Coffee margins heat up, inspire gourmet-brew binge among QSRs
by Ron Ruggless
Reprinted with the permission of Nation's Restaurant News
Cups continue to runneth over with upgraded premium and higher-quality coffees at quick-service restaurants.
In recent months, such big players as McDonald's and Burger King have introduced premium coffee, as have smaller chains such as the 460-unit Del Taco of Lake Forest, Calif. Coffee bean behemoth Dunkin' Donuts, which serves 2.7 million cups a day, is extending its coffee and espresso lines with new gourmet offerings.
Premium coffees, following demographic trends, will continue to percolate, experts say.
"It's analogous to imagining how hard it would be to try to sell a car that doesn't have cup holders," said consultant Dennis Lombardi, executive vice president of foodservice strategies at WD Partners, a multiunit design and development firm based in Columbus, Ohio. "Fifteen or 20 years ago, they didn't even have cup holders. It's a continuing evolution of providing consumers with what they need.
"Basically, the coffeehouses--of course, Starbucks is the leader by far--have raised consumers' levels of expectations, awareness, preferences and opinions about coffee," Lombardi said. "It's now to the point where if your coffee isn't quality, you'll pay a price for that as an operator."
A report in March from the research firm Mintel International Group indicated that premium brews are driving sales at coffeehouses, doughnut shops and quick-service restaurants.
"Coffeehouses have more than doubled their U.S. sales in the last five years to an estimated $8.3 billion," Mintel said. "In another five years the market is expected to reach a staggering $18.8 billion."
According to the National Coffee Association, the popularity of traditional, consumer-brewed coffee has been declining since 2004, and Mintel's research found that only 35 percent of customers at coffeehouses purchase coffee beans there. More than 67 percent of coffeehouse visitors listed quality at the top of their list of needs.
"Consumers are moving away from traditional coffee in favor of premium, specialty selections," said Billy Hulkower, an analyst for Mintel. "People have developed a taste for inventive, upscale, premium-priced coffee. Starbucks and other coffeehouses have effectively attracted people to their shops, and further flavor and promotional innovations have the potential to continue negatively impacting traditional coffee sales."
Restaurants have noticed.
"You watch the consumer and you watch your competitors," Lombardi said. "You find the right positioning and right time to make the necessary moves." Continuing his cup-holder analogy, he said Ford, Chrysler and General Motors all seemed to add them at the same time.
"Some of this [premium-coffee trend] had to do with the increased awareness of breakfast as an important daypart, especially for QSR," Lombardi said. "McDonald's clearly needs to protect its market share in breakfast, while the other QSR firms are looking at it pretty enviously and saying, 'How do we do more of that ourselves?'"
Line extensions are seen as big chains' next logical move. McDonald's, which has 13,700 U.S. restaurants, is testing a "customization" process at an unspecified number of restaurants, including some in Detroit, Chicago and New York, that uses a machine to add requested cream and sugar to coffee orders before they're served.
The 5,800-unit Dunkin' Donuts, which launched a line of cappuccinos several years ago, in March added a line of espresso-enhanced Dunkin' Donuts Turbo Hot beverages, which the chain describes as "coffee with a kick." John Gilbert, the chain's vice president of marketing, said: "Dunkin' Donuts saw great success after rolling out Turbo Ice coffee last summer. We found our young adult consumers really enjoyed a refreshing drink that also gave them a great pick-me-up."
Dunkin' Donuts this February signed a deal with Jet Blue Airways for service of the chain's coffee in Dunkin'-branded cups on its flights.
Different levels of caffeine are part of Burger's King's approach to tapping the premium-brew market. The chain offers at most outlets have-it-your-way versions in the form of regular, decaffeinated and extra-strength "BK Joe"--an option that has 40 percent more caffeine than regular coffee.
"Our customers work hard, so BK Joe does, too," Denny Marie Post, Burger King Corp.'s chief concept officer, said when the new coffee was launched. "They told us they wanted more control when they start the day, so we developed new BK Joe to give them the edge they need when they need it."
Companies have held details about incremental sales and profits from coffee upgrades close to the vest. Generally, profit margins are about 95 percent on coffee, but the higher-quality products are likely to cost the companies slightly more, experts said.
"People want to have convenient access to premium options," said Mintel researcher Hulkower. "Chain restaurants that serve breakfast are trying to present a better one-stop option for their consumers. In addition to building coffee sales, newer options are accentuating their current food offerings."
rruggles@nrn.com
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