Monday Morning Java: Coffee Industry News, Analysis and Insight to Start Your Week Off With a Jolt

McDonald's premium coffee is black gold, Starbucks calls a timeout, Wegmans "Coffee U," Raley's and Peet's get married, Celestial java...and more.

McDonald's (Premium) Black Gold: Consumers' wallets and purses might be near-empty because of the current near-global economic malaise, and their confidence in the economy even emptier, but they still need that coffee-fueled jolt of java to get them started each morning. And, they're willing to spend a little bit more per-cup in order for it to be a premium coffee buzz.

After all, when the home equity line of credit and credit cards are all tapped out--and as a result buying a new car, remodeling the house, or taking a major vacation are out of the question--a cup of premium roast coffee or a premium blend latte or cappuccino can be an affordable luxury that doesn't break an already severely injured bank account.

But the economic bad news' timing couldn't be better for international fast-food retailer McDonald's it seems. The company's big push to introduce premium coffee drinks in its U.S., European, Russian, Asia Pacific, African and Middle-East region stores about two years ago is paying big dividends for the fast food giant. McDonald's Corp. has just reported a double-digit increase in same-store sales in all of the above national markets where it has stores.

The primary driver of these major same-store sales increases are the chain's premium coffee drinks, along with some new breakfast items it introduced at about the same time, according to a McDonald's spokesperson.

The world's number one fast food retail chain reported that overall sales from its stores open at least 13 weeks soared nearly 12% over a year earlier , demonstrating that while the poor economy is hurting many upscale retailers, its actually seems to be helping middle of the road McDonald's and its sales of premium coffee drinks.

U.S. same-store sales growth increased by 8.3%--do primarily to the premium coffee drinks--over the same period last year. European and Russian same-store sales growth was even more impressive, growing by a whopping 15.4 percent, compared to the same period last year. McDonald's same-store sales in the Asia-Pacific, Africa and Middle-East regions rose 10.9%, with China, Japan and Australia contributing the highest percentage of that nearly 11% rise.

The chain's premium coffee drinks aren't yet available in all of its U.S. and international market restaurants. However, the consumer feedback--and sales numbers--are positive for the about 1,000 stores currently offering premium roast coffee and premium quality coffee drinks like lattes, espresso, cappuccino's and other Barista-made drinks.

Most analysts say they are especially surprised at McDonald's strong 15-plus percent same-store sales growth in Europe. These analysts attribute that astounding growth in a part of the world not all that famous for its love of fast food, primarily to the new, premium roast coffee and coffee drinks, as well as to the fast food retailer's introduction in Germany of 100 of its new McCafes, which are the chain's version of a Starbucks-style upscale cafe. McDonald's has McCafes in the U.S. and elsewhere, and plans on opening more. The upscale little McCafes are becoming extremely popular in Japan, for example.

Additionally, these analysts tell us McDonald's has upgraded the look and menu selections, including adding premium coffee drinks, in many of its stores in the United Kingdom and France. This, they argue, has brought many new customers to the stores in those nation's. In fact, France, of all places, has become McDonald's most profitable country outside of the United States.

Starbucks Takes A Timeout: On Tuesday evening, February 26, every Starbucks cafe in the U.S. closed for three hours so that the company could spend that time reinforcing the "Starbucks Way" to its employees: teaching them to be friendlier, more neighborly and more...well "Starbucksier," if you will allow us to use that word.

The three hour training break (we almost said coffee break but that would be redundant) was the brainchild of Starbucks' founder and once again CEO Howard Schultz. He was recently brought back in as CEO from his bigger-picture position of Chairman because the mega-coffee retailer (Schultz would hate that term) was floundering sales-wise and Wall-Street analysts' approval-wise.

For at least two years before assuming the CEO position for his second run, Chairman Schultz had been regularly warning the company via his blog, internal emails and in face-to-face talks, that it had strayed from what has made it successful: being a neighborhood cafe in the European style, a third place where people don't visit to merely get a cup of coffee but to hang out, read and converse as well. (Think the bar on the TV show Cheers.) The problem, Schultz says, is the Starbucks (which we note is only 37 years old) needs to recapture "the soul of its past."

Schultz also repeated over and over Starbucks had lost its new product innovation mojo, and that this combination of factors threatened to end its rapid-growth plans, as well as send its stock price on a never-ending downward spiral. The Wall Street analysts agreed with that last comment. Starbucks board of directors ultimately agreed a couple months ago as well, firing the then CEO and urging Schultz to once again assume that position and role , along with remaining Chairman.

