Each week, we seek expert advice to help a small or medium-sized business overcome a key issue.
It started with a little white lie. Claudio David was in his late teens and had already amassed a tiny empire of gumball dispensers and pop machines in laundromats, schools and barbershops throughout Toronto.
"I had a pop machine client call me up and say, 'I'm having issues with my office coffee provider. Is that something you do?'" Mr. David says.
Without missing a beat, he responded, "Absolutely." He hung up and immediately thought, "Oh man, I've lied to her."
He frantically called around and researched the market he had inadvertently thrown himself into. "She was the first office coffee client, and we just figured it out from there," Mr. David says. That was in 1996.
He soon launched Office Coffee Solutions and was serving a network of law firms, advertising agencies and university staff rooms. He supplied it all – machines, disposable cups, sweeteners and even the cleaning supplies to care for the machines.
When single-cup coffeemakers by Keurig and Tassimo started popping up a decade later, Mr. David adapted by selling the machines and their little single-serve pods. "The minute we got into single-serve our growth took a big jump," he says. "It was very common to see 20 per cent growth per year."
In 2012, the Toronto-based operation, which has 30 employees, pulled in $3.2-million in revenue. Last year they hit $5.2-million. The company also has two retail spaces.
But times are changing. Keurig owner Green Mountain Coffee's patent for the K-cup expired in September of 2012. Since then, brands such as President's Choice have begun manufacturing their own compatible pods. The market is worth more than $725-million a year in Canada and is expected to swell to almost $1.8-billion in sales by the end of 2017, according to research firm Euromonitor. Single-serve machines and coffee pods are available in more stores, and prices are falling.
Some of Mr. David's office-coffee clients, who make up 75 per cent of his business, have started switching to single-serve machines to save money. The convenience of using the pods also makes them more attractive for smaller businesses that can pick up their own supplies for cheap at the grocery store.
The sprawling availability of compatible pods is also hurting Mr. David's retail operation.
"When we started in this, we didn't have a lot of players to compete with," he says.
The Challenge: How can Office Coffee Solutions recapture its lost business in an increasingly saturated market?
THE EXPERTS WEIGH IN
Knud Jensen, professor of strategy and entrepreneurship, Ted Rogers School of Management, Ryerson University, Toronto
He's got a good business now, providing the services for large and small offices. It's a market that still has growth. As for the single-cup machines, the small offices will use that, but the economics of that is abysmal in terms of profit. He's got to go in where his strength lies, and that's the coffee supply business. The best way to do that is through developing a competitive advantage by over-servicing and building out the customer experience. If he's not already doing it, he could use his Barrie office as a springboard to really grow his business outside the GTA.
Also, I don't see that the retail space is an option for him – it's too tough of a market. Just look at the competition – even Second Cup had to change their structure. He doesn't have the investment to go big enough to compete by expanding the retail side.
Karen Fischer, partner at small business consultant RK Fischer and Associates, Port Perry, Ont.
They're addressing two different target markets, business-to-business and business-to-consumer. On their website, the branding is very confusing – are they trying to look like one big company with three divisions or three different product offerings? There's really nothing that brings it together.
They're also only using social media for the home coffee solutions side of the business and that's a mistake, especially with office coffee being their main thing.
They need to show that the office coffee is a service. It's not that they've done a bad job but I think rebranding would help them differentiate themselves. It can be expensive, but it's a one-time thing. Once they get it right, people will understand who they are as a business.
Scott Dawson, president of office coffee supplier DawsCo Service Ltd., Calgary
Green Mountain wants to sell on a massive scale. They want the Bed Bath & Beyonds and the London Drugs to sell their product because it's a cheap way to distribute, using those large companies' pre-existing distribution networks. They can offer a price on those products that's not inclusive of the overheads that Mr. David would have to include selling the exact same product.
The big coffee brands are going to be selling in more and more places, which is going to alleviate the need for those products in Mr. David's businesses. He has to seek out other systems and other offerings for both retail and office clients. He's going to have to start offering fewer of the "me too" products and more of the "I'm the only place you can find it" type products.
He also needs to be careful not to focus too much on retail – it's a thin profit margin. In the office coffee business you can go get one decent client and that profit could equal what you'd sell in a retail store in two or three weeks.
THREE THINGS THE COMPANY COULD DO NOW
Look for new markets beyond the GTA
Use Barrie as a springboard to tap into clients who may not have access to all the products available in larger urban stores.
Improve your marketing
Build out a proper digital strategy for the largest share of revenue, the office coffee side.
Find an exclusive product
Identify an exclusive product or service that will increase your customer base.
Interviews have been edited and condensed.