Coffee Serv finds ways to grow in a mature OCS market.

BY ELLIOTT MARAS, EDITOR

Philadelphia OCS operation finds new markets in specialty coffee, single-cup brewers and the Internet.

There's no textbook on how to succeed in OCS. From its beginnings in the late '60s to the present day, OCS has been an entrepreneurial business. It is an industry built by entrepreneurs who understood the value of free coffee in the workplace and came up with profitable ways to provide it. The basic model was: provide a brewer, deliver product, service the equipment, and bill the customer for the product and service.
 

Jack Kirshner believes it is important to keep an open mind about new products to succeed in OCS. He believes it is also important to know how far to extend one's resources.

While a standard, how-to-do-it manual hasn't emerged, most successful OCS operators have recognized the importance of sharing best practices, informally and through industry forums. Today, as the next generation of owner/managers assumes leadership, the same dynamics of informal camaraderie and a willingness to experiment with new products and services continue to drive the OCS industry. The tools and operating practices have evolved, but the founding premise of providing a tangible value to the customer has remained intact.
 

Jack Kirshner was among the entrepreneurs who, in the late '70s, saw opportunity in the emerging OCS concept. His willingness to test new products along the way helped him weather the various challenges that later confronted OCS. Today, with firm footholds in bottled water, specialty coffee, single-cup brewers, the foodservice sector and last, but not least, the Internet, Kirshner's company, Philadelphia, Pa.-based Coffee Serv Inc., continues to grow in what many observers term a "mature" OCS market.

Some of Kirshner's unique advantages, besides undergraduate business schooling at Philadelphia's Drexel University and undeniably good business instincts, include involvement in an exceptionally strong local OCS organization — the Keystone Coffee Association —- and a 24-year-old son, Ben, who happens to be a professional in the emerging world of e-commerce.

Specialty coffee drives consumer tastes
That Kirshner's company survived the past year's economic downturn verifies his long-term assessment of the OCS market: The consumer's enhanced appreciation for better quality coffee has created a viable market for providers committed to delivering high-quality coffee. "Starbucks got us (consumers) away from sticker shock," Kirshner observed. "They said it was OK to spend money for a good cup of coffee."
 

"The good thing about OCS is that it's a recession-proof type of business; everyone drinks coffee," Kirshner said, not lamenting the fact that he suffered some major downsizing in his Internet-related accounts in 2001. But while the "dotcoms" suffered, the legal and insurance sectors fared well, even as economic indicators fell to eight-year lows.
 

More importantly, the demand for better quality coffee has created a viable market for specialty coffees, including his private label coffee, and for Keurig machines. The single-cup Keurig units allow him to charge previously unimaginable prices for once-unforeseen product quality and convenience.
 

For Kirshner, the founding principle of OCS - providing value to the customer - has not changed. He came upon the business a few years after graduating from college. With a couple of years of corporate sales under his belt, he went to work for the father of a college friend, the late Cyrus Melikian Jr. He went to work in the OCS division of Flavor-Maker™ Inc., a coffee product and equipment manufacturer based in suburban Philadelphia.

Humble beginnings in OCS
At age 26, Kirshner decided to strike out on his own. Working from their apartment, he and his wife, Linda, started Coffee Serv. He consulted frequently with the late Irv Greif, a Philadelphia OCS pioneer, and broker Dave Gellman, president of Gellman Associates, Norristown, Pa. Kirshner marketed plumbed-in brewers, which were beginning to replace nonplumbed-in pourovers. "It was relatively easy to get accounts," he recalled. "In those days, the quality of coffee was high, like it is today."
 

"If you see something works and spot trends, that's one of the values of being part of an association," he said.

Specialty coffee has proved a big winner for Coffee Serv. At left, employees Matt Kirshner, Lamar Jengo and Louis Camacho unload specialty OCS packs in the Coffee Serv Inc. warehouse.

BreakMate™ opens doors in the '80s
In the late '80s, Coca Cola BreakMate™ machines proved to be great door openers. While most OCS operators eventually got rid of their BreakMates™ because of quality and maintenance issues, Kirshner credited the countertop, soft drink dispenser with winning him as many as 100 accounts which he wouldn't have otherwise gotten. A big problem was that service calls were not limited to the route person's regular delivery schedule.
 

BreakMate™ taught Kirshner the importance of being careful about marketing new concepts, a lesson that would repeatedly prove important. Operators who "went wild" with the concept got stuck having to pay leases on a lot of machines that customers no longer wanted. "The BreakMate™ was one of the first major 'side' investments for OCS operators," he noted.

Kirshner was able to recoup most of the business he lost from dissatisfied BreakMate™ customers using canned soda.
 

In the meantime, a bigger challenge was slowly unfolding. As the OCS market became saturated, more and more operators began selling on price. This was compounded by a widespread dilution of coffee pack weights. When green coffee prices spiked in the late 1970s, many OCS operators responded by offering lower pack weights, unwittingly denigrating their product's quality. It would take more than a decade for OCS to recover its reputation for providing a good quality product.
 

