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.

Monday Morning Java

Blog Action Day at Natural~Specialty Foods Memo

Today is Blog Action Day. Blog publishers from throughout the world have committed to write something about the environment today in their blogs, offering there own unique perspectives depending on what industries, topics, issues or other things their publications focus on. You can read the organizer's full press release here.

As our readers know, Natural~Specialty Foods Memo (NSFM) writes about environmental or green issues as they relate to the food and grocery industries, on a regular basis. The topic is part of everything we write about--food marketing, retailing, food processing, agriculture and a myriad of related industries, topics, issues and ideas. We also have a weekly feature, Weekly Green Report, where we discuss all aspects of the environment as it relates to the natural and specialty foods and related industries.

As a participant in Blog Action Day NSFM has decided to bring you some interesting information and ideas regarding all things green this morning. Our goal is to stimulate our readers' thoughts regarding the environment and the natural and specialty foods industries. We also invite you to read our latest "Weekly Green Report" (published Friday, October 13) here. Over 15,000 blogs have signed up for Blog Action Day, and it's estimated their combined writings will reach about 12.5 million readers. We welcome our regular readers and readers viewing NSFM for the first time to Blog Action Day.

Report: Wal-Mart and Environmental Sustainability

In Friday's Weekly Green Report NSFM provided a report with various points of view from Wal-Mart's Living Well Sustainability Summit held in Roger's Arkansas on Wednesday, October 11. Read our report here.

Sami Grover, an executive for The Change, a company that works on environmental sustainability issues, attended the all-day green conference in Rogers, Arkansas, and was able to get an interview (one of the few if not the only one) with a group of key Wal-Mart executives.

These executives included: Andy Ruben, vice president of strategy and sustainability, Linda Dillman, executive vice president of risk management, benefits and sustainability, Leslie Dach, executive vice president of corporate affairs and governmental relations, and Doug McMillan, CEO of Sam's Club. Grover's interview is published in today's Treehugger Blog. You can read Sami Grover's exclusive interview with Wal-Mart's sustainability brain trust here. (We thank the folks at Groovy Green Blog for the Wal-Mart graphic at left.)

In addition to reading the piece linked above, you can listen to an 18 minute podcast interview with Andy Ruben, Wal-Mart's sustainability chief, and Ashok Gupta of the Natural Resource Defense Council (NRDC). In the interview, conducted by Betsy Rosenberg of the EcoTalk sustainability radio network, Ruben and Gupta lay out Wal-Mart's sustainability program and discuss how the mega-retailer and the non-profit environmental group are working together on some green issues and the Wal-Mart sustainability initiative. Listen here.

Speaking of EcoTalk, we suggest the following podcast interviews below conducted by Ms. Rosenburg. Like the Wal-Mart/NRDC interview above, all of the podcasts are free and you can download them here. Suggested podcast interviews:

>Interview Title: "Greener Pastures." Kate Clancy, author of the paper, "Greener Pastures: How Grass Fed Beef and Milk Contribute to Healthy Eating." She is the Senior Scientist with the Food and Environment Program at the Union of Concerned Scientists.

>Interview Title: "Daniel Imhoff: Paper or Plastic." Mr. Imhoff is the author of the book, "Paper or Plastic: Searching for solutions to an over packaged world."

>Interview Title: "Al Gore." Former U.S. Vice President Al Gore just won the Nobel Peace Prize for his work on reducing global warming. He is interviewed by Ms. Rosenberg about his book "An Inconvenient Truth" and the issue of global warming.

>Interview Title: "Frog's Leap Winery." Jonah Beer of California's Frog's Leap Winery is interviewed. The Winery and company vineyards are considered to be among the most environmentally sustainable in the U.S.

There are a number of other podcasts available at this link in addition to those we have suggested our readers listen to. Enjoy!

Analysis & Opinion: The State of the Organic Foods Industry 2007

We believe 2007 will mark the beginning of the "mainstreaming" of organic foods in the developed world. By this we don't mean organics will replace conventionally-produced food products as the norm anytime soon. Rather, by the "mainstreaming" of the organic foods industry we mean 2007 marks the realization among all sectors in the food and grocery industry that organic food products no longer are a tiny niche product limited to merely the elite, but rather the category is one that can have widespread appeal if factors such as the price/value ratio are reasonable.

We see five major develoments which have made 2006-2007 the "moment" in our opinion when the food industry (and consumers) have began to really look at organics as a viable, potentially mainstream food and product category. Those five "moments" are:

>The announcement late last year, and focus this year, by Wal-Mart that the world's largest food retailer would begin making a major push in the organic products category, merchandising many more skus of organic food and grocery products in their stores and making organic marketing a corporate retailing priority.

>An Announcement by the CEO of Kroger Co., the largest supermarket chain in the U.S., soon after the Wal-Mart organics initiative kick off that he wants Kroger to be the food retailer which brings organic foods to the masses. Kroger has dramatically expanded the number of branded organic food and grocery products it sells in its stores and developed an extensive private label organic grocery product line (which they continue to grow) since the announcement.

