Financial data in this presentation has been estimated by Cafemakers, LLC using information obtained from public sources and company interviews.
In the 1990’s driven by the proliferation of Starbucks and other specialty coffee businesses, a critical mass of consumers began developing taste preferences for coffee; recognizing that there was not merely one generic “coffee” flavor, but identifying that flavor varied significantly through ingredient quality and preparation. As we headed into the early 2000’s, consumers began to articulate these preferences through their buying habits, opening new opportunities for retailers. As noted in this article in QSR magazine, by 2003 the retail industry was by then hurrying to roll out new coffee quality improvements simply to stay competitive.
Why are we here today? Big business is pouring millions into coffee quality improvements at all levels, from growing, processing to roasting and preparation in pursuit of higher profits. Are these improvements working? How do we know? This presentation identifies 3 strong motivators for most retailers to justify these expenses and that act as metrics to gauge its success.
Profitability: For companies like Dunkin’ Donuts; the majority of sales and profitability amount from coffee. Capitalizing on its working class appeal and an emphasis on speed, coffee and coffee improvements at Dunkin’ have fueled its growth and success in light of substantial competition from a variety of business segments, from QSR to coffee shops and restaurants. This success is illustrated by the demise of donut competitor Krispy Kreme, who substantial market buzz, teeters on the brink of demise resulting from blistering expansion without sustainable profitability. Further capitalizing on growth trends in specialty coffee, Dunkin’ rolled out an espresso program deemed “enormously successful” by company management.
Customer retention: For companies like Chik-fil-a, customer retention is the key motivating factor. Increased reports from operators to management indicated that drive thru window operators at Chik-fil-a stores were noticing Starbucks and other coffee company cups in customers’ cup holders. Management saw this as both a problem and opportunity: How many customers were not making the two stops necessary to obtain both coffee and their breakfast? How many more customers would be regained by serving an upgraded coffee product so that multiple stops would not be deemed necessary? As a result of process improvements and coffee quality improvements, retail sales prices were raised 45% to maintain profit. Despite higher costs and an unusually warm summer for rollout, within the first few months, coffee sales doubled.
chik-fil-a quality consultant mike falkenberry comments on coffee improvements at chik-fil-a
Strengthening the brand: Ann Arbor, Michigan book retailer was an early adopter of the manufactured “3rd place” concept of mass retailing. Faced with increasing competition from other retailers and other retail segments including bulk warehouse stores and e-tailers like Amazon.com, Borders knew that visiting their stores would need to be an “experience” in order to excel. Border Cafés are integral to that experience. The Borders café experience builds upon the concept pioneered by Roy Oldenburg in his book “A Great Good Place” where he argues that bars, coffee shops, general stores, and other &quot;third places&quot; (in contrast to the first and second places of home and work), are central to local democracy and community vitality. For that reason, each Border Books location has approximately 1,400 square feet of space dedicated to a small café for the purpose of providing a comfortable atmosphere that will entice customers to visit and stay longer, as a vital part of their own community structure. Recognizing opportunities to its own coffee program, Borders entered into an agreement with Seattle’s Best Coffee in 2004 to re-brand its own cafes until the SBC Café logo, use its support network, product and brand, while still operating those cafes indendently.
Borders presently operates 465 cafes, of which 70% will have completed upgrades and conversion to SBC by the beginning of 2007. In making these upgrades, management established parameters to gauge success, including the mix of café sales versus retail book sales, the overall same sales improvement and same unit growth per café.
… public documents report that these improvements have improved the bottom line.
Changes were made to make coffee the most central part of the business menu - eliminating non-core food items (like some sandwiches) and placing a strong emphasis on “coffee.” Retail merchandise was removed from the café floor area and new fixtures, water treatment and coffee equipment were installed to improve beverage quality.