So, for three hours on February 26, associates at all of the cafe chain's U.S. stores were given the Howard Schultz mantra, which built the cafes into the huge success they've become today: be more friendly, remember Starbucks is much more than a coffee shop, know your customers because they are your neighbors, and more.

However, since all of the Starbucks cafes across America closed at 5:30 pm--and didn't open again until 9pm--more than a few customers who showed up for their after work coffee drink or before work java-jolt for the millions who work the late shift were taken by surprise by the locked doors and sign on the door informing them of the three hour "training closure" despite the fact Starbucks announced it in the stores weeks earlier, and the media wrote about it days before.

The March 11 edition of Advertising Age has an interesting piece about a study done by the Aegis group, which found Starbucks did a good job informing consumers about the closure but failed to report the most important part--why it was closing for the three hours. (Of course, those tens of thousands of customers who tried to get a cup of coffee and hang out at their third place between 5:30pm and 8: 30 pm that evening might disagree with the first part of the study--that the company did a good job in communicating the closing part--as well.)

But we digress. The Ad Age story on the Aegis Group's study is an interesting piece of research and knowledge for retailers of any type or format who may be planning a similar three hour closure--although in the case of supermarkets they would rather die than lose even three hours' sales--or for that matter merely in need of improving their communications programs. That's something nearly all retailers have a need to do.

Increasing Starbucks' 'Friendliness Quotient': Research firm Aegis Group isn't the only one studying the retail coffee chain's three-hour closure event. Jon Carroll, the long-time columnist for the San Francisco Chronicle, has not only analyzed the mega-coffee retailer inside out--especially since he now goes to his local Starbucks which is something he avoided for years--he's done so with his own tongue planted firmly in his cheek.

In this column, Carroll offers Starbucks six "Big Idea" innovations which he says will not only allow the cafe chain to recapture "the lost soul of its past" as CEO Schultz believes is needed, but will also allow the company to increase its "friendliness quotient," which was one of the chief objectives to the three hour cafe-level employee reorientation on February 26. [Read Jon Carroll's column here.]

Starbucked: In case you're craving more Starbucks news like a haggard shopper craves a double-mocha latte after spending hours in the mall, may we suggest this interview in the Christan Science Monitor with author Taylor Clark about his fairly new book, "Starbucked: A Double Tall Tale of Caffeine, Commerce and Culture." We just started reading the "Starbucked" book and came upon this review in the Monitor by journalist Clayton Collins. It's short, well done and informative.

Coffee Retailing Notes

Wegmans Sends its Associates to Coffee U: Speaking of training in the art of coffee brewing, upscale East Coast USA grocery retailer Wegmans Food Markets has launched a training program designed to equip it store associates with all the skills needed to brew the "perfect cup of coffee," according to the company's senior vice president for customer affairs Mary Ellen Burris, who wrote about what the retailer calls its new "Coffee University" program in her weekly online column on the retailer's website.

Rochester, New York-based Wegmans created the program in partnership with its coffee roaster, Yonkers, New York-based Barrie House. The "Coffee University" course "provides the first of three barista certification levels, as well as covering the American cup of coffee from the ground up", Burris says.

The course follows guidelines used in Italy to among other things create a perfect shot of espresso. In fact, the "university-level" trained barista's will even have a new blend of espresso to practice with in the stores, which Barrie House roasters has developed as another way for Wegmans to improve the quality of its premium, in-store coffee drinks.

Peet's and Raley's Get Married: As a part of its goal to expand the number of in-supermarket coffee shops it currently has, Emeryville, California-based premium coffee roaster and marketer Peet's Coffee & Tea, has scored a big hit with Sacramento, California-based Raley's, which operates 129 supermarkets in Northern California and Nevada under the Raley's Superstores, Bel-Air Markets, Nob Hill Foods and Food Source banners.

That big score? Peet's will put coffee kiosks in 100 Raley's-owned supermarkets over the next three years. The kiosks will be mini store-within-a-store versions of Peet's stand alone retail coffee houses. The Peet's kiosks are similar to those Starbucks has in thousands of supermarkets and big box bookstores across the U.S.