The culmination of this unfortunate trend - pack weights in Philadelphia slipped from 2 to 1.5 ounces — was the membership warehouse clubs' foray into the OCS business in the mid-1990s. The clubs began advertising OCS packs to business customers.
 

For Kirshner, the widespread lowballing was more of a problem than the warehouse clubs. Most customers, after all, did not want to maintain their equipment themselves and send their employees out to a warehouse club to buy supplies. The real danger was that if OCS would be viewed as a commodity, it would no longer be profitable. Hence, lowballing was a threat.
 

Fortunately, coffee houses were quietly recultivating customer tastes. In the late 1990s, Kirshner began carrying Green Mountain and Millstone coffees, in addition to his specialty private label blends. Customers conditioned by Starbucks and other specialty retailers were willing to "trade up" to these higher-cost coffees.

Offering equipment upgrades
To enhance his pitch for quality, Kirshner also began offering thermal brewers and carafes. "The best way to keep that coffee fresh is some type of thermos system," he said. The different thermal models each have their own special points, such as versatile size, site gauge or ease of cleaning. "It's all personal (customer) preference," he said.
 

A key player in the industry's comeback was Filterfresh, the Westwood, Mass.-based single-cup franchiser, which came on strong in the '90s, particularly in New York City and Philadelphia.
 

"All of a sudden, they (Filterfresh) were getting 25 cents a cup and telling customers they were saving money," Kirshner said. "People wanted convenience."

Single-cup poses a new challenge
Unfortunately for established OCS operators, Filterfresh was a competitor, not a supplier. It would be a few years before OCS operators were able to meet the challenge with an equally marketable product.
 

The first single-cup brewers designed to counteract Filterfresh were hard to work with, Kirshner said. Some had European graphics, which weren't well-received in the United States. Others required too much maintenance on the part of the customer.
 

But in 1999, the right product became available — the portion-controlled, pod-based single-cup system.
 

"The Keurig was 'set it and forget it,' " Kirshner said. "This is the first coffeemaker where no coffee was (left) in the machine. You (always) had a clean, fresh cup of coffee. It's also given your salespeople something new to sell." The system also offered specialty and flavored coffee, which were popular with younger consumers.
 

Kirshner has placed about 200 Keurig units to date. Even the recent setbacks of the dotcom crash and recession haven't made a dent in its growth. The only thing limiting his growth, he noted, has been competition from other Keurig operators. "This (Keurig) is mainstream now," he said. "Everyone (in OCS) has it, even Filterfresh."
 

The challenge the industry now faces, he said, is not to lowball the single-cup machine. So far, OCS operators haven't fallen into that trap, as green coffee prices have stayed low for the last two years. The challenge will come if and when green coffee prices rise again. Kirshner hopes the industry has learned its lesson from the late 1970s.
 

"If you lowball it, it'll hurt you due to the cost of equipment and service," he said. "If you give it away, you're going to pay for it later." Besides the higher cost of equipment, the service cost for Keurig can easily double that of a standard automatic or thermal brewer.

Foodservice coffee trades up, too
Foodservice coffee has also traded up in quality. Kirshner, having observed early on that small restaurants, delis and c-stores were being ignored by the large coffee purveyors, served the foodservice market from the start. Coffee Serv has witnessed strong growth with the Lavazza Espresso Point machine, having placed nearly 80 of these user-friendly, portion pack, espresso machines.
 

Kirshner has also expanded into frozen beverage machines in his foodservice account. He offers most of these units on a lease basis.

Customers can order online from the Coffee Serv website, developed by Ben Kirshner. A separate site has been designed for consumers.

Management gets more challenging
Higher ticket outlays have raised the bar in terms of OCS business acumen. Kirshner said he scrutinizes his costs very closely, frequently. He keeps tabs of everything the account purchases on an annual, monthly and even weekly basis. If the revenue falls below a certain point, he considers charging a rental. "You have to look at operational costs and accounting costs," he said.
 

The dotcom crash took its toll on OCS companies in Philadelphia and New York, but for Kirshner, e-commerce has created new growth opportunities. Coffee Serv has invested close to $50,000 in Internet marketing since launching its first website in 1996. In the last 12 months, about 10 percent of the company's sales have come from online purchases.

Internet unveils new opportunity
Enter the words "coffee service" in any of the major Internet search engines such as Yahoo or Altavista, and Coffee Serv's main website, www.coffeeserv.com, will appear as one of the first entries on the list, if not the first. The site offers one of the most professional looking OCS presentations on the Internet. Kirshner has been blessed by the fact that his oldest son, Ben, is an Internet marketing professional.

Presently a media buyer/consultant at the New York City-based Internet marketing and advertising company, Sendtraffic.com, Ben Kirshner was barely out of high school when he developed the Coffee Serv website in 1996. This first attempt resembled most OCS websites at the time, consisting of company information and offering viewers the ability to send e-mails. It did not offer online buying, but that was destined to change.
 

Ben Kirshner attended George Washington University in Washington, D.C., where he majored in entrepreneurship and studied the evolving world of e-commerce. He was able to apply his education to his father's e-commerce initiative.

