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GROCERY: Percolating sales

Retailers are waking up to gourmet coffee and smelling the profits. In their quest to stay ahead of the curve vis-a-vis the competition, more and more supermarket operators are turning to specialty/gourmet coffees as a way to create excitement and bring upscale consumers into their stores.

Savvy merchandisers are working with coffee brewers, from Starbucks to local operators, or are even creating their own programs to offer fresh hot cups of gourmet java to shoppers. And they're learning that such in-store coffee shops can help them sell high-margin whole-bean coffee, too.

In short, gourmet coffee has graduated from an exclusively highbrow affectation to a mainstream trend, and supermarkets can make that trend work for them.

Category experts and retailers with successful coffee bar operations say the key is to treat gourmet coffee as a bona fide business, and not just a ploy for attracting upscale shoppers. Also, retailers must recognize that it's a different category from the traditional grocers' mainstay of conventional canned coffee, and shouldn't be merchandised or promoted in the same way.

Its increasingly mainstream appeal notwithstanding, gourmet coffee is still an upscale item, but one that's now considered an affordable treat, and -- for some at least -- a daily necessity. Starbucks, of course, has a lot to do with that.

"Coffee has become the latest food category to be embraced by the food 'in crowd,'" explains Phil Lempert, food editor for NBC's Today and a contributing editor to Progressive Grocer.

"It started with wines, moved to olive oils, then vinegars, and now it's coffees," says Lempert. "Being a coffee expert and having a cupboard full of different roasts from different countries has evolved from the kitchens of 'foodies' to those of just about every 18- to 50-year-old in America."

Much of the growth in the coffee category is coming at the high end, among gourmet/specialty brands. According to data provided by the Specialty Coffee Association of America (SCAA), the gourmet market in the United States has increased 19 percent over the past four years, growing from $7.53 billion in 1999 to $8.96 billion in 2003. That statistic is primarily derived from coffeehouse sales, but a similar trend can be seen in grocery aisles.

Although ACNielsen does not specifically track specialty coffee as a category, among over 400 brands identified by Progressive Grocer as specialty coffees sold at supermarkets with at least $2 million in annual sales (excluding supercenters), dollar volume for the high-end segment grew at a healthy 9.1 percent pace for the 52-week period ending Oct. 30. That growth was based on nearly a half-billion dollars in sales. The overall coffee category, meanwhile, declined 0.9 percent, even though it generated over five times as much overall revenue ($2.69 billion). That disparity shows that specialty coffees are holding their price points -- and propping up the profitability of an otherwise flat or declining category.

Here's another thing to consider: According to industry experts, 75 percent of all coffee is consumed at home, yet the SCAA reports that only 17 percent of adults buy coffeehouse brands at grocery stores. So, with Starbucks recently announcing an across-the-board price increase (insiders predict a 4 percent to 5 percent bump), one could argue that the chances of increased sales at supermarkets are rosy.

"Gourmet coffee prices are like gas prices," notes Remo Miniello, specialty food buyer for Harleyville, Pa.-based Henning's Market. "They'll always hold, or go up. But you'll never see them come down from where they are now."

Largely thanks to the Starbucks influence, the gourmet coffee category is no longer the exclusive domain of the wealthy or eclectic. Everyone from college students to secretaries to grannies can be seen sipping exotic steaming concoctions at a variety of coffee bars and bookstores throughout the United States.

Given the profitability of the gourmet segment, and the blurring of distribution channels that has opened up licensed branded initiatives at most large retail venues, it's only natural that supermarket retailers would be open to bringing a little bit of the coffeehouse experience directly into their stores. Coffee bars and kiosks have grown from the most primitive of initiatives into elaborate enterprises that, in many cases, now include branded store-within-a-store concepts.

Java to go

Such is the case with Mollie Stone's Markets, an upscale seven-store chain in the San Francisco Bay area. Currently Mollie Stone's has licensed Starbucks outlets in three of its stores, and recently opened up its first in-store Peet's location.

