When Gus Olympidis of Family Express thinks premium, he’s not thinking only of fuel—he’s thinking lattes made with fresh milk, iced coffees and foamed hot espressos, in a barista-style cup, sans barista.
Like many facing the coffee buzz kill brought on by the likes of Starbucks, Dunkin’ Donuts and McDonald’s, this Valparaiso, Ind.-based retailer is taking its beans to new heights, piloting an automated, self-serve dispenser that produces foamed lattes, espressos and any manner of milk or flavored brew, hot or iced. It even cleans itself.
“This is the Lamborghini” of espresso dispensers, says Olympidis, president of the 60-store Family Express chain. And he’s not kidding. (See graphic at end of story.) A single system—custom made by Franke, the Aarburg, Switzerland-based manufacturer of the foodservice equipment in most McDonald’s restaurants—is easily 20 times the cost of a typical water-soluble hot-dispensed setup.
But in an era when c-stores are slowly losing the battle of the beans, to Family Express, the investment is not only worth it—“It’s necessary,” Olympidis says.
“Our industry is blaming McDonald’s or Dunkin’ for taking away [our coffee] business, but the future goes beyond what we’re offering today,” he says. “Our customers—the females, millennials—have moved to another frontier.”
For an industry repositioning itself as a foodservice business, the battle for coffee has run both hot and cold, literally. Air-pot coffee has been a staple of c-stores for decades, but that “gas-station coffee” has given way to more upscale beans and a gourmet flavor selection, at least on the hot-dispensed side.
Cold has been another matter. Study data from The NPD Group’s CREST database shows c-stores having a 3.4% “menu importance” rating vs. 6.6% for QSRs; that number relates to the percent of meals and snacks that include these items. On the traditional-coffee side, that menu importance number for c-stores goes up to 9.6% and 7.2% for QSRs.
“This is what our industry has been doing,” says Olympidis, pointing to a brewed coffee and dispensed cappuccino section at one of his stores. “But coming up with another flavor from a country people have never heard of isn’t going to do it. Our customers are moving on.”
In the larger picture, Olympidis could very well be right. According to the New York-based National Coffee Association (NCA), daily consumption of espresso- based drinks is on the rise, up 5% to 18% of coffee drinkers, per research released this past spring. And consumption of non-gourmet coffee is down 4% to 35%.
That’s not to say that it’s been a complete surrender for c-stores. Framingham, Mass.-based Cumberland Farms made a viral splash two years ago, reinventing its coffee offer by upgrading its house blend and offering it on ice, inaugurating the change with a celebrity stamp from “The Hoff ” (“Baywatch” star David Hasselhoff).
And much of the industry has dis- covered customization, providing coffee “stations” that include sweeteners and flavored syrups.
CONTINUED: C-Stores' Coffee Needs
But the larger battle may be one of paradigm. What does a convenience store of the future need to offer? Consider:
- Coffee as a cornerstone. Data clearly shows that coffee is the magnet of a successful breakfast offer. Ratcheting up a store’s coffee isn’t just about preserving pots and urns—it may affect the entire foodservice program. Some statistics show as many as two-thirds of coffee buyers buy another item with their coffee. And with a majority of brewed cups being sold in the morning day-part, the breakfast opportunity is there to be won or lost.
- Stakes have been laid. If coffee is pivotal to a store’s breakfast business, then the competition already has the upper hand. Starbucks is 13,000 strong at the higher-priced gourmet end. Since introducing McCafé, McDonald’s, with its 14,000 U.S. sites, has put a quality cup on the map at the 99-cent price point. And with its strong breakfast offer and newly reimagined coffee strategy, the 7,000-site Dunkin’ Donuts in 36 states are riding on good numbers and aggressive growth.
- Attitude. Some data shows that consumers look to c-stores last when it comes to coffee—definitely for specialty drinks, but even for hot dispensed. And other trends show coffee numbers at c-stores—at least with hot dispensed—are stagnating. Other numbers have c-store operators much less optimistic about specialty coffee, while QSRs and other channels are brimming with hope.
- Millennials. It’s not just about fresh or even a few flavors such as French vanilla and hazelnut. The younger generation prefers upscale espresso drinks, lattes and milk-infused drinks, essentially hot and cold beverages few c-store chains are operationally prepared to offer. A solution such as Family Express’ may seem ideal, but can the industry stomach such a high price tag—$30,000 to start, potentially up to $50,000 per store—not to mention the care needed to keep such a precise instrument in tip-top condition?
