July 4, 2009
QSRmagazine.com : issue : qsr magazine January 2003
The Continuing Coffee Boom
Starbucks might be the undisputed king of quick-serve’s coffee-culture, but nowadays any concept worth its beans should take a look at what coffee can do for a bottomline
The customers talked all the time about the doughnuts. Hot, fresh, tasty, and the perfect way to start the day—in 65 years, the folks at Krispy Kreme had heard all the kudos imaginable about their trademark Carolina doughnuts.
Nary a word was ever said about the coffee, the ultimate doughnut companion. It was there, sure, but its relationship to the business was rather like that of a parking lot: You had to have it, but it wouldn’t start a conversation or cause you to stop the car.
"They didn’t speak as favorably to the coffee, but they talked about the doughnuts," Stan Parker recalls of customers in the day before the coffee explosion. "We wanted to give them the same experience with coffee."
When Krispy Kreme found the perfect complement coffee to its doughnuts, it didn’t matter that Digital Java was a small Chicago micro roasting operation. The family running it did coffee the way Vernon Rudolph approached his doughnut business in 1937, by tinkering until the perfect product emerged for sale.
How serious was the company about improving its cuppa Joe? The whole Chicago roasting business was bought, moved to North Carolina, and transplanted to the new, state-of-the-art roasting facility that produces Krispy Kreme Signature Coffee, four blends ground fresh in stores daily.
When other brands hear of that two-year odyssey, they nod, then recount their own stories of finding the perfect bean. Starbucks may have started the American coffeehouse revolution, but its biggest marketplace is just finding footing in the emerging world of gourmet quick-serve blends.
"It’s the attention to detail," says Tom Berzinski of Caribou Coffee, a brand that rode the Starbucks coattails to more than 200 retail locations over the past decade. "Good coffee in the restaurant business is something you have to have. You see a lot more attention to detail, and the customers expect that."
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| Upgrading coffee isn’t cheap, and keeping it upgraded can be even more expensive. |
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Such devotion to coffee—once the ugly duckling of quick-serve menus—isn’t surprising to those who study and sell the twenty-first century brew of one of the world’s oldest beverages. Wars are fought over it, customers in the United States spent $10.71 billion on it last year, and restaurants that used to consider it a necessary nuisance if they served breakfast are buying micro roasters and sending tasters to the far corners of the globe to find the best their customers can afford.
But those experts will also agree that coffee is a complicated animal in the quick-serve business. A pot’s shelf life is short, meaning that gallons are often dumped if customers slump on their coffee fixes. Training someone to make a pot of coffee takes time, and consistency can depend on whomever is least busy on any given shift. For that reason, some of the biggest names in quick-serve have yet to enter the world of gourmet coffee, simply because they aren’t sure how to deliver on the goods time in and time out and not pour pots down the drain at four o’clock in the afternoon.
"You can’t serve a great meal, then not deliver on the coffee," says Ed Valle, director of beverages for Dunkin’ Donuts, which attributes half of its sales to the 800 million cups of coffee sold annually. Dunkin’ Donuts was charging a dime for coffee when others charged a nickel, Valle says, indicating that the company has always emphasized a quality cup of coffee. Attend Dunkin’ Donuts University and you’ll learn the best way to make a good, consistent pot.
That trip to coffee perfection starts with the bean, specifically those premium blends that caught the consumers’ attention about 10 years ago when the coffeehouse phenomenon was born with Starbucks, says Mike Ferguson, marketing director of the Specialty Coffee Association of America, a group with 2,500 members of roasters, growers, retailers, and exporters. The coffee his group represents is that being touted in franchised coffee shops and in the upgraded coffee programs for many quick-serves. It’s a higher grade of coffee, meaning it’s less likely to have defects in the green beans, the stage coffee is in when it’s sold on the world market.
The majority of coffees Americans drink come from South America. The prices, both minimum and maximum, are set by the International Coffee Association, which groups together close to 98 percent of producers and sets quotas for the world’s biggest exporters: Brazil, Colombia, Indonesia, Mexico, Vietnam, and Cote d’Ivoire. Politics in the coffee trade has been around since the late 1500s, when Arab nations began cultivating the plants and exercised a monopoly that would allow only boiled, and therefore infertile, seeds to be exported so no other nations could begin their own coffee cartels. It wasn’t until 1616, when records indicate Dutch traders smuggled out a coffee plant, that the crop began to spread to places such as Ceylon, Java, Sumatra, and Bali.
Today, coffee is second only to oil as an international trade item, and occasionally, the World Bank uses the beans in lieu of currency so producer countries can trade them to wealthier nations for aid.