It was a critical factor in the mind of Borders management to see that the café had a new life independent of the book store - although conveniently available within and adding to the décor of each retail location, clearly focused on coffee. In some cases, cafes were relocated within the store in order to make them more visible or provide access independent from the book retailing business. The SBC partnership became an attractive one to Borders, due to the strength of the SBC brand independently and the partnership program available from the company. Changes to the SBC coffee supply improved the overall beverage taste and supplied customers with a comfortable flavor profile, comparable to SBC’s parent Starbucks that would be quickly recognized and accepted by customers. Additionally, although all Borders Café staff were retained throughout the transition, training and procedures implemented by SBC assisted Borders to serve beverages with greater consistency than before.
Slide change: 2.8 million included non-café stores, which was a little confusing and caused an error in the graphic. Superstore locations including Borders cafes average total annual sales of $7 million - inclusive of approximately $400,000 café sales. Our estimates of company expenditures amount to approximately 150,000 for improvements to each of these locations. Three scenarios ranging from conservative to aggressive were established based on performance information showing that café improvements were linked directly to a 1-2% same store sales increase nationwide and café sales increases from 10%-15%. In our most conservative scenario (1% sales + 10% café), we project that improvement costs will be recovered within 5 years; our most aggressive 2% / 15%, within 2. the average of all three scenarios predicts reimbursement of costs within 3 years with new revenue of greater than $150,000 per location within 5 years or new income directly attributed to cafes of nearly $70,000,00 chain-wide.
We move next to look at an example from McDonald’s
Here too, we see company officials crediting upgrades in coffee service as a driving factor to achieving profitability.
Coffee has been a key part of the McCafe concept. The concept was developed for two reasons: 1) attract new breakfast segment business and 2) reach out to a more upscale demographic than would be attracted to the well-known McDonald’s brand. Data available from a NPD research study indicates that more than a third of all breakfast orders include coffee, and that coffee by itself if the #1 breakfast food item.
McDonalds launched its first McCafe in Australia in 1993 and now operates more than 1000 world-wide, including a small number (5) in the USA. Already popular with a young audience, the McCafe brand allows McDonalds to attract a more mature set of customers that would previously not be interested in having their coffee served by a clown. These locations include an expanded menu of panini sandwiches, pastries and a blend of coffee specifically designed for use as espresso in addition to traditional McDonald’s brewed coffee. The majority of these locations are in Australia and Germany - Germany in particular is experiencing the fastest growth in the chain.
We take a look at the fastest growing segment of McCafe’s business - specifically their units in Germany. There are presently 200 McCafe locations with a total of 500 projected in the country within the next 2 years. Most locations in Germany are shop-in-shop stores, co-located with a traditional McDonald’s location. German market has been taking off with specialty coffee consumption in the past 5 years, German dairy producers have reported rising milk sales; attributing that rise directly to the growing taste for Italian & American-style cappuccinos and café lattes. This demand, of course, has led to good buy-in with franchisees; which is an ideal source of capital for rapid expansion.
Here we see examples of the updated shop exterior and interior - completing shedding the carnival atmosphere in favor of a modern espresso café
In Germany, the average McDonald’s per-location sales is approximately $1.5 million (in $US), with an average 31% profit margin. McCafe margins are significantly higher, at approximately 50%, mostly attributed to specialty coffee drink sales. The net result is stunning; showing that stores with McCafe concepts outsell stores without by about 10-11%, at a greater profit margin - both attributed directly to the sales of specialty coffee.
As we have seen in this presentation, whether to increase sales, retain customers (or attract new ones), strengthen a brand, increase the profitability of existing sales - or some combination as shown in our Borders and McDonald’s case examples - espresso beverages and specialty coffee upgrades in coffee service are the method of choice for many leading retailers, and those enhancements are reaping proven results.
coffee quality improving profitability andrew hetzel cafemakers, llc hawaii, usa
restaurants that continue to serve coffee as an afterthought are trying to play catch up, even as economic forecasters predict a continued financial pinch for the country in general jan ‘03 qsr magazine
drive-thru operators notice competitors coffee in customer vehicles
45% price increase
coffee sales double
if customers were willing to make two stops in the morning to get an exceptional cup of coffee, there was a big opportunity to create value for them by upgrading our offerings mike falkenberry chik-fil-a
cafe and gift and stationery categories positively impacted comparable store sales in remodeled stores, resulting primarily from the conversions of cafes to the seattle’s best coffee brand borders group