- Commodity crunch. Market price volatility is also inextricably tied to the coffee category. Can retailers expertly balance not only their flavor profiles but also their profit formulas?
- Proper metrics. Profit is a critical goal-setting tool, but some say using it to measure coffee progress allows retailers to play with numbers. These observers say counting cups per day sold can better indicate if business is growing.
- Brain for beans. Many retailers have no idea what’s involved in delivering a high-quality cup of coffee. Knowledge about bean types, including how they’re ground, roasted and brewed, must increase.
- In-store vigilance. Failing to keep the coffee bar clean and well stocked is certain to kill even the best-tasting coffee.
Despite these industry challenges, many believe the channel can still lay claim to what may be a growing market.
“Our advantage has always been that we’re a one-stop shop for fuel, tobacco, speed of transaction and any other need that is solved by the c-store channel,” says Sharon Porter, director of sales and marketing for Insight Beverages, Lake Zurich, Ill.
Porter’s colleague, John Notte, senior sales manager of convenience stores, adds, “They’re on their way to work—they want breakfast, coffee, need cigarettes, a bathroom break, need space to drive in, larger lots, plenty of parking. The consumer has less time and wants to combine trips.”
Another convenience benefit is customers being able to customize their own cups, says Joe Chiovera, principal in XS Foodservice and Marketing. During his time several years ago with Laval, Quebec-based Alimentation Couche-Tard and its Circle K chain, research showed the importance of customization to customers, leading the company to form a marketing campaign around that value proposition.
“Coffee is an intensely personal beverage,” says Jeff Sisarsky, director of hot beverage marketing for Nestlé Professional Beverages, Tampa, Fla. “C-stores with the most successful coffee programs understand that the easiest way for their customers to personalize their coffee is through flavor variety.”
For Charlene Eid, customization is key. As a one-store retailer in Parma, Ohio, just outside of Cleveland, she admits competing with big chains for the coffee customer is a struggle. “But here, they can make their own cup,” she says. “They can decide what goes in and how much. It’s all in their control.”
CONTINUED: Core Threat
Core Threat
As an industry, c-stores are behind the bean. Data from Chicago-based Technomic Inc. shows that in 2013, c-stores came in third (11%) behind full-service restaurants (16%) and limited-service restaurants (47%) in hot-beverage sales.
The channel itself saw average hot-beverage sales fall 3% on a per-store, per- month basis, with gross profits off 2.6%, according to numbers from the NACS State of the Industry Report of 2013 Data. The specific factors leading to this decrease could have as much to do with weather as cross-channel competition. Total foodservice category sales rose only 2.4% in 2013, compared to an 8.7% increase in 2012.
That’s not to say c-stores have given up on the category. Steve Bradley, corporate vice president of sales for Wilbur Curtis Co., Montebello, Calif., says c-stores—especially the cutting-edge players—have emphasized coffee as an important part of their foodservice offer.
“The reputation of gas-station coffee was that it wasn’t fresh or clean. We’re seeing a lot of the c-store operators going from glass to thermal-type offerings to avoid burnt coffee,” Bradley says. “With c-stores paying more attention to it, they’re giving Starbucks and Dunkin’ a run for their money.”
Others agree. Jennie Jones, vice president of sales and marketing for S&D Coffee, Concord, N.C., says a vast majority of the industry has upped its game, delving into the gourmet realm as a matter of course. But in terms of specialty coffees and espressos, she believes the industry has shied away.
In CSP Business Media’s FARE 2014 State of Foodservice Study, c-store operators saw a distinct promise with dispensed regular coffee, but not as much on the specialty side. When asked to vote on two foodservice-beverage categories that have the highest sales-growth potential next year, 24% said dispensed regular coffee. This is compared to 10% of quick-serve restaurant (QSR)/fast-casual respondents. But in made-to-order (MTO) specialty coffee drinks, the numbers reverse, with c-store retailers seeing a lower level of promise (19%) vs. the more aggressive perspective of QSR/fast casual (33%).
Yet signs of enlightenment do exist. Jones of S&D has seen renewed interest in specialty coffees, with c-store chains taking their hot house blends and duplicating them with an iced profile: “It’s an extension of the brand—the same coffee dispensed at an ambient temperature.
“I wouldn’t call it a trend; it’s a resurgence,” Jones continues. “We’ve had customers dabbling, but it’s labor-intensive and people at the time felt there was not a market for it. But with the success of chains like Cumberland Farms, they’re feeling like it’s something to focus on again.
“There’s still an opportunity. We are a convenience. There’s business to be had.”
If so, the next question would be: Is it an ocean of opportunity, or is it a matter of stealing the demand that exists? For Mark DiDomenico, director of business development for Datassential, Chicago, it’s probably the latter.
“I’m not so sure availability is as an issue anymore,” he says. “Once McDonald’s picks up a product, it’s out there. People are within a couple of miles of an iced coffee. At this point, it’s about: How can we steal that meal occasion?”
CONTINUED: Load-Bearing Bean
Load-Bearing Bean
What’s at stake could be more about the larger meal occasion. In its latest study on day-part traffic, NPD showed c-stores losing the morning meal (down 1% to 33%) to QSRs (up 4% to 22%) and other retail establishments (up 11% to 19%).
“[Retailers] may be shocked that hot dispensed and coffee, when looked at holistically, is possibly No. 1 in menu importance for c-stores,” Notte says. “When you look at a fast feeder in terms of menu importance, it’s french fries.”
By menu importance, Notte says that while coffee alone may only be a $2 item, it’s a proven springboard to a bigger market basket—and a standard bearer for a company’s message of freshness.
“Almost two-thirds of the c-store coffee consumers are purchasing another item with their coffee,” says Cynthia Hswe, director of strategic marketing for Boyd Coffee Co., Portland, Ore. “You need to capture that audience with craveable breakfast items.”
Unfortunately for the convenience channel, drive-thru windows may be part of that required mix, says Chiovera of XS Foodservice. “Several years ago, McDonald’s came and kicked us in the teeth,” he says. “They put together a good coffee program to go with great breakfast sandwiches, and they made us inconvenient because you can get a quality cup of coffee without getting out of your car.”
Certainly, Starbucks competes on coffee without drive-thrus for the most part, but to Chiovera’s point, coffee is inextricably woven into the profile of a typical convenience customer. Coffee drinkers have a “huge affinity” toward tobacco. “They are bona fide, hot-dispensed drinkers,” he says, explaining how the potential to either sell more or lose what’s there exists because of those overlaps. “We’re getting hit from different angles.”
Looking ahead, c-stores will eventually have to address product variety in terms of iced coffee, milk and other options because of upcoming millennials, says Hswe of Boyd’s. “That demographic wants iced coffee and espresso-based drinks,” she says. “Brewed coffee skews to an older population. Stores that want to remain relevant have to address that trend.”
Here’s where Family Express’ grand play comes in. Having faced stagnant coffee sales for months, the company’s question became: How do we solve the problem within the confines of a c-store format? And in addition, how can Family Express further expand on fresh-baked goods, clearly an exploding category for the chain?
There was a Franke conclusion.
CONTINUED: Latte Start
Latte Start
The story behind Family Express’ shift in coffee strategy goes beyond coffee, involving everything from a specially designed baked-goods case to a proofing oven taller than anything that currently exists in the commercial market.
Two years ago, Bill Nolan, vice president of marketing for Family Express, saw a specialty coffee-making device at the NACS Show. While that company’s equipment offered more of an inspiration than an actual solution, it prompted the retailer to research options.
Eventually, Family Express found Franke, which created an automated process for McDonald’s employees to make an array of flavored, milk and iced coffees. Olympidis says it essentially “commoditizes” MTO coffees, bringing it from behind the counter into the hands of everyday Joes and Janes.
Initially, Franke, which has its U.S. headquarters in Smyrna, Tenn., was hesitant. It did not work with c-stores and had not participated in industry trade events. As Olympidis recalls, Franke conducted an intense vetting process that scrutinized his company’s culture and commitment to coffee. Daily maintenance was part of the issue, but so was water quality.
“Water in one part of the state could be completely different than another— different sources, different municipalities,” Olympidis says. “It’s that kind of care and attention they needed from us. It tells you other chains [with a financial focus] couldn’t do it.”
The wrong combination of bad water and poor maintenance could make what is essentially a $30,000 investment into a pile of stainless in a year, he says. The boxes these kits come in are even tagged with special computer chips that can tell if the equipment was dropped or left leaning to one side for a long time.
The equipment redesign and rollout phases have been a learning process for the manufacturer as well. For example, Olympidis says he had to advise Franke on the format of the touch-screen ordering menu. Originally designed more for an employee than a customer, images and words had to be more intuitive and appealing.
All summer, the retooling of store layouts went on in preparation for a fall debut. Olympidis says employees will play baristas initially, explaining what customers need to do. Radio and bill - board ads will build on that foundation to saturate the market with the story of the stores’ new European Café.
But coffee is not the only story. Seeing the links between day-parts and coffee, Family Express took on the parallel effort of designing a completely new bakery case to double capacity and open up the company to a new online-ordering capability.
The company had to work extensively with an equipment manufacturer to produce the new cases, something Olympidis says “shouldn’t have taken rocket science—but it did.” And the company is mapping out a new floor plan for its baking facility, a move that could include creating a new proofing unit, possibly unique to the entire baking industry. The unit uses a rising and falling conveyor to take the dough through a vertically heated oven for even baking.
The entire strategy, from high-end dispenser to the ramping up of its bakery, is all about refocusing the store for the future. “We have a hard time closing stores,” Olympidis says. “Other companies may look at the financials and shut a store down because it doesn’t meet some random number. I ask, ‘What’s in the store that’s not working, and how can we fix it?’ ”
CONTINUED: Today’s Coffee Battlefield
Today’s Coffee Battlefield
To understand how the c-store channel can better compete in today’s coffee land - scape, retailers can look back to the 1990s, when Starbucks and the gourmet-coffee “experience” really began. The Seattle- based chain’s rapid expansion into the early 2000s was exponential. Other copycat chains reached differing levels of success in that time, but the overall concept remained largely the same for years.
Then Oak Brook, Ill.-based McDonald’s and Canton, Mass.-based Dunkin’ Donuts re-entered the scene. Both already sold a lot of coffee. But this was a new day. With strong breakfast offers, the two chains revamped their coffee programs and hit the market with a renewed vigor in the mid-2000s. The idea of a cheaper but upgraded cup of coffee simply took off, leaving many other channels dumbfounded and struggling.
In time, the MTO cup will be an inescapable challenge, says Nolan of Family Express. He points to the success of Keurig. The ability of a simple device to make a single, perfect cup of coffee “has changed the game.”
And he may be right. The number of drinkers of single-cup brewed coffee rose 9% last year to 29%, a trend that is continuing from the year before, according to the NCA.
Commodity Crisis
Just as Family Express stands on the verge of commoditizing MTO specialty drinks, the concern of coffee as a price-sensitive commodity casts a long shadow.
At press time, coffee jumped a mind- boggling 10 cents on the New York futures exchange in a single day. Randy Layton, vice president of coffee operations for Boyd’s, says the issue begins with supply and demand. For years, the imbalance was weighted toward supply, with demand lagging. Today, growing demand from Eastern Europe and Asia has struck an even balance.
“Worldwide demand is up as far as coffee being a preferred beverage, and supply has not grown,” Layton says. “We’re at a choke point.”
Forty percent of the world’s supply comes from two countries, Brazil and Vietnam. While the two countries grow different types of beans serving different purposes, if anything happens to those sources, prices jump. A recent ongoing draught in Brazil caused such tremors.
“It takes four years from when a tree is planted to [yield] usable coffee, and it only produces a pound of roasted and ground coffee,” Layton says. “That leaves the rest of the world to take up the slack, and they don’t have the ability.”
The financial industry adds another layer of pressure. Wall Street and traders around the world have turned coffee into a financial instrument. “They’ve done a lot of buying and gone long on coffee,” he says. “Today, the market reacts quickly to news. Before, it could take weeks or months for a problem to [result in] a price change. Now it’s a matter of seconds, because of more efficient communication ... and miscommunication.”
CONTINUED: Where Retailers Stand
Where Retailers Stand
For the most part, retailers are in a state of limbo, hinting toward a more “gourmet” cup while not necessarily planning for the new directions that coffee, tea and other “fresh” beverages can go.
“The curve is being raised,” says Mike Keown, president and CEO of Farmer Brothers, Torrance, Calif. “Operators are stuck wanting to sell a 99-cent cup. But the [better players] have brought it to the point where you can charge more.”
Some of the challenge with coffee comes from a resistance to change, such as pulling things out or investing in new equipment. Take ice, for instance. Notte of Insight Beverages firmly believes ice should be available at the coffee bar (or as close as possible) for iced coffee. In too many stores, he says, patrons have to walk to the cold-dispensed area for ice and then back to the coffee area to complete their cup.
“You only have so much space, and now you have a frozen-coffee dispenser and an iced-coffee dispenser, and some - one’s buying bakery ...” Notte says. “You have to make those hard decisions when you want to increase space for an overall food and beverage program.”
For the most part, retailers are hanging in there, says Sisarsky of Nestlé. “There was a time when c-stores were the last place you would look if you wanted to find a fresh cup of coffee. But now that consumers are more coffee-savvy and discerning, c-stores have seen an opportunity and have responded,” he says. “Today, most c-stores realize that there’s no such thing as the average coffee drinker.”
Single-store retailer Eid believes coffee represents an open opportunity for anyone who wants to grab it. She knows she has to sell anyone who’s hesitant about convenience-store coffee on the idea that she serves a quality cup. But she usually wins them over after they take a sip. Another key is making sure all the ingredients are fresh, the station is full of syrups and condiments, and the area is clean.
“If people don’t have faith in it or if it does not meet expectations, they won’t come back,” Eid says. “It’s all about being on top of everything.”
However the industry decides to tackle the coffee challenge, the public may still be persuaded to try it. “It seems like the marketplace for different coffee options is very elastic,” says Joe DeRupo, spokesperson for the NCA. “The more varieties are available at different retailers of different types, the more people seem to want. In very general terms, this elasticity appears to be coming from an awareness and eagerness to try new coffee beverages—so there’s room on the street for many different options.”
CONTINUED: Retail Channel Data
Coffee 101
For retailers seeking to understand some of the fundamentals of an upgraded coffee program, George Shoemaker, vice president of sales for The Biz of Coffee, Pittsfield, Mass., along with other sources, provided a list of important subjects to master. Ultimately, the customer is focused on quality, freshness and taste, so even though some of these steps occur thousands of miles from the c-store, everything counts.
Bean: Arabica and Robusta are the two major beans, with Arabica often considered the higher-end bean.
Roasting: Many prefer lighter roasts in that darker roasting tends to mask a lower-quality bean with a heavier, burnt flavor.
Organic, shade-grown: Like meat, coffee can be grown using different methods that may or may not involve pesticides or chemical enhancements. While costing more, some of the more chemical-free processes are touted in marketing to customers.
Fair Trade: Farmers in Third World countries are often exploited. Efforts to fairly reward them is also an extra step, which is, again, a message related back to the customer.
Water: Levels of fluoridation, chlorine and other contaminants can affect coffee taste as well as potentially damage brewing equipment.
Grinding: How fine or coarse grounds are affects taste.
Cross-Channel Share of Hot-Beverage Dollar Sales
Data from 2013 shows c-store volumes run higher in comparison to other channels, indicating a lower price point. But in terms of dollar sales, limited-service restaurants have the upper hand.
| Channel | Share of hot-beverage sales |
| Limited-service restaurants | 47% |
| Full-service restaurants | 16% |
| C-stores | 11% |
| Vending/office coffee service | 10% |
| Travel/leisure | 6% |
| Other | 10% |
Source: Technomic Inc.
Reasons Customers Choose a Coffee Venue
| Channel | Convenience | Price | Quality | Variety | Environment |
| C-store | 74% | 27% | 17% | 8% | 7% |
| Coffee shop | 36% | 30% | 47% | 30% | 25% |
| Doughnut shop | 51% | 29% | 41% | 20% | 16% |
| QSR | 65% | 39% | 18% | 9% | 9% |
Source: 2013 Datassential Coffee & Tea Tracker
Coffee Venue Appeal
| Venue | Very appealing | Not appealing |
| Coffeehouse | 40% | 7% |
| Doughnut shop | 33% | 9% |
| Bakery cafe | 29% | 9% |
| Casual dining | 21% | 14% |
| Fast casual | 19% | 16% |
| QSR | 18% | 20% |
| C-store | 15% | 24% |
Source: Datassential, CSP’s 2014 Category Management Handbook
Family Express' 'Lamborghini' of Espresso Dispensers
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