There are dozens of coffee varieties, but the market is dominated by two species: Coffea arabica, the oldest known bean, and Coffea robusta. Arabica, as its name implies, is grown mainly in Arabia, but is also the dominant coffee in Ethiopia, India, Brazil, Mexico, and Colombia. Robusta is grown mostly in Africa and costs less.
Ferguson says the 1990s explosion of coffee retail has helped people understand what a good cup of coffee tastes like. They know the smell of freshly ground beans. They know when a batch of beans has been roasted too long and has turned bitter. Once they’ve had good coffee, he says, they won’t go back.
Customers may not be able to taste the difference between, say, Indonesian coffee or some from South America, but they will know when a brew is well-balanced, full-bodied, or smoother than others, Ferguson says.
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They also know they enjoy the fresh taste of grinding their own coffee, and that’s why quick-serve brands such as Bojangles’ and Krispy Kreme are getting into whole bean retail sales.
"It’s kind of like the new wine, if you will," Valle says of coffee’s mystique and why people prefer certain blends. "Everbody’s upgrading their coffee. You can’t get away with a cheap cup of coffee anymore."
The fact that coffee comes from some of the world’s most unsettled and unsettling areas is one reason why the Specialty Coffee Association came to be. Most of the growers of finer grade coffees are small operations. They often get caught in the regional and economic politics of coffee supply and demand—a system that often ensures the price Americans pay is vastly different from the price the grower gets for the green beans.
"We’d like to see them get a bigger piece of the pie," Ferguson says. "We’d like to see them stay around and produce that coffee."
The 1990s economic boom in the United States fueled that coffee revolution, he says. Sales evidence from the 2002 Coffee Service State of the Industry Report, shows the public, now in less-rosy economic times, has no thought to return to cheaper coffee. Daily consumption of premium specialty coffee has increased from nine percent of adults in 1999 to 14 percent two years later, according to Ferguson’s group. Retail units that derive a majority of profits from coffee sales increased from 585 in 1989 to 13,500 last year. Restaurants that continue to serve it as an afterthought are trying to play catch up, even as economic forecasters predict a continued financial pinch for the country in general.
The quality, and therefore the price, of coffee depends on how quickly the beans mature and ripen and how fast they’re pushed along to the roaster. Coffee imported with more defects—up to 30 percent of imported coffee can be defective under standard government allowances—doesn’t taste as good when it’s roasted, but it’s cheaper, Ferguson says.
"The specialty coffee starts out more expensive," says Ferguson, who prefers to start off the day with an earthy Ethiopian coffee so distinctive you can almost taste the dirt the beans were grown in. "People are willing to pay more, and they’re continuing to show that willingness."
Good coffee is an affordable luxury, Berzinski says. As customers become more accustomed to the taste of coffee’s best, they’re less surprised by higher price tags either in coffeehouses or the corner quick-serve. They’re also inclined to favor establishments with more varieties that range from smooth, subtle blends to heartier fare favored by Europeans.
All of that leaves room for more sales opportunities, but it comes at a price, operators say. Upgrading coffee isn’t cheap, and keeping it upgraded can be even more expensive.
Quick-serves know that cost, but franchisees also know of the tremendous potential for waste there is with premium coffee programs. Valle says that’s a chance that must be taken, and a pot of coffee can sit only 18 minutes at Dunkin’ Donuts before it’s tossed and a fresh one brewed.
Freshness is critical, and it doesn’t do any good to start with a premium bean then botch the brewing, says Joe Drury, president of Bojangles’, which grinds its coffee fresh in stores daily and will soon hit the retail market with its blends. Drury’s company upgraded several years ago, seeking a customized coffee product, consistent procedures, and a better bean.
"We’ve got a good, strong breakfast brew," he says. "That sets you apart from the sandwich business. We have breakfast built in with everything we do."
The coffee beans are vacuum packed, sealed, and brewed within days after leaving the distribution center. Ensuring that consistency is an investment, he says, but it’s one critical to a brand that has breakfast built around almost everything it does.
Most of the vanguard of coffee quick-serves are those that had breakfast products as a core element of their business, franchisors say. Almost 80 percent of quick-serve coffee sales occur between seven and 10 in the morning, but what to do after that rush is the question many brands are asking, says Gary Lillian, president of Javo Beverage Company, which produces a mosaic of coffee products and supplies.
"Coffee is one of those—hair pulling experiences," says Lillian, whose company is making a coffee concentrate. "They say, ‘Coffee is only two to three percent of my sales, but in the morning, it’s 30 percent of my headache.’"