Website attracts consumers
Like other OCS websites, www.coffeeserv.com attracted a fair amount of interest from consumers, including many people outside of Coffee Serv's market area. Every day, the company received about 10 e-mails and phone calls from people looking to buy coffee. "There was definitely a need for e-commerce," Ben Kirshner stated.
 

Rather than let all of this interest go to waste, Ben Kirshner designed a second website, www.coffeeforless.com, a consumer website which he launched in 2000. This site enabled consumers to place orders online using credit cards, even for products the company didn't warehouse. Orders were taken from across the country and were shipped via UPS.
 

"It was a test," he said. One purpose was to see how big a market existed for consumer coffee purchases. "The consumer market is a lot bigger than the corporate coffee market," Ben Kirshner noted.

Online ordering gets tested
The other purpose was to make sure he knew how to operate an online order business before introducing this feature to the main, "b2b", Coffee Serv website. The senior Kirshner realized he could not afford to alienate OCS customers with an ordering system that didn't work smoothly.
 

The consumer website unveiled some glitches in online ordering that needed to be addressed before bringing this feature to the OCS site. One problem was that a lot of the prices could not be posted on the website since they are variable.
 

"Business customers buy coffee for wholesale prices," Ben Kirshner said. "Business customers get discounted prices based on how many people are consuming coffee and how much equipment is needed from us. The old website was not able to differentiate a consumer ordering one case for their home or an office ordering 20 cases a week."
 

To remedy the situation, Ben Kirshner added features to the site that prompted the customer to find all necessary information online.
 

Another problem was there was no way to include information on the package indicating who placed the order. This was mainly a problem for gift purchases; someone would order a product and have it shipped to someone else. The party receiving the order would not know who sent it or why. Hence, it was necessary to include a comment area on the website that could be printed and accompany the order.
 

Still another improvement was adding multiple shipping addresses to the order form to save the customer the task of creating a new order for every destination.

Early effort flushed out the bugs
"It was little things like that that we needed to fix," Ben Kirshner noted. "You really learn from your customers; they want to order online and you figure out how to get it to them. I see the future of the coffee business online."
 

This year, a new "b2b" website will debut, offering online ordering and a wealth of items the company doesn't warehouse, such as gift baskets and food. "It's allowing us to expand our current product line a thousand fold," Ben Kirshner noted. He estimated that 70 percent of the products advertised on the website will not be warehoused at Coffee Serv.

OCS customers will order online
The new website will also make the ordering process easier. "We now have the ability to offer our "b2b" corporate (Coffee Serv) customers a Web-based private interface (Intranet)," Ben Kirshner said.
 

"This will allow the customers to be able to order directly online with their own prices. This will in turn cut some of our overhead. The customers don't have to call or fax in their orders anymore. They can now go online to see the pictures and prices, and pay using their credit cards."

In addition, the customer will be able to view their order status, order history, spending history, and receive special email notifications, which could include discounts for the specific products they order.

Another e-commerce benefit will be electronic data exchange with some suppliers. "Our vendors are going to have back-end access to our website," Ben Kirshner noted. "Millstone Coffee is going to be able to log in and see how much we have in inventory." In some cases, reordering will be automatic.

Much of the cost of developing and sustaining e-commerce is in marketing the website. "You can't just have a website and let it sit there," Ben Kirshner said. "You have to market it." This is where his own expertise has been especially helpful.
 

E-commerce is still a relatively young field, and reliable information is difficult to find. Many novices who have delved into e-commerce have learned that reliable resources are hard to verify. Much of the e-commerce marketing expertise being promoted is either bogus to begin with, or outdated, according to Ben Kirshner.
 

While Coffee Serv's e-commerce initiative is still evolving, Jack Kirshner is convinced it makes sense for OCS. He has forwarded numerous online inquiries from customers outside of Coffee Serv's market to certain suppliers, which, in turn, has given him extra leverage with those suppliers. In other cases, he has forwarded leads to OCS operators in other geographic markets.

New products: Where's the limit?
An openness to new concepts has certainly proven important to Kirshner. But he is glad he resisted the temptation to expand into office products. A few years ago, certain OCS trade organizations offered programs that allowed OCS operators to market office products without having to warehouse them. This was in response to the incursion of some office supply companies into OCS. Kirshner trusted his instincts not to expand into office products, and in retrospect, thinks he was correct.
 

"You can only be so many things to so many people," he said. Office products require salespeople with specialized product knowledge and a separate inventory control system is needed.
 

With the single-cup market maturing, Kirshner is keeping an eye out for the next hot concept. He has noticed new interest in specialty tea recently. He also has an open mind about water soluble, single-cup systems. The fact that these systems carry flavored drinks is a big plus.
 

The biggest challenge of all, however, is maintaining the ability to charge fair prices for coffee. In retrospect, the industry's most difficult period occurred when lowballing undercut his ability to charge enough to make a reasonable profit. So far, he's glad to see that OCS operators have not dropped their prices in response to the recent recession.