Set Your Soda Fountain Apart
By Jamie Hartford
Any good convenience store operator knows that beverages are the lifeblood of this business, but the really smart ones understand that the fountain — not the cold vault — holds the most potential for profit.
Sure, packaged beverages bring in more than five times the sales of their cold dispensed counterparts. But if you’re looking at gross margins, the latter comes out on top, besting packaged beverages 48% to 40%, according to NACS State of the Industry (SOI) data for 2011. Cold dispensed beverages are among the top 10 most profitable categories in convenience stores.
Sales of fountain drinks have been on the rise in recent years, jumping 14.5% from 2009 to 2010 and leaping another 12% last year, according to NACS SOI data. Average store sales topped $47,600, with more than $25,000 going straight to the bottom line.
Almost 94% of convenience stores sell cold dispensed beverages, as do most QSRs. That makes for pretty stiff competition for the consumer’s dollar, especially when most players carry the products of at least one of the segment’s two major suppliers, Coca-Cola and PepsiCo. "Cold dispensed beverages, from a retailer’s perspective, is one of the more challenging areas to really create differentiation," said David Bishop, managing partner of Balvor, an Illinois-based sales and marketing firm specializing in convenience retail.
But distinguishing your fountain offering can help you leverage this highly profitable category.
One sure-fire way to draw attention to your dispensed beverage program is by adding a Coca-Cola Freestyle, a dispenser that can serve up more than 100 different drink creations from a single machine. Last December, an article on Forbes.com hailed the Freestyle as one of the "coolest products of the decade" (the other was Apple’s iPhone).
After first testing in QSRs, the Freestyle made its pilot debut in convenience stores last year. C-store operators have received the machines with "tremendous enthusiasm," said Russell Baker, group director for retail channel planning and development for Coca- Cola Refreshments. "While initial results have been positive, it’s too early to report specific metrics since pilot studies are still under way with customers," he said.
Rhodes 101, a chain of about 30 convenience stores in southeast Missouri, has had Freestyles in 11 of its units since early January. "We had gone through and done some strategic planning and decided that beverage is one of the areas we want to hang our hat on," said President Keith Boeller. "Our customers think of us that way. They look at our cup and see that’s what the brand stands for." Installing the Freestyle machines was a way to further differentiate from the competition, he said.
The stores feature two of the machines inside the store and one at the drive thru. The Freestyles are the only cold beverage dispensers in the store, which Boeller says is a requirement from Coca-Cola. The transition from the legacy equipment to the new machines happened literally overnight.
Boeller says the Freestyles generated a lot of excitement, with some customers even posing for photos with the machines. But others weren’t so enthusiastic. "The tech-savvy group caught on quickly, and they fell in love with it," he said. "But others were more creatures of habit. They were like, 'I just want my Diet Coke, and what was wrong with the old equipment?’"
To ease the transition, the company initially increased staffing levels during peak dayparts and charged one employee with teaching customers how to use the machines. Five months in, customers are getting the hang of it, but one employee is typically on standby to assist customers who still need help using the machine.
Rhodes 101 has seen some margin erosion for its cold dispensed beverages since switching to the Freestyle, but the volume has more than made up the difference. "It increased drastically immediately," he said, without sharing specifics.
The company initially worried that the Freestyle would cannibalize its packaged beverage sales, but Boeller stresses that hasn’t been the case. "Completely the opposite," he said. "It has exploded." Food sales have increased, too, thanks to a rise in foot traffic.
The Freestyles, which dispense both ice and drink, can serve only one customer at a time. So far Boeller says the ma- chines have had no trouble handling the stores’ volume, but the real test will come during the peak season this summer.
Boeller’s stores account for al- most half of the convenience store locations in which Freestyle ma- chines are currently operating. But the vast majority of operators, who don’t have the latest, greatest beverage equipment, need to find another way to set their fountains apart.
One way to do that is by offering variety. A dual-brand program — both Coke and Pepsi — is the easiest way to broaden the appeal of a beverage program, experts say. Rick Wilshe owns food brokerage firm Wilshe Enterprises, based in Fayetteville, Arkansas, but he has previously served as a beverage category manager in the convenience space. One specialty store chain where he worked carried only PepsiCo products.
"We were able to get away with it, but we constantly received com plaints," he said. "Consumers like choice. They like to be able to be very brand loyal. The best thing you can do is offer a wide choice of brands so they can have it their way."
Wilshe, who served as the project manager for the hot and cold proprietary beverage program at 7-Eleven in 2010, believes that offering a proprietary beverage line with flavors that differentiate from the competition can also be a draw. He advises retailers to conduct ample market research and focus groups before rolling anything out.
"Flavors that are unique and funky and a little more offbeat have more success," he said.
Reeder’s Service Center, an independent convenience store in Tulsa, Oklahoma, has seen success with a line of proprietary dispensed iced teas. "Tea is the big thing now," said Cheryl Reeder, owner and president. "In this part of the country, people will drive out of their way to get a good tea."
The store has offered dispensed iced tea for 12 years, but Reeder says she revamped the program three years ago. It now offers four flavors — Blackberry Jasmine, Hibiscus Raspberry, Plane Jane and Southern Sweet — under its Miss Reeder’s brand. Since the change, sales have increased.
One of the hardest parts of developing the store’s proprietary tea program, according to Reeder, was getting the water right. Different filters had to be tested, and the machines had to be calibrated to provide the correct flow rate. All in all, it amounted to about 20 hours of work on the machines.
"You just can’t get a good cup of tea out of tap water," Reeder said. "You have to go that extra step. You can’t just hook it up to the machine."
The same is true with any dispensed beverage, agrees Balvor’s Bishop. In some places, water quality is so poor it can be difficult to achieve proper carbonation, and mineral content and hardness can affect the taste of the water, which ultimately makes up about five-sixths of most fountain beverages. Water quality can be especially bad in rural locations.
Smart chains, Bishop says, work with their suppliers or filtration specialists or use self-brixing kits to ensure quality at their fountains. He recommends maintaining a log and checking equipment on a scheduled basis.
"There’s no sense in losing a customer over something you can manage fairly realistically, as opposed to spending thousands on a new system," he said.
Another place where quality comes into play is the cup. The type you use can actually affect the way the customer experiences the drink, Bishop says. Styrofoam cups aren’t biodegradable, and insulated cups might cost more, but they do keep drinks colder longer — an important consideration for on-the-go customers.
No matter how good a convenience store’s fountain beverage program might be, at the end of the day, sales can often depend on how much value you offer the customer.
"Price is the main driver, unfortunately," Wilshe said. With summer coming up, he expects to see many chains rolling out 99- or even 79-cent dispensed beverage offerings. "It’s a huge price war, and that’s compromising margins for operators, but there doesn’t seem to be much you can do about it."
Doug Allison, a spokesman with PepsiCo Foodservice Division, says some operators make the mistake of over-complicating promotions. "We’ve seen operators have tremendous success with 'everyday low price’ strategies, loyalty programs and bundled offers (i.e., beverage and chips)," he said.
But Bishop cautions against engaging in a price war with the competition. "Price is a tactic, not a strategy," he said. In the end, operators have to make customers believe their store offers something the competition cannot. "You’ve got to ask yourself, 'How do I create differentiation in a category where the same products are available everywhere?’" he said.
Operators who come up with an answer will be rewarded with a flowing fountain.
Jamie Hartford is a freelance writer based in Los Angeles. Read more of her work at jlhartford.com.