>The fabulous success of Whole Foods Market, Inc. and its acquisition last month of natural foods supernatural retailer Wild Oats Markets. Just 10 years ago Whole Foods was a retail super-niche grocer. The chain had stores in just a few regions of the U.S., primarily in major cities. Even in those places where there was a Whole Foods store 10 years ago only a select group of consumers shopped in the stores. Today, ten years later, Whole Foods has more than doubled the number of stores they had a decade ago, including markets in places like Tennessee, Kentucky, Illinois and other heartland and southern states as well as on the east and west coasts in the U.S. They also have stores in Canada and one in the UK.

Whole Foods also is growing as fast as it can. The grocer is going through a new store building frenzy, constructing and opening huge new lifestyle retail stores where organic products take center stage in every department, from produce, meat and seafood, to grocery, bakery, health & beauty care and non-foods. These stores have become more than a place to buy groceries for consumers from various walks of life--they've become "third places" where people love to spend time in the in-store restaurants, wine bars and even mini day spa's like the new addition to the recently opened store in Canpbell, California.

>The development by major grocery and mass merchandising retail chains like Wal-Mart, Target, Kroger, Safeway Stores, Publix, Wegmans and others in the U.S., and Carrefour (France), Tesco and Sainsbury (OK-based) and others throughout the world, of comprehensive private label organic grocery product brands which not only rival branded organic products, but conventional ones as well.

>The growing number of large, conventional consumer packaged goods companies that are either creating new organic grocery product brands or acquiring existing, smaller organic foods companies, or doing both. General Mills, Kraft Foods, Heinz, Kellogg, M&M Mars, Kimberly-Clark, Unilever, Nestle and many others are moving aggressively into the organic grocery and non-foods categories. Organic industry pioneering companies like Hain-Celestial are creating mega-consumer products companies built on organic product brands.

We believe these five key developments in 2006-2007 (plus a few others) mark a key moment in time--2007-- when all sectors of the food and grocery industry realized the organic category is not only here to stay but also becoming part of the mainstream.

Below is a chart prepared by Dr. Philip H. Howard, an assistant professor in the Department of Community, Agriculture, Recreation and Resource Studies at the University of Missouri. The chart shows the acquisitions of organic food and product companies made by the top 25 food processors in North America over the last decade. (The chart was prepared in July, 2007.)

The chart graphically shows the "mainstreaming" process of the organic industry via acquisitions by major consumer packaged goods companies over the last 10 years. We believe these types of acquisitions will increase dramatically over the next decade as the organic category grows in consumer demand and is merchandised even more extensively by major food retailers. Dr. Howard also has created a number of other charts detailing the current structure of the organic foods industry in the manufacturing, marketing and retailing segments. You can view those charts here.

Essay: 2007 A Green Tipping Point for Food Retailers

Just as we believe 2007 is a watershed year for the beginning of the "mainstreaming" of organic foods and products, we also believe this year is a major tipping point for the food retailing industry in most of the developed world in terms of environmental or green retailing.

Just a few years ago very few if any major food retailers (just like corporations in general and most people) took seriously such concepts as global warming, energy conservation, environmental sustainability and related green issues. In our opinion, today there is widespread acceptance in the retail food industry that all these environmental issues are real and that the time is here to address them aggressively. This year will be noted we believe as the year of the green tipping point environmentally for food retailers.

North America and Europe's (also Australia and parts of Asia) leading food retail chains (and many independents) are to one degree or another launching green initiatives. Some initiatives are more aggressive than others but the key point is the industry norm is now that companies must incorporate their carbon footprints and other green issues into their day-to-day business operations. Leading global retailers like Carrefour in France, Marks & Spencer, Sainsburry and Tesco in the UK, Wal-Mart, Kroger, Safeway Stores, Publix, Whole Foods and many others in the U.S., are all in the process of refining their environmental policies and carrying out initiatives that include everything from attempting to measure carbon footprints to installing solar energy panels on store rooftops, buying wind power, cutting down dramatically on packaging, and in a number of cases even building "eco-stores" to the strictest green standards.

In Scotland, UK-based Marks & Spencer just opened two "eco-stores" which use 40% less energy than conventional supermarkets. Tesco is developing a similar "eco-store" format in the UK. In the U.S. Whole Foods is building two new stores that meet the strictest green building standards thus far developed globally under the LEED system. In California, Safeway Stores just installed solar panels on a store and is in the process of installing them on 30 more. Wal-Mart has done the same with 22 stores in California and Hawaii as well as at distribution centers in both states. These green initiatives are just the tip of the iceberg in terms of what these and many other food retailers of all sizes are doing environmentally. Much more is on the way.

In our view the green tipping point has arrived. This year will go down as the "environmental moment" when food retailing changed its paradigm from a raw energy consumer to a green, conservation-minded corporate citizen. A "Green Grocer" if you will. This tipping point was achieved by the realization that green retailing impacts the bottom line. Conservation makes environmental sense, but even more important to these retailers, it makes economic sense. We have no problem with economics being the driving force.

As realists we know much more needs to be done. However, our point is that the tipping point has arrived, which means the discussion now is focused on how best be good green retailers rather than the old discussion about whether doing so even made sense. We're also optimists and believe--especially with prodding from consumers and groups--these food retailers want to do the right thing. That doesn't mean they will compromise profits. But it does mean they are open to listen, to improve, and to make the environment a central aspect of their corporate and merchandising operations.

The next decade will look different than we can imagine in terms of green food retailing. The green retailing moment has arrived and we believe those retailers who seize the environmental mantle also will be the ones who succeed and thrive.