No Frills Coffee

Consumers abandoning expensive brews

DALLAS -- Forget the froth-laden cappuccinos and the double-shot lattes. More people want their coffee without frills and the fancy price tag. Companies that cater to customers who want a decent cup of coffee at an affordable price are capitalizing during the economic crisis, according to a report in the Wall Street Journal, while high-end retailers struggle to avoid losing revenue and customers.

"We try to keep ourselves recession-resistant," Margaret Chabris, spokesperson for Dallas-based 7-Eleven Inc., the world's largest convenience-store chain, told the newspaper. [image-nocss] Coffee is the No. 1 sales category at the company, owned by Japanese retailer Seven & I Holdings Co.

The company offers coffee from 99 cents to $1.79 for the largest cup. It recently introduced its Brazilian Bold coffee as a response to customers' desire for a stronger coffeehouse blend, Chabris said.

Total coffee sales at 7-Eleven in February rose 1.1% from a year earlier. The chain sells an estimated 1 million cups of coffee a day globally, she said.

Dunkin' Donuts, Canton, Mass., has been expanding in the U.S. West and South, entering markets such as Las Vegas, Phoenix and Nashville, Tenn., where the brand has been "very well-received," said company spokesperson Casey Corrigan. Despite the recession, the chain, owned by Dunkin' Brands Inc., is growing domestically and internationally, she said.

Dunkin' Donuts is the U.S.' No. 1 retailer of hot and iced coffee by the cup and the world's largest coffee and baked-goods chain, with more than 8,800 outlets worldwide. In 2008, global sales totaled $5.5 billion.

"Dunkin' Donuts has always appealed to the 'everyday Joe.' We really appeal to a broad psychographic and not so much a demographic-everyone from a company CEO to a construction worker," Corrigan told the newspaper.

Competition for coffee consumers is as fierce as ever, as companies fight for market share at a time when people are reining in spending.

McDonald's Corp., Oak Brook, Ill., is aggressively taking its premium McCafe coffee line to its 14,000 U.S. units. More than 7,000 McDonald's offer the McCafe brand of espresso-based coffee, with plans to outfit most of the remaining restaurants by mid-2009.

"We are very aggressive and very bullishly adding this new line of coffees to all of our existing restaurants," said Danya Proud, spokesperson for McDonald's USA.

The economic recession has enabled the world's largest restaurant chain, with total revenue of $5.7 billion in the fourth quarter of 2008, to tap into the growing demand for lower-cost food and beverage items.

As consumers gravitate toward cheaper beans, higher-quality coffee retailers have been affected to a greater degree by the economic downturn.

Caribou Coffee Co., Minneapolis, earlier this month reported fourth-quarter 2008 earnings of 7 cents a share on net sales of $68 million, a 3% decline from a year earlier. Net sales at its coffeehouses open more than a year fell 5.1%, as 230 stores have closed their doors since the 2007 fourth quarter.

Caribou is the third-largest company-owned gourmet coffeehouse operator in the United States. As of Dec. 28, 2008, the chain had 414 company-owned coffeehouses and 97 franchised stores.

Starbucks Corp., the world's largest coffee chain, posted a fiscal first-quarter revenue decline of 5.5%. In February, the company began the process of cutting 6,700 employees, or 4% of its work force.

In an effort to offer more attractively priced fare, Starbucks has entered the instant-coffee market and is pairing breakfast items with a cup of coffee for $3.95.

High-end coffee retailers "have to convince the consumer that they can drink much better quality coffee for just a little bit more than what you can make at home for a lesser-quality coffee," said James Cordier, coffee analyst and founder of OptionSellers.com. "That window may have closed already, but there's a chance they can keep their customers by offering quality coffee at a discounted price, because once people invest in that good coffeemaker at home, you're done."

Arabica coffee futures, like many commodities, have fallen off their late-January highs as traders liquidated risky commodity positions while the stock markets fell to 12-year lows and the U.S. dollar flexed its muscle. Friday, coffee for March delivery fell 0.15 cent to settle at $1.0830 a pound.

Traders say underlying fundamental support for coffee prices results from delayed Central American harvests and expected lower production in top grower Brazil because of adverse weather and production cycles. Supplies of top-quality beans from Colombia, Costa Rica and Guatemala are scarce as a result.