"It all started about 10 years ago, when we had air pots on a tray table with free coffee for our customers," recalls David Bennett, owner of Mollie Stone's. But after things started getting busy later in the day, the coffee service was often neglected. Then Bennett had an epiphany: Why not invite Starbucks to actually set up a small coffeeshop inside one of his stores?

"I was lucky because I had an 'in' at Starbucks," continues Bennett. "I had done some real estate business in the past with a gentleman who was by then higher up in the Starbucks food chain, and he invited me up to Seattle to talk with the people at corporate headquarters."

When Bennett got there, however, he was surprised to find that Starbucks was already ahead of him.

"We went into this room where Starbucks had about five or six different concepts that they were getting ready to roll out into grocery stores around the country," says Bennett. "And I thought I had this great idea!"

It was, indeed, a great idea, which was why Starbucks already had it in development. At first the coffee giant was primarily interested in larger chains to roll out its concept nationally; if there was one thing the company knew as well as coffee, it was real estate. Although a small chain, Mollie Stone's had some of the best retail locations in the Bay area. It was a marriage made in heaven: regular upscale retail traffic at great locations in a major metropolitan area. And so Mollie Stone's became the first supermarket chain to feature licensed Starbucks operations inside its stores.

Bennett had no reservations about opening up what might have been perceived in years gone by as competition for the disposable dollar on his own premises. Rather, he sees it as providing a service.

"We're in the coffee business not just to attract customers to the retail store, we're in the coffee business to run a coffee business," notes Bennett. "I've got about 50 employees dedicated to the licensed areas."

Counting beans

High-end varieties now account for the bulk of Mollie Stone's coffee business. "Today beans make up about 80 percent of our business, compared to 20 percent national branded ground coffee," says Bennett.

A similar trend holds true across the continent at Henning's Market, a one-store gourmet supermarket in suburban Philadelphia. "Our customers are very educated in the category and tend to buy and grind their own beans," says Miniello.

According to him, just about everything relating to the sale, marketing, and merchandising of gourmet beans is different from run-of-the-mill canned coffee, "especially the smell. It makes so much difference in the aisle. When you just have canned coffee, there's no smell at all. Whole beans attract customers -- no doubt about it."

Henning's Market, too, has set up an in-store coffee shop for its shoppers. "It's really just providing your customers with what they want," says Miniello. "You want to make them comfortable and provide them with convenience. There's also the social aspect. While you're shopping, you can take a little break, relax, and have a really good cup of coffee."

Heightening the customer's shopping experience is what it's all about, says Lauri Youngquist, e.v.p. of Vadnais Heights, Minn.-based Knowlan's Super Markets.

"When we decided to get into the coffee business, it was because we believed this enhanced our customers' experience when they came in our stores, with the opportunity to relax and enjoy their shopping experience, as well as drive additional traffic," she says. "Our coffeehouses are run as separate business units, to keep the grocery cultures and coffeehouse cultures separate.

"Our coffeehouses are stores within a store, with soft lighting, lounge chair seating, and fireplaces," continues Youngquist. "We offer complementary wi-fi [wireless Internet access], as well as computer stations for customers to sit at and enjoy. We carry up to 20 varieties of beans which are roasted daily in each coffeehouse."

The recent popularity of specialty coffees comes as no surprise to Lempert, a longtime coffee fan. He points to the low cost of entry -- about 10 cents to 15 cents per cup, when brewed at home -- for the unparalleled taste, aroma, and pure pleasure that gourmet coffee yields. In fact, if your store doesn't have a coffee bar -- or at least have one in the works -- you're probably already behind the curve. An in-store coffeehouse will simply attract more shoppers, more often.

"The average person shops the supermarket twice a week," says Lempert. "Put in a coffee bar, and you attract people through the door five to seven days a week. Merchandise the area well, and you can get those folks to shop more than just the coffee bar."
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