Prior to 2002, Peet's was primarily a coffee roaster and retailer which operated its own stand-alone coffee shops, primarily in Northern California's San Francisco Bay Area where the company is based. The coffee company also had a line of packaged premium coffee products but they were sold primarily in specialty stores or very upscale supermarkets.

In 2002 however, current CEO Patrick J. O'Deo joined the company with the mandate to grow sales. The centerpiece of O' Deo's growth program was to dramatically increase distribution of the roasters packaged coffee items into supermarkets nationally in the U.S., along with creating new products to sell in this channel.

In the last five years, distribution of the company's coffee products into supermarkets has grown significantly--and O'Dea goal is to continue that rapid distribution growth. Currently Peet's brand coffee products are in about 5,700 U.S. supermarkets. CEO O'Dea has set a goal to grow that to 8,000 supermarkets in the next two -to- three years.

As part of his supermarket growth plan, the CEO also is pushing to get the kiosk style coffee shops into a number of upscale supermarkets like the program just inked with Raley's. Peet's also is expanding the number of stand-alone cafes is operates, including in states outside of California. The company currently has 170 of its own retail stores. Most are on the west coast, but others are in Denver, Chicago, Boston and Austin, Texas. Plans call for additional geographic expansion in the U.S.

Peet's had sales of $249 million in 2007, which was an 18% increase over the previous year. The Raley's deal alone should add some solid numbers to fiscal 2008 sales. It also will extend Peet's brand identification and awareness, which should help increase sales of its products in the supermarket channel of distribution.

Free Fair Trade Coffee for Cancer Support: ATM, the pioneering British Fair Trade Coffee-on-the-go cafe chain, held what it billed as the largest-ever free coffee morning in the United Kingdom at London's Liverpool train station on February 28. The "coffee morning" event started in the wee hours (about 4:am) of the morning and finished-up around midday. The event was held in support of the Macmillion Cancer Support Center.

Tens of thousands (maybe hundreds of thousands) of London's commuters were given a free cup of ATM's premium roasted Fair Trade coffee in return for simply providing there name to the coffee retailer on a slip of paper that the commuters could either download from the web and bring with them to Liverpool Station. Not bad: the busy commuters didn't even stop off at the ATM machine in order to get money to buy their normal morning cup of ATM on-the-go Fair Trade coffee that morning. And a good cause was supported to boot.

Coffee Industry Notes

Celestial Coffee: Celestial Seasonings, which is one of the strongest brands in the specialty tea category, is launching a new line of organic, Fair Trade certified whole bean coffees under the brand. This will be the brands, which is owned by Hain-Celestial, Inc., entrance into the highly competitive, fast-growing organic and Fair Trade segments of the coffee category.

Five coffee varieties will initially be launched under the Celestial Seasonings brand. They are: Morning Thunder, Decaf Morning Thunder, French Roastaroma, Caramel Mocha and Vanilla Hazelnut.

We kind of like the name French Roastaroma. It's nice word play on the popular french roast variety of coffee bean, which nearly every consumer has heard of. Morning Thunder, if you aren't already aware, is the name of one of the Celestial Seasonings brands' most popular varieties of tea. It has a higher than normal caffeine level compared to the other varieties, hence in part its name.

The Soaring Cost of That Morning Java Jolt: Retail prices of coffee at the grocery store and cafe are rapidly increasing along with nearly every other food and grocery item. However, in the case of coffee, the price increases have been even higher over the past than they've been for wheat, dairy and other essential foodstuffs (yes, coffee is essential). in just the last six months alone, world coffee prices has risen by 23%, and the price surge is far from over.

At the supermarket, a typical 13oz pkg of ground coffee has increased in price by $1.00 since last year, according to a recent price survey conducted by the Los Angeles Times. In July, international coffee house retail chain Starbucks increased the price of its drinks in its stores, and its competitors generally followed the leader.

Further, large and small coffee roasters and marketers are increasing their wholesale prices to supermarkets and other coffee retailers, so another round of coffee price increases is coming up. Retailers have tried to contain their price increases but aren't about to lose margin on items in the category. This is especially true since the overall food and grocery product inflation that's occurring makes it easier for grocery retailers in particularly to pass on price increases.

The primary reason behind soaring coffee prices seems to be the low value of the U.S. dollar. Rapidly-rising global energy costs--which affect everything from coffee bean production to transportation of the finished product to warehouses and retail stores--also is a big factor. The Los Angeles Times recently examined the soaring price of coffee. Read about some of their findings here.