Lillian says the concentrate his company is developing comes from roasted and ground coffee beans, but it’s turned into a syrup that then goes to operators. The coffee is made when hot water is mixed at the restaurant with the concentrate. So far, the product is in use at Johnny Rocket’s and is being tested in about four other major franchises, he says.
Lillian also says that breakfast-oriented restaurants can profitably brew on-site because they serve products suited for coffee all day long. The other brands, the ones that may sell one cup of coffee between three and four in the afternoon, are the ones who might be interested in the concentrate.
"Your option during that time is either throw the pot out or serve bad," he says. "With this, it’s not coffee until you pull the handle and mix it with the water."
The 30 percent premium on the product will probably equal the wasted coffee costs in most quick-serve restaurants, he says. What you get for that price, however, is convenience, quality, and a product that requires almost no training and takes about three minutes of attention each week. "And it’s a better cup," he says. "You’ll take that headache away and put the focus back on the center of the plate where it needs to be."
Caribou’s Berzinski says overall, restaurants are trying to find a way to improve the coffee operation by paying more attention to equipment, water quality, and who makes each pot. "Coffee is only half the battle," he says. "We’re standardized by coffeehouse to make sure the product is consistent."
Ferguson says quick-serves have raised the level of their coffee service, but many franchisees don’t understand how delicate the procedure of brewing can be. Unlike a good bottle of wine, which is hard to ruin, a premium blend of coffee beans can be turned to acid if it’s brewed incorrectly, kept at the wrong temperature, or brewed too weakly.
For example, Krispy Kreme coffee is brewed into thermal servers and never sits on heat in the stores. That keeps the coffee from getting that burnt or charred taste. Fresh pots are brewed throughout the day, and beans must be brewed within 28 days of being roasted. The price varies by market compared with the old coffee program, Parker says, but in company stores the range is $1.29, $1.49, and $1.59.
"You can absolutely taste the difference," Parker says. "In each blend we wanted there to be something unique."
As Krispy Kreme franchisees test their new coffee products, they’re finding that what works well in one region might not fare as well in another. Smoother, lighter brews are favored in the South, but in the West, it’s the bold flavor customers go for.
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| "It’s kind of like the new wine, if you will," says Ed Valle at Dunkin’ Donuts. "Everybody’s upgrading." |
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Some 1.4 million pounds of coffee a year are roasted and blended at Krispy Kreme, one of a growing number of quick-serve franchises brewing, roasting, and distributing whole-bean coffee for its stores. The Krispy Kreme beans are distributed to 234 stores, and the secret blends for the coffees are in the company vault, right beside the formula for the doughnut mix.
The brand’s growth is one of the reasons why coffee was put on that back shelf during the first half of the coffee revolution, Parker says. The last four or five years were spent expanding market share and opening new stores; now it’s the coffee’s turn.
The potential for coffee profitability is even hitting areas that weren’t easy stretches for coffee. Starbucks, seen as competing against itself in many markets, recently announced that it will join retailer Target in putting coffee shops in the new and relocated stores. Target staff will operate the shops, which will sell the same products as Starbucks stores, and a portion of sales goes to Starbucks.
Smoothie King, the quick-serve franchise known for healthier drinks, introduced in November a new product, its five-member HeaterZT line of beverages. "We’re getting more serious about coffee and coffee opportunities," says the smoothie chain’s president and CEO Kevin Donovan. The hot smoothie brews come in flavors ranging from Coconut to Chocolate Peanut Butter to Cinnamon Oatmeal Raisin. The addition of more coffee flavors, from French Vanilla to Irish Cream, will help the franchise’s stores maximize the number and variety of products that can be produced with similar equipment, Donovan said. All of the Smoothie King extras will come with those beverages, meshing the brand’s core product with this emerging niche. "Coffee is fashionable," he says. "It’s a cultural identity, and it’s fashionable. Coffee drinkers were coming to us and saying, ‘Can you satisfy this?’"
It took two years and much involvement from the Smoothie King Franchise Advisory Council Board to develop the HeaterZT.
Another way chains like Dunkin’ Donuts are trying to capture more of that coffee money is through the flavorings that have been credited with turning once-occasional coffee users into regulars. At Dunkin’ Donut those include the popular French Vanilla and Hazelnut. The flavors help stores create more sales opportunities, bringing in people who might come looking for a good cup of coffee, even though they’ve never been regular food customers.
"The beverage experience is very important," Valle says. "There’s a price that comes with serving quality."
