April 16

Coffee Service Corner

Coffee Service Corner Monthly Column

Single Cup in Coffee Service – An Evolving Landscape

For a number of years I had the privilege for writing a column for my dear friend Ben Ginsberg’s Vending & OCS magazine. Ben’s publication was known and respected for relevant content, and Ben did a great job of soliciting advertisement from the supplier community. As I prepared for this article, I reviewed a 1999 issue of the magazine. (One I kept, as it had an article on my beloved Standard Coffee Service and before I began writing for Ben).

In this leading edge magazine, less than 17 years ago, there was only one advertisement for single-cup technology and it was not brew-by-pack. It was a Cafection ad announcing the rollout of their Avalon X, a hopper-based brewer. This issue also featured Hamilton Beach’s rollout of their new commercial batch brewer line. Probably not the timeliest of ventures. And I should note that a current industry magazine I read this weekend has 5 advertisements on single-cup products and/or systems.

In less than two decades, single-cup beverage brewing has grown exponentially with little signs of slowing down. However, the-single cup landscape in coffee service is changing.

Downward Pricing Pressure

The accepted threshold of what hot beverage drinkers will pay for an in-office cup brew was thankfully raised in the mid 1990’s with the introduction of the Flavia system. From the days of the 10 cent cup of batch brew, the bar has been raised from around 50 cents in the 1990’s to more than 75 cents per cup today. Our industry has enjoyed a period of prosperity that allowed batch brew locations to be converted to single cup systems. In general, this has allowed the operator to enjoy profit dollars more than double what the batch brewer generated. But today, most every operator that I speak with reports a growing downward pressure on pricing from their competition and the proliferation of alternatives.

The faux K cup entrants to the marketplace are offering very good quality cups at dramatically lower prices than the incumbent. The operator and the operator’s customer now have a choice. “Do I recognize the value of brands and pay a premium? Or, do I go with a not so well-known brand…. even perhaps a private label, and reduce my COGs by as much as 15 cents per cup?” Does this sound familiar? Remember the great exodus away from the grocery brands during the 1980’s and the move towards heavier-weight private label fractional packs with COGs reductions approaching 30%.

As reported by IRI, value cup products in the retail segment are one of the most important category drivers. Is retail a harbinger of the next wave in Coffee Service? One thing is for sure, the office decision-makers see these lower-cost cups on the grocery shelves and that too creates even more downward pricing pressure.

Like GMCR/Keurig, both Trilliant and Mother Parker’s are two fully integrated, high-speed cup roaster/packers. There are a number of other alternative providers including some Coffee Service operators that are packing their own cups.

Sustainability 

We all see the press coverage of the carbon footprint created by packaging used in single-cup brewing. Until now, the Coffee Service customer base has tolerated this reality. But with the growing number of Millennials in the workplace, and their more principled stand on this problem, will we see greater rejection of the products that have such a negative impact our environment? We already are.

Some cup manufacturers are already promoting eco-friendly materials in their cups and more manufacturers have announced that they will have biodegradable or compostable cups in 2016. This could be the tipping point that motivates even more Coffee Service operators to look beyond the brands and move in this direction unless those cup providers can make the same claims.

With the recent sale of GMCR/Keurig to JAB Holdings, will we see a hastening of their move to such a solution? This European conglomerate is number 2 (maybe number 1) and certainly has aspirations to build the single-cup market beyond the U.S. Just last week, according to BBC, the German city of Hamburg banned a number of products and appliances which would include K cup brewers.

The interest and demand for recognized badging of products continues to grow. Having organic products in the menu of offerings is important, as is affiliation with reputable organizations such as Rainforest Alliance. Protecting the environment and humanity in origin countries is a necessity for which more and more coffee and tea drinkers are eager to pay and support.

More Than Just Cups

While cup sales lead in total volume in the Coffee Service industry, there are other options that remain relevant.

Mars Drinks continues to come to market with new coffee and tea blends and more advanced brewing systems. So far, they have been steadfast in their “not in retail” position. Office managers continue to express angst over their amenity office cups making their way to the homes of their employees.

Pods have been a steady market share gainer as equipment manufacturers continue to come to market with more robust, intuitive brewing systems. Gram throws have gone up and we are seeing more single origin offerings.

Hopper-based systems can provide a fabulous cup of coffee and most have the ability to brew combination drinks, at a fraction of the cost of a brew-by-pack offering. The asset cost is much higher and the brewers are more service-intense, but we are seeing growing office demand for these systems.

Even the Courtesy Products’ Café Valet drip brew packets and appliances found in many hotel rooms will soon be available for Coffee Service. Very good quality coffee with an almost no-cost appliance should have a place in the small office community and campus’ dorm room.

A Conflicting Dynamic

The Millennial influence in the office is also impacting demand in a way that is counter to the downward pricing pressure being experienced by operators. One of the most important attributes of single cup brewing, choice, is being countered by a demand for better quality. Much of this is driven by the coffee shop experience. Beverage consumers are eager to wait in line for a custom brew and then lay down $5.00 for it.

This is not to say that the cup manufacturers have not made measurable improvements in the beverage quality we experience today versus that of a decade ago. Improvements have come in the quality of the ground coffee, the amount of coffee in the cup, and even the brewing technology within the cup.

And don’t forget the high-end tea demand that continues to grow by leaps and bounds. Can brew by pack meet the quality caveat? Does tea demand more steep time than the 30 – 40 second limitation of the cup systems? Or will this need by met by products outside of the “brew-by-pack cup”?

Nutrition Possibilities

What lies ahead beyond hot beverages from the cup, sachet or pod? With greater attention being paid to lifestyle, nutrition, and wellness, there appears to be a niche that could be met with a brew-by-pack offering that would require no measuring or envelopes to open. Could we see a wave of new offerings soon?

One thing is for sure. We have come a long way in the evolution of single cup over the past two decades and this evolution is sure to continue.

Until next time – Ken

By Ken Shea

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