties. Top quartile retailers, who have daily cup sales of more than 200 per store, provide more than five options, on average, to their customers. While on the other end, bottom quartile retailers use just around three choices, but again are Top Third Second Bottom selling 49 or less cups per store per day. Quartile Quartile Quartile Quartile When trying to answer the variety question, look beyond purchase data to analyze your current business as store Source: Balvor, 2014 shipments often masks issues only revealed through instore observations. For instance, Balvor worked with a varieties each visit, as well as who’s buying the tertiary variconvenience store chain that offered a four-blend set and eties. Retailers also should realize that expanding assortment documented that two-thirds of the customers selected the doesn’t make sense for everyone. In fact, reducing variety house blend, one-third the highly-caffeinated blend, and could be the better option, especially for lower-volume retail one-fifth used the Kona blend. Of these customers, one-fifth locations, if you know what customers want. poured multiple blends into their cup, but no one selected Know Your Q-Factor the decaf blend during the multiple days of fieldwork. If you go into McDonald’s, you’ll likely hear the cashier This shows that you really should understand what the customers are buying as opposed to what your stores are ask, “How many pumps of cream would you like?” when brewing or purchasing to determine how much variety your ordering a cup of coffee. Convenience stores on the other store needs. Learn if frequent coffee buyers select the same hand excel at providing customers real control for how 48 Convenience Store Decisions l February 2014
  • 4. drinks get personalized, extending well beyond creamers and sweeteners. The downside of this tactic is that retailers lose a degree of control over supply cost, which can erode profits if not actively managed. For instance, we observed during fieldwork at a c-store chain that one customer poured eight portion-control cups of creamer into his coffee cup. As retailers know, the cost of these items alone could easily erode much of the penny profit for that individual sale. Knowing your Q-Factor is critical to managing the business profitably. For those not familiar with the term, Q-Factor relates to difficult-to-measure or “questionable” cost items. In the case of hot dispensed beverages, this generally includes creamers, sweeteners and stirrers, but could include other supply costs. Whether your cost analysis is based on actual usage or on purchase history, you should develop performance targets for stores. Then manage those stores that exceed expected thresholds as that could be an indicator of shrinkage due to theft or mismanagement. We determined the Q-factor for one convenience retailer, which indicated that cost should factor in 1.2 portion control creamers, 0.2 fluid ounces of bulk creamer, a half packet of sweetener and a half-ounce of flavored syrup for every cup of coffee sold. Retailers should conduct their own analysis due to differences with the range of available condiments, store locations and other factors that may affect usage. Even though retailers may occasionally encounter a customer that seems to enjoy coffee with his creamers, a thorough usage analysis should account for these aberrations and enable you to manage the business more effectively. So, if your gross margin or penny profit per cup only reflects the cost of coffee, the cup and lid, you have a false read on profitability. Developing a Q-factor forces you to look more closely at other costs. In the process, you will understand whether what you perceive to be a competitive point of differentiation really is or is simply pouring profits needlessly down the drain. Where do we go from here? Knowing how your busi- ness is performing is critical to making sound business decisions in terms of where and how you evolve your current program. Getting closer to your customers is vital in understanding how they use and view your stores so that you can better address their needs. Seeing how customers interface with your coffee program enables you to realize what’s truly adding value versus costs. Lastly, it’s important to remember that the most successful retailers got there through creating a vision, allocating the necessary resources, having patience and perseverance, and building a culture of foodservice and hospitality in their stores. All this takes organizational alignment, dedication, and time. CSD

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