by Vik Patel, President and CEO at Purple Square Management Co
Key players in the coffee and breakfast foods industry (e.g. Dunkin Donuts, Starbucks, Wawa, etc.) are able to stay ahead if they remain innovative in the face of increased competition and provide value to the market. In shops like those mentioned, coffee and breakfast item segments make up a majority of how their store sales are derived.
For most companies, innovation is usually driven out of need due to increased competition, which is normally a good thing. Outside of a few brands and products, however, I think in this space we have seen an influx of innovation for the sake of innovation. This has led to a diluted marketplace with a lot of subpar product and has even led to brands trying to capitalize on the past and potential future success of the space. With that being said, the stakes have been raised, and many companies are looking to rise to the expectations placed on the industry, which ultimately will be a good thing for the consumers.
STAYING SUCCESSFUL AMONG COMPETITION
The value trend is simply the price of doing business currently. If you don’t have a value platform with a portion of your core products, the chances of you winning a head-to-head battle with one of your competitors is slim-to-none. Value is not simply discounting your products, although that has proven to be a good short-term entry to this arena. Over the long haul, the brands who will be successful are those that will bring an experience to the consumer that makes the price or discounting less important.
I am deeply concerned about the labor market, as there appears to be no end in sight for minimum wage pressures, supply of labor versus demand, ACA compliance and sick or holiday pay, amongst other things. I do not believe that these issues will simply “go away”, but more that we need to combat and overcome them with innovation of the equipment and POS platforms. Employers in the quick service restaurant (QSR) industry will have no choice but to look more and more to ordering kiosks and beverage machines that make the beverage in order to mitigate the need to employ as many staff as we currently demand.
WHAT DOES THE FUTURE HOLD?
In addition to the labor challenges, I feel that the increase in competition is also something to be concerned about, at least in the short term. There are very little barriers of entry into the coffee space and, to a lesser extent, the breakfast business. Competitors have seen the higher profit margins in these categories and want a piece of them for themselves. In the long term, I do not think it is sustainable for many of them to execute and innovate at a high enough level to continue making the sacrifice of focusing on their core business to remain in the coffee and breakfast space.
In the near term, I think the space has been overbuilt and has too many players at a local, regional and national level. I strongly believe that a recession and/or shakeout is needed to reduce the number of competitors in the space and focus again on quality and delivering a great guest experience with a fantastic product offering.
Overall, I am extremely confident on the future of the space. With more and more people being introduced to espresso-based beverages, there is unlimited upside in that arena. Couple this with continued innovation in iced coffee, hot coffee, cold brew and frozen beverages with new blends, and the sky really is the limit. Breakfast will remain the most important meal of the day, and with the advent of growth in the beverage arena, it just produces more opportunities to pair them with sandwiches, doughnuts and other snacks throughout the day.
Please note: This article contains the sole views and opinions of Vik Patel and does not reflect the views or opinions of Guidepoint Global, LLC (“Guidepoint”). Guidepoint is not a registered investment adviser and cannot transact business as an investment adviser or give investment advice. The information provided in this article is not intended to constitute investment advice, nor is it intended as an offer or solicitation of an offer or a recommendation to buy, hold or sell any security. Any use of this article without the express written consent of Guidepoint and Vik Patel is prohibited.