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Food & Coffee Offers New Ideas to

Drive Non Fuel Income
Jan 2010

This paper deals with the continued evolution of coffee and food offers on retail service station
sites. While coffee and food offers at retail service stations is not a new idea we examine:
The options for retailers looking to introduce new Food & Coffee (F&C) offers using an
established 3rd Party brand, or developing their own brand, direct or 3rd Party operation and
key success factors for great new offers
We identify new ways in which retailers can innovate and improve existing F&C offers to
drive increased consumer preference and sales
We examine how the economic downturn is affecting the F&C market, and propose changes
to existing F&C offers to respond to the current market conditions

FOOD & COFFEE OFFERS AT SERVICE STATIONS THE STORY SO

FAR & OPTIONS
The idea of oil companies adding F&C offers as part of the non fuel offer at service station sites
is not new. Across Europe, the Middle East & elsewhere over the last 10 years Oil Companies
have added offers with increasing sophistication, starting from simple self service coffee
machine to much more complex served food offers with fresh products prepared on site.
Oil Companies have introduced F&C offers to leverage the dramatic growth and increase in
coffee drinking with a caf culture developing in many markets as well as capturing the wider
opportunity for food on the move and differentiating their whole retail site offers from
competitors.
While some Oil Companies have already deployed good F&C offers, others have not developed
such offers or only have basic offers. At a macro level we still see a strong opportunity and
rationale for Companies implementing programmes, with the increase in coffee consumption
being a key driver. Over the last few years the rise in coffee consumption has been driven by
coffee drinking as a social pastime linked to increased spending on food, drink and leisure.

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Average coffee consumption at a global level grew by 18% from 2006 to 2007 to 1.3 kg per
head p.a. and we see further growth opportunity in countries with low current consumption, as
shown below in Table 1. Growth of coffee consumption in the UK is a good example, with
consumption per head growing by 21% from 2003 to 2007. The UK now has an estimated
11,000 coffee shops (branded and unbranded), with Oil Retailers establishing strong coffee and
food offers, lead by BP who have over 200 Wild Bean Cafs, Esso (Exxon) have over 100 On
the Run Cafs featuring Costa coffee, and Subway have over 20 stores on service station
sites.
In Europe there are 9,300 branded coffee stores (including 3,800 in the UK) with a 2009 report
by Allegra Strategies (a coffee market analyst) forecasting growth to 11,000 stores by 2012.
Figure 1: 2007 Coffee Consumption by Country (Kg per Head per annum)

14
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In developing and deploying coffee and food offers, Oil Companies need to make two strategic
and operational choices.
Choice 1 is whether to operate the coffee and food offer yourself or allow a 3rd Party to operate
for you. The key criteria on making the right choice is to make an accurate and realistic
assessment on the capability of your site staff (Manager and all Team Members) to operate a
F&C offer, as operating this type of offer entails additional complexity over and above operating
other non fuel site elements (e.g. a shop or convenience store).
Unless you are confident that you can invest in the right people to deliver an F&C offer on a
consistent basis, then you should not consider direct operation and should look at 3rd party
operation.
Choice 2 is to develop and use your own brand or use a well known 3rd Party brand (often
under a Licence or Franchise Agreement). While using a 3rd Party brand may well generate
higher sales, you have to pay an initial Franchise Fee, plus ongoing Royalty and Marketing
Contribution payments to the brand owner, and may also face restrictions on where you
purchase raw materials from or minimum labour levels etc. Your decision should be based on
looking at the economics.

Source: International Coffee Organisation

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A theoretical example, but based on known metrics from a North West European market is
shown on Table 2 below. The challenge is developing your own brand to a point that while it
may still drive lower sales than a 3rd Party brand, but it drives higher profits. In the example
below, at both sales levels the own brand delivers higher profitability, but in the higher sales
scenario the gap between own brand & 3rd Party brand profitability, increases.
However in developing your own brand, your model has to be based on a belief that you can
build recognition and brand equity without spending significant amounts on advertising, as high
advertising spending can kill profitability. The approach has to be on effectively using the
location strength of your service station sites and cross selling by staff members, plus low cost
web and SMS marketing to build awareness.
Figure 2: Indicative P&L, Own Brand and 3rd Party Brand Operation

Sales $ p.a.
Gross Margin
Gross Profit
Labour Cost
Utilities
Other
Advertising
Franchise Fee
Royalty
Total Costs
Net Profit
Higher Sales
Sales $ p.a.
Gross Margin
Gross Profit
Labour Cost
Utilities
Other
Advertising
Franchise Fee
Royalty
Total Costs
Net Profit

