Coffee Wars – 3 Strategies the Heavy Hitters Employ to Stay on Top

Few things are as personal as your choice of caffeine addiction. To quench our thirst for FRESH POTS of joe (the video below is for your enjoyment), we’ll examine the three strategies the industry heavy hitters compete on.

Dunkin’ Donuts went public on July 28th of this year, garnering a lot of attention from investors and begging the question: What are some of the smart things that Dunkin’ Donuts is doing to compete in the coffee market?

Loyalty Cards
Everyone loves free stuff; it makes us feel special and keeps us coming back. Two major coffee players took note of this and now offer customer loyalty rewards to their customers. Dunkin’ Perks Rewards which works off of their gift cards is similar to the Starbuck’s card, yet doesn’t seem to be framed with the same sort of ritzy “gold card” appeal. With both cards customers can expect to receive free coffee bonuses for participating. One of the key reasons coffee competitors should consider doing this is to create a behavioral relationship with the customer, harnessing what those in the financial industry often refer to as “wallet share”. Customers can set-up automatic transactions to refill their cards either via a certain date for those on a budget or when he or she hits a certain dollar threshold. This works well for both the business and consumer; the consumer gets control over their coffee spending habits while getting rewarded and the businesses receive customer data and secured revenue for loyal customers. The second important reason to foster a digital coffee loyalty program is so that you can learn a lot about your customers. Knowing and engaging your customers is key to growing your business – those in this space could learn a lot by A/B testing with simple segments.

Here’s an example use-case: Let’s say I’m a “Generic WebCafe”. My customers that purchase drip coffee may respond to certain offers for coffee to brew at home than those that are exclusive espresso drinkers. Using a combination of coupon campaigns and email marketing offers you can quickly find out which products work best for cross-selling initiatives.

McDonald’s McCafe seems to be trying to elbow their way into the same beverage market so it’d be smart of them to take cues from this. Currently they seems to be more coupon oriented, I’d surmise that the heavy franchising makes it difficult to roll out rewards at a corporate level.

Coffee Subscriptions
While the coffee subscriptions market is as competitive as it is diverse, the basic principle remains the same. People drink coffee regularly, therefore there is a strong demand to re-up on everything from coffee grounds, freeze dried individual packets, to individual coffee pods. If you take a look at the graphs below you can see that while these online stores are still small relative to the activity on the brand-level there is an increasing need to provide coffee on-demand to the masses. My prediction is that this growth will steadily increase as the practice of ordering consumable products online becomes more common place.

Limited Distribution and Seasonality
There are few things in life that get me prepped for a change in seasons like Coconut Flavoring in Summer, Pumpkin Spice in Fall, and Peppermint in Winter (I’m a proud coffee addict). Limiting distribution to drive demand is a well know technique used in a number of industries, given that we’re talking coffee I’ve taken note that certain flavors promoted heavily during certain seasons. Starbuck’s push for iced frappes this summer as a prime example, they even brought back coconut this summer as it was the most asked for flavor on Starbucks.com (information from Missy the manager of my local Starbucks Boston store). I’ve also noted that Dunkin Donuts increases ad spend on both iced tea and coffee in the summer and promotes specific flavors, this season it was the caramel mocha with the tagline “together at last”. It’s likely that we’ll start seeing pumpkin spice roll around for both companies in late August or early September. The whole point of this flavor recollection exercise is that these businesses understand that they will profit from associating themselves with the change in seasons. Seasonal promotions help behaviorally condition customers to seek out specific flavors throughout the year and often drive sales on higher margin product offerings.

No matter how you slice it our thirst for coffee isn’t going anywhere, however the market for coffee in every form will become more competitive. Ultimately smart techniques that create loyalty to the brand will be important for the top contenders. I’d keep an eye out for McCafe and Subway as they edge into the beverage market, and will be interested to see how subscription based businesses fare in the future. Even if smaller coffee companies like Peet’s Coffee can take queues from the big players, though they have smaller distribution, they would likely benefit from offering subscriptions for their drip coffee and teas.

One of the insights that I did gleaned from looking at our referral traffic reports for both Starbucks.com and Dunkindonuts.com is that both could benefit from marketing on weather oriented websites, tying themselves to the morning start-up routine of millions of Americans, would behaviorally condition many to make an association with the brand in their morning start-up routine.

This video is one of my favorites and is for your enjoyment…

About Lindsey Mark:
Lindsey Mark works in Client Relations at Compete and is responsible for the strategic development of client retention and support policies for compete.com, with a focus on education and training efforts. She graduated from Rochester Institute of Technology in Rochester, NY so she's a certified technology junkie and open source advocate. When she's not thinking about marketing or training digital 007's at compete, she's doing yoga & blogging about gluten-free diet and lifestyle. Find Lindsey on Twitter as @linji, Google Plus as Lindsey Mark or connect with her via LinkedIn.