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Defend your hot beverage business


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Tips for protecting sales and profits in today's increasingly competitive retail climate.

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Defend your hot beverage business

  1. 1. to lower retail prices, which was also learned in the (SD /Balvor Foodservice Survey. If you're unsure about add- ing a smaller size, analyze your sales trends by cup size over the last few years. If the share By David Bishop, Contributing Editor of units sold is shifting down to smaller sizes and, worse, total unit NTENSIFYING COMPETITION FOR THE morning day- sales are declining, this may be the I part and escalating commodity costs for coffee drinks have forced convenience retailers to make trade-offs between pricing and profits. This is no small issue as hot dispensed beverages are strategically vital to a retailer's evidence supporting a move. ADJUST RETAIL PRICES morning business segment and fresh foods program. SELECTIVELY Defending the current business is a key step to build- If you're ing it over time. Here are a few tips that retailers should be concerned aware of that will help protect the price conscious customer about maintain- and minimize the negative impact on profitability. ing competitive prices and CHECK YOUR SIZE OFFERING profitability, If your smallest cup size isa 16 ounce, consider intro- con templa te ducing a smaller size to maintain parity with what your a pricing primary competitors are offering. The fact is that more approach that than one-third of the convenience retailers don't offer selectively anything smaller than a 16-ounce cup. This was one of changes prices the key insights learned as part of the 2010 (SD /Balvor based on a prod- Foodservice Survey. Why is this important? uct's role and The smaller cup size aids you in more effectively com- price sensitivities. peting against rivals, like Dunkin' Donuts or McDonald's, This is relevant as whose smallest size can be a 10- and 12-ounce, respectively. near Iy nine out Adding a smaller size also enables retailers to offer a lower of 10 convenience opening price point without sacrificing as much penny retailers set retail profit as compared to simply discounting the 16-ounce cup prices comparable size in order to maintain price parity. to their primary Although many retailers remain reluctant to introduce competitor. But, a smaller size for fear of down trading, top-quartile conve- competitive price nience retailers were more willing to do so if they faced this checks by retailers issue. In fact, top-quartile retailers-based on foodservice tend to focus on a dollar sales-were 29% more likely than the average to have particular product introduced a smaller cup size in the last 12 months in order or package size. :; 34 Convenience Store Decisions I December 201 0 CSDecisionso ,
  2. 2. --- ~--~---------- FeatureFoodservice Starbucks is the most recent and public example of how retailers are applying this approach to hot beverages. Starbucks is maintaining or even lowering retail prices on some of its basic hot drinks, which generally serve as an entry point for light and moderate customers. Simultaneously, the chain is increasing prices on more complicated, signature drinks it believes are less price sensitive. The blended approach-selectively adjusting prices of C'ile en Poudre products-prevents the more price-conscious customer from defecting to a competitor and enables you to pass along the higher input costs in areas less likely to experi- ence unit sales declines due to higher retail prices. If you're unsure, test various pricing scenarios in the store to understand how customers respond, analyzing total units sold and share of units sold by cup size. If total units sold decreases or shifts to smaller sizes, then assess the impact on dollar sales and gross profits. CHANGE CUP SIZE REFERENCES More and more convenience store operators are following If you communicate the actual cup sizes-like 16 ounc- Starbucks' lead and embracing special brews, such as Rainforest es-on the menu board or signage, think about shifting to Alliance certified beans and unique country blends. a relative description instead, like medium. Recent store audits conducted by Balvor reveal a majority of conve- nience retailers focus on the actual ounces in the cup while the competition uses relative descriptors. but knowing the actual ounces for each cup size requires a Using a relative descriptor makes it more difficult for customer to look at the bottom of the cup as it's not listed on customers to compare prices across chains. For instance, the menu board or on the side of the cup. .- checking prices at McDonald's may be straightforward, The shift in terminology brings the store into alignment " with how competitors present their cup offering. And, it also makes it easier for stores to refine the cup sizes avail- Size able without alerting the customer or the competition to (By Ounce) the change. That's if there is a need for you to introduce Dunkin'Donuts 10 a smaller cup size in order to maintain the opening price McDonald's 12 point position. Starbucks 12 It's not uncommon for packaged manufacturers to hold Einstein Bros. 12 the line of prices by reducing the portion size during peri- 7-Eleven 12 ods of inflation. Therefore, retailers could follow a similar Circle K 16 tactic with hot coffee that's just a little more subtle. Speedway 16 PUTTING IT IN CONTEXT Consider these suggestions within the context of how you manage the business and what your objectives are both short and longer term. Also, be sure to leverage insights Chain Relative Sizes Actual Size gained from analyzing sales trends, competitive mar- (S/MIL) (16 oz.) ket intelligence, and customer engagement to assess how Dunkin' Donuts Yes Yes' and where these suggestions can help defend your hot dis- McDonald's Yes pensed beverage business. Starbucks Yes Yes' Following these tips are simply a few among many steps Einstein Bros. Yes you should be executing to defend and, better yet, grow the 7-Eleven Yes current business. You also should be examining how you Circle-K Yes can better control shrinkage and product waster via better Speedway Yes controls, practices and equipment. Retailers interested in gaining additional insights * Size is smaller font and subordinate to descriptor on menu board. and perspectives on this topic can view Part 1 of CSD's Source. Store audits, Ba/vor LLC.September, 20 I0 Foodservice Webcast Series, which is available free on-demand at CSD 36 Convenience Store Decisions I December 2010 CSDecisionso I