Own Brand
265 000
70%
185 500
39 750
13 250
6 625
25 000

% of Sales

84 625

3rd Party Brand

400 000
65%
260 000
100 000
20 000
10 000
20 000
2 000
20 000
172 000

100 875

88 000

450 000
70%
315 000
63 000
22 500
11 250
31 500

128 250

600 000
65%
390 000
132 000
30 000
15 000
30 000
2 000
30 000
239 000

186 750

151 000

15%
5%
3%
9%

14%
5%
3%
7%

% of Sales

25%
5%
3%
5%
1%
5%

22%
5%
3%
5%
0%
5%

At lower sales level, own

brand marginally more
profitable

At higher sales level, own

brand noticeably more
profitable than 3rd party
brand

KEY SUCCESS FACTORS FOR DEVELOPING NEW FOOD & COFFEE

OFFERS
Assuming you have chosen to develop your own brand/offer, rather than using a 3rd Party
brand, we propose the following as four key success factors:
Focus on coffee As detailed above, in many markets significant opportunity exists for
coffee and a food and drink offer can be centred on a coffee offer/proposition. Even adding a
coffee offer to an existing strong food proposition can add significant sales. Business Week
magazine quoted Michael Heinritzi, McDonald's No. 1 European franchisee, with nearly 40
stores across Germany and Austria, who suggests that when a McCafe is added to an
existing McDonalds fast food restaurant, store revenues jump 20% to 25%
Keep it simple An F&C offer does not need to be complex to be impactful and appealing to
customers. At service stations, customers are generally in a rush, so keeping menu items
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limited and focusing on speed of service and consistency is key. A less complex offer means
that while site staff will need training on how to operate the offer, all site staff can be trained
and at less busy times staff can man the main sales till but also serve food and coffee
Be Bold In the design and colour scheme for a F&C insert in a service station, focus on
drawing customers attention to food/coffee part of the store, otherwise customers are often
blind and miss this part of your site offer
Focus on fresh Customers in most markets increasingly want products that are freshly
prepared on site. This does not mean all products have to be made to order, as this can be
highly labour intensive and reduce profitability, but made today, freshly baked labels on
products can be powerful sales drivers

HOW RETAILERS CAN INNOVATE & IMPROVE EXISTING FOOD &

COFFEE OFFERS
As with fuel retailing generally, innovating, updating and improving the site offer over time is
important. Innovation on F&C offers and helping differentiate your offer from competitors will
help drive increased returns. We offer the following four innovation ideas:
Drive Thru Customers like the convenience of not getting out of their cars and fast food
chains like McDonalds have successfully used drive thru over the last 20 years. We see drive
thru coffee and bakery lead food offers as an opportunity on service station sites. In the USA
Starbucks have 2,000 drive thru locations and one drive thru in the UK. In 2010 Starbucks
plan to open their first drive thru on a service station in the UK
Car Hop Linked to speed and the drive thru idea, a lower cost and complexity way to
deliver F&C offers to customers in their cars is a car hop, having a runner on the forecourt
who takes orders while the car is filled up with fuel, then delivers the order to the customer
and takes payment. The runner communicates with staff members in the store using a radio
headset
Electronic Menu boards As the cost of LCD and plasma screens has decreased
significantly over the last 5 years, using electronic menu boards that are much more visual
than traditional printed boards and can be targeted at specific parts of the day (separate
menu for breakfast and lunch) are now economically feasible
Targeted marketing Linked to the development of more sophisticated CRM (Customer
Relationship Management) programmes, retailers who use CRM and customer databases
can use data to target high value customers to get them to trial or improve frequency of use
for F&C offers. For example, fuel card customers could be sent an SMS or e mail offering
them a half price coffee

CHANGES YOU CAN MAKE TO EXISTING FOOD & COFFEE OFFERS

IN RESPONSE TO THE ECONOMIC DOWNTURN
The current economic downturn has impacted fuel demand in many markets and this has also
had a consequent effect on non fuel sales. However the wider evidence looking at the F&C
market as a whole across Europe, the Middle East and elsewhere is that the food & coffee is not
declining, merely that the strong growth in the market is slowing. Consumers have not cut back
on purchasing a cup of coffee or food item that only costs a few dollars, with this being a small
treat they are not prepared to give up. Fast food and other limited service offers seem to have
benefitted from consumers trading down from more expensive full service offerings.
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We offer the following data as evidence of a decline in growth rates, rather than an actual
decline in sales:
UK coffee market Research from analyst Allegra Strategies suggests that in 2009 the
coffee shop sales grew by 6.2% to 1.63 bn. vs. 2008. This growth was lower than in the
previous year (2008 vs. 2007) when the market grew by 15%
Eastern Europe coffee market Coffeeheaven operate 90 coffee shops in Poland, Czech
Republic, Latvia, Bulgaria and Hungary. For the 6 months to 30th September 2009,
Coffeeheavens like for like sales grew by 5% vs. 16% for the same period in 2008
McDonalds Results for the first 9 months of 2009 showed like for like sales growth of 6.4%
for Europe, 2.2% for Middle East, Africa & Asia Pacific and 2.5% in the USA
In the light of this sales slow down, retailers need to adapt their offers and respond to the
changing market conditions. We propose the following as four initiatives to help grow sales:
Bundling Offering a breakfast or meal deal of two or three items, one being a coffee or
other drink at a special price that is cheaper than the combined individual prices of the items,
can help improve value for money perception and increase average spend
Loyalty Introducing a loyalty scheme, however inexpensive can help drive repeat purchase
and customer satisfaction. A credit card sized paper card where you offer one free coffee for
every 10th coffee purchase can be a simple way to reward customers
Entry point pricing Introducing a food or drink product promotional product that is at a new
lower price point then existing items, can help drive sales and improve value for money
perception. The price of an existing core menu item should not be reduced, but a new
product created that still delivers reasonable gross margin, for example a new sandwich or
bakery product with a low cost filling, or a drink with a new smaller cup size
Upselling Getting your staff focused on asking customers if they want a croissant with their
coffee or want a large coffee or other drink rather than a regular one, can help increase sales.
Offering your staff members a bonus scheme for the staff member who sells the highest
number of large coffees in a week, is a simple way to reinforce upselling

WHAT ARE OUR KEY CONCLUSIONS?

We see continued opportunity for F&C offers at service stations. While using established 3rd
Party brands remains an option, developing your own brand may generate higher returns
For retailers with existing F&C offers there is an opportunity to innovate. For retailers
introducing new F&C offers, we propose a number of key success factors
While the economic downturn has slowed growth in F&C sales, the market is still growing and
retailers can make changes to their offer to respond to market conditions
We have experience of designing new and updating existing F&C offers and would be happy
to look at how we can advise your business

For further information, or to arrange an exploratory conversation with our senior specialists, please
contact:
Martin Alford

M +44 7583 161 661

E martin.alford@rpsgroup.com

W www.rpsgroup.com/downstream