Three tips are provided for convenience retailers to maintain pricing competitiveness and profitability amid rising commodity costs: 1. Consider introducing a smaller cup size, like 12 ounces, to compete with rivals' offerings and allow for a lower entry price point. 2. Selectively adjust prices, maintaining or lowering prices for basic drinks but increasing prices for more complex signature drinks that are less price sensitive. 3. Change references to cup sizes from ounces to relative descriptors like "small" and "medium" to make price comparisons across chains more difficult for customers.

1. to lower retail prices, which was
also learned in the (SD /Balvor
Foodservice Survey.
If you're unsure about add-
ing a smaller size, analyze your
sales trends by cup size over
the last few years. If the share
By David Bishop, Contributing Editor
of units sold is shifting down to
smaller sizes and, worse, total unit
NTENSIFYING COMPETITION FOR THE morning day- sales are declining, this may be the
I part and escalating commodity costs for coffee drinks
have forced convenience retailers to make trade-offs
between pricing and profits. This is no small issue as
hot dispensed beverages are strategically vital to a retailer's
evidence supporting a move.
ADJUST
RETAIL PRICES
morning business segment and fresh foods program. SELECTIVELY
Defending the current business is a key step to build- If you're
ing it over time. Here are a few tips that retailers should be concerned
aware of that will help protect the price conscious customer about maintain-
and minimize the negative impact on profitability. ing competitive
prices and
CHECK YOUR SIZE OFFERING profitability,
If your smallest cup size isa 16 ounce, consider intro- con templa te
ducing a smaller size to maintain parity with what your a pricing
primary competitors are offering. The fact is that more approach that
than one-third of the convenience retailers don't offer selectively
anything smaller than a 16-ounce cup. This was one of changes prices
the key insights learned as part of the 2010 (SD /Balvor based on a prod-
Foodservice Survey. Why is this important? uct's role and
The smaller cup size aids you in more effectively com- price sensitivities.
peting against rivals, like Dunkin' Donuts or McDonald's, This is relevant as
whose smallest size can be a 10- and 12-ounce, respectively. near Iy nine out
Adding a smaller size also enables retailers to offer a lower of 10 convenience
opening price point without sacrificing as much penny retailers set retail
profit as compared to simply discounting the 16-ounce cup prices comparable
size in order to maintain price parity. to their primary
Although many retailers remain reluctant to introduce competitor. But,
a smaller size for fear of down trading, top-quartile conve- competitive price
nience retailers were more willing to do so if they faced this checks by retailers
issue. In fact, top-quartile retailers-based on foodservice tend to focus on a
dollar sales-were 29% more likely than the average to have particular product
introduced a smaller cup size in the last 12 months in order or package size.
:;
34 Convenience Store Decisions I December 201 0 CSDecisionso
,

2. --- ~--~----------
FeatureFoodservice
Starbucks is the most recent and public example of
how retailers are applying this approach to hot beverages.
Starbucks is maintaining or even lowering retail prices on
some of its basic hot drinks, which generally serve as an
entry point for light and moderate customers.
Simultaneously, the chain is increasing prices on more
complicated, signature drinks it believes are less price
sensitive.
The blended approach-selectively adjusting prices of
C'ile
en Poudre
products-prevents the more price-conscious customer
from defecting to a competitor and enables you to pass
along 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, analyzing
total units sold and share of units sold by cup size. If total
units sold decreases or shifts to smaller sizes, then assess the
impact on dollar sales and gross profits.
CHANGE CUP SIZE REFERENCES More and more convenience store operators are following
If you communicate the actual cup sizes-like 16 ounc- Starbucks' lead and embracing special brews, such as Rainforest
es-on the menu board or signage, think about shifting to Alliance certified beans and unique country blends.
a relative description instead, like medium. Recent store
audits conducted by Balvor reveal a majority of conve-
nience retailers focus on the actual ounces in the cup while
the competition uses relative descriptors. but knowing the actual ounces for each cup size requires a
Using a relative descriptor makes it more difficult for customer to look at the bottom of the cup as it's not listed on
customers to compare prices across chains. For instance, the menu board or on the side of the cup. .-
checking prices at McDonald's may be straightforward, The shift in terminology brings the store into alignment
" with how competitors present their cup offering. And, it
also makes it easier for stores to refine the cup sizes avail-
Size able without alerting the customer or the competition to
(By Ounce) the change. That's if there is a need for you to introduce
Dunkin'Donuts 10 a smaller cup size in order to maintain the opening price
McDonald's 12 point position.
Starbucks 12 It's not uncommon for packaged manufacturers to hold
Einstein Bros. 12 the line of prices by reducing the portion size during peri-
7-Eleven 12 ods of inflation. Therefore, retailers could follow a similar
Circle K 16 tactic with hot coffee that's just a little more subtle.
Speedway 16
PUTTING IT IN CONTEXT
Consider these suggestions within the context of how
you manage the business and what your objectives are both
short and longer term. Also, be sure to leverage insights
Chain Relative Sizes Actual Size gained from analyzing sales trends, competitive mar-
(S/MIL) (16 oz.) ket intelligence, and customer engagement to assess how
Dunkin' Donuts Yes Yes' and where these suggestions can help defend your hot dis-
McDonald's Yes pensed beverage business.
Starbucks Yes Yes' Following these tips are simply a few among many steps
Einstein Bros. Yes you should be executing to defend and, better yet, grow the
7-Eleven Yes current business. You also should be examining how you
Circle-K Yes can better control shrinkage and product waster via better
Speedway Yes controls, practices and equipment.
Retailers interested in gaining additional insights
* Size is smaller font and subordinate to descriptor on menu board. and perspectives on this topic can view Part 1 of CSD's
Source. Store audits, Ba/vor LLC.September, 20 I0 Foodservice Webcast Series, which is available free
on-demand at www.csdecisions.com. CSD
36 Convenience Store Decisions I December 2010 CSDecisionso
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