I have a lot of different subscriptions.
I subscribe to The Globe & Mail, The Wall Street Journal, and The Washington Post for news.
I subscribe to Netflix, Disney+, and Spotify for entertainment.
I subscribe to Amazon Prime for fast deliveries with free shipping, and to several different grocery products via Amazon's Subscribe & Save program.
I subscribe to HP for printer ink.
And for the month of March, I'll subscribe to A&W for coffee.
Okay, fine: my A&W coffee sipscription might not count because I won't be paying for it. But it's still an interesting concept worthy of discussion.
My free coffee offer arrived last week, when A&W sent me an email with the subject line, "Sign up for free coffee for a month. No catch." That caught my attention.
The email was short and simple. It read: "A&W Sipscription is a new monthly coffee subscription on our mobile app that lets you sip on unlimited A&W coffee. We’re currently testing the program and we’re inviting you to try it for free. Yep, free! The only catch is you’ll drink so much coffee you might get jittery." And the large, orange, "Sign up now" button below that paragraph was tough to miss. It took me less than a minute to sign-up, and a few minutes more to read the FAQ.
A&W isn't the first to think of introducing a coffee subscription program; that honour likely goes to Panera Bread, which generated a lot of press in early 2020 when it announced it would be offering unlimited coffee at all Panera locations for an $8.99 monthly subscription.
The benefit to a coffee-lover is obvious: as noted by Business Insider, "a regular Panera coffee costs $2.49 in New York City, so the savings come around the fourth cup of coffee."
But does a benefit exist for Panera? Let's make a few assumptions:
According to an online survey conducted by the National Coffee Association (NCA), as of January 2020, Americans drink 1.3 cups of coffee per day. (If you're curious, Canadians drink more than double that amount: according to the Coffee Association of Canada, our average is 2.7 cups per day.)
Just like "unlimited buffets" tend to appear to people who like to eat a lot, an "unlimited coffee program" is going to appeal to those who consume above-average amounts of coffee. We want to look at the extreme situation for this exercise, so let's quadruple the US figure and round that number to the nearest whole cup. That means we'll assume every member of the Panera program will drink 5 cups of coffee each and every single day of the month.
Finally, let's assume we're talking about a month with 31 days in it.
So in a month with 31 days, the "above average" consumer will drink 155 cups of coffee. And they'll only pay $8.99 to do it, which means each cup costs them $0.058.
Working at Starbucks for four years taught me that drip coffee offers very high margins for coffee retailers, so it's not impossible to imagine that Panera will break even on the coffee. But when you factor in the cost of the cups and lids, creamer and sugar, wages, and all the fixed costs associated with operating a Panera location? Not a chance: above-average coffee drinkers simply aren't going to be profitable for Panera.
But what about average users? Well, that changes the math significantly.
Imagine the pandemic is behind us, and that you're so sick of staying at home for a full year that you'll happily head into the office five days every week, regardless of whether or not your employer has achieved enlightenment as it relates to the benefits of allowing employees who want one a work-from-home option.
And imagine that on your way to work every morning, you stop by Panera and get a single cup of coffee. In a month with 23 weekdays, you'd consume just 23 cups of coffee for your $8.99, or $0.391 per cup. That's more than 6X the six cents the coffee-addicts described above would pay, but it still represents a significant saving relative to buying each of those cups individually at $2.49 per cup.
I don't have access to Panera's cost-of-goods, but I'm willing to bet that at forty cents per cup, Panera is very close to covering the total costs for each cup. This means that if Panera managed to attract more "light" users than "heavy" users, the program could break-even.
Except you don't operate a business to break-even.
Fortunately, Panera seems to be well aware of this fact. In October 2020, Restaurant Business reported that Panera's unlimited coffee program had 500,000 paid subscribers, each of them paying $8.99 per month for their coffee fix... which equals revenues of nearly $4.5 million on an annualized basis.
That's a rounding error compared to the $5.9 billion of revenue Panera earned in 2019, but the benefits of the program extend beyond just the coffee revenues. In that same article, Panera CEO Niren Chaudhary revealed that Panera's coffee subscription is generating:
90% incrementality (read: only 10% of Panera's existing coffee business was cannibalized by the unlimited coffee subscription);
35% of subscribers are new customers;
35% of coffee orders include food (which has very healthy margins, and which may not have been purchased had the coffee subscriber not entered the location to get their java-fix).
When asked about the program, Chaudhary said, "The coffee program has been very successful at a very difficult time during a pandemic,” and that, "Even when the program was being offered for free a couple of months ago, it was still profit accretive for us. We’re very excited. It’s a program that works for us.”
So offering customers unlimited coffee seems to work for Panera in the US.
Will a similar program work for A&W in Canada?
I think it will if the following proves true:
The coffee is good. I've never had a cup of coffee from A&W, and I'm eager to give it a try. Granted, working at Starbucks for four years (and earning my Coffee Master certification) turned me into a coffee snob, and I'm a tougher critic than most. But having acceptable-tasting coffee is a fundamental price-of-entry if you're going to offer a coffee subscription; if the coffee isn't good, there aren't many reasons for a customer to pay for unlimited quantities of it.
The program offers value. The FAQ made it clear that this sipcription program was a free test, and that if A&W deems it to be a success, a national roll-out will happen sometime in 2021. But the cost of the program has yet to be communicated, and the value equation is extremely dependant on the price of the program. Also, as A&W clearly indicates on its FAQ page, "There is a limit of one free coffee per transaction, but you can make unlimited transactions every day." The one-coffee-per-transaction restriction is reasonable, but should A&W decide to introduce any further limits with a national roll-out (like a daily maximum or a minimum number of hours between refills, for example), that could also make the program much less appealing.
The program offers variety. For the test, I'll only be able to order, "any size A&W Organic Fairtrade Coffee from the mobile app". That's it: not even decaf coffee is included in the trial program. Compare that to Panera's program, which offers, "any size and any flavor of hot coffee, hot tea or iced coffee once every two hours." It makes sense to only offer a single selection during the test to simplify the logistics of executing the program, but should the program get rolled out nationally, A&W would be wise to replicate the breadth of Panera's options, even if it means pricing the program slightly higher or introducing a two-tiered "unlimited" and "unlimited plus" program with different consumer benefits and costs.
The program drives incrementality and food sales for A&W. If it doesn't, then A&W isn't going to launch their sipscription program nationally, regardless of how much consumers may like it.
Ironically, out of everything on that list, the fourth point might be the easiest for A&W to achieve, for two important reasons.
First, most people aren't choosing A&W for their morning coffee today: it's a very safe bet that Tim Horton's, McDonald's, and Starbucks are leading coffee sales in Canada (probably in that order, although I couldn't find any publicly-available information to confirm that). That means that from a coffee perspective, A&W has a lot of opportunities to grow coffee sales ahead of it, and the word-of-mouth they'll earn as soon as news of this sipscription test gets some attention will certainly help with that.
And second, be honest: did you know that A&W offered a breakfast menu? I'm almost embarrassed to admit that I didn't know that before I began my research for this post; that means that whenever I wanted breakfast-to-go, A&W wasn't even in my consideration set. But if I had an unlimited coffee subscription at A&W, would it make sense to go to an additional quick-serve restaurant for my morning sandwich? Probably not... and that's exactly how A&W can benefit with their sipscription program, just as Panera seems to be doing.
There are essentially three types of subscription offerings: content (like The Globe & Mail, Netflix, and Spotify), curation (such as Goodfood for easy-to-prepare dinner options, Carnivore Club for "premium cured meats", or Lootcrate for "premium gear for the pop culture connoisseur"), and replenishment (like Dollar Shave