By David Bishop, Contributing Editor

INTENSIFYING COMPETITION FOR THE morning day-part and escalating commodity costs for coffee drinkshave forced convenience retailers to make trade-offsbetween pricing and profits. This is no small issue as

hot dispensed beverages are strategically vital to a retailer'smorning business segment and fresh foods program.Defending the current business is a key step to build-

ing it over time. Here are a few tips that retailers should beaware of that will help protect the price conscious customerand minimize the negative impact on profitability.

CHECK YOUR SIZE OFFERINGIf your smallest cup size isa 16 ounce, consider intro-

ducing a smaller size to maintain parity with what yourprimary competitors are offering. The fact is that morethan one-third of the convenience retailers don't offeranything smaller than a 16-ounce cup. This was one ofthe key insights learned as part of the 2010 (SD /BalvorFoodservice Survey. Why is this important?The smaller cup size aids you in more effectively com-

peting against rivals, like Dunkin' Donuts or McDonald's,whose smallest size can be a 10- and 12-ounce, respectively.Adding a smaller size also enables retailers to offer a loweropening price point without sacrificing as much pennyprofit as compared to simply discounting the 16-ounce cupsize in order to maintain price parity.Although many retailers remain reluctant to introduce

a smaller size for fear of down trading, top-quartile conve-nience retailers were more willing to do so if they faced thisissue. In fact, top-quartile retailers-based on foodservicedollar sales-were 29%more likely than the average to haveintroduced a smaller cup size in the last 12months in order

:;

to lower retail prices, which wasalso learned in the (SD /BalvorFoodservice Survey.If you're unsure about add-

ing a smaller size, analyze yoursales trends by cup size overthe last few years. If the shareof units sold is shifting down tosmaller sizes and, worse, total unitsales are declining, this may be theevidence supporting a move.

ADJUSTRETAIL PRICESSELECTIVELYIf you'reconcerned

about maintain-ing competitiveprices andprofitability,con templa tea pricingapproach thatselectivelychanges pricesbased on a prod-uct's role andprice sensitivities.This is relevant asnear Iy nine outof 10 convenienceretailers set retailprices comparableto their primarycompetitor. But,competitive pricechecks by retailerstend to focus on aparticular productor package size.

34 Convenience Store Decisions I December 201 0 CSDecisionso

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FeatureFoodservice

Starbucks is the most recent and public example ofhow retailers are applying this approach to hot beverages.Starbucks is maintaining or even lowering retail prices onsome of its basic hot drinks, which generally serve as anentry point for light and moderate customers.Simultaneously, the chain is increasing prices on more

complicated, signature drinks it believes are less pricesensitive.The blended approach-selectively adjusting prices of

products-prevents the more price-conscious customerfrom defecting to a competitor and enables you to passalong the higher input costs in areas less likely to experi-ence unit sales declines due to higher retail prices.If you're unsure, test various pricing scenarios in the

store to understand how customers respond, analyzingtotal units sold and share of units sold by cup size. If totalunits sold decreases or shifts to smaller sizes, then assess theimpact on dollar sales and gross profits.

CHANGE CUP SIZE REFERENCESIf you communicate the actual cup sizes-like 16 ounc-

es-on the menu board or signage, think about shifting toa relative description instead, like medium. Recent storeaudits conducted by Balvor reveal a majority of conve-nience retailers focus on the actual ounces in the cup whilethe competition uses relative descriptors.Using a relative descriptor makes it more difficult for

customers to compare prices across chains. For instance,checking prices at McDonald's may be straightforward,

"

Dunkin'DonutsMcDonald'sStarbucksEinstein Bros.7-ElevenCircle KSpeedway

Size(By Ounce)

10121212121616

Relative Sizes(S/MIL)

YesYesYesYesYesYesYes

Chain Actual Size(16 oz.)

Yes'Dunkin' DonutsMcDonald'sStarbucksEinstein Bros.7-ElevenCircle-KSpeedway

Yes'

* Size is smaller font and subordinate to descriptor on menu board.Source. Store audits, Ba/vor LLC.September, 20 I0

CSDecisionso36 Convenience Store Decisions I December 2010

C'ileen Poudre

More and more convenience store operators are followingStarbucks' lead and embracing special brews, such as RainforestAlliance certified beans and unique country blends.

but knowing the actual ounces for each cup size requires acustomer to look at the bottom of the cup as it's not listed onthe menu board or on the side of the cup. .-The shift in terminology brings the store into alignment

with how competitors present their cup offering. And, italso makes it easier for stores to refine the cup sizes avail-able without alerting the customer or the competition tothe change. That's if there is a need for you to introducea smaller cup size in order to maintain the opening pricepoint position.It's not uncommon for packaged manufacturers to hold

the line of prices by reducing the portion size during peri-ods of inflation. Therefore, retailers could follow a similartactic with hot coffee that's just a little more subtle.

PUTTING IT IN CONTEXTConsider these suggestions within the context of how

you manage the business and what your objectives are bothshort and longer term. Also, be sure to leverage insightsgained from analyzing sales trends, competitive mar-ket intelligence, and customer engagement to assess howand where these suggestions can help defend your hot dis-pensed beverage business.Following these tips are simply a few among many steps

you should be executing to defend and, better yet, grow thecurrent business. You also should be examining how youcan better control shrinkage and product waster via bettercontrols, practices and equipment.Retailers interested in gaining additional insights

and perspectives on this topic can view Part 1 of CSD'sFoodservice Webcast Series, which is available freeon-demand at www.csdecisions.com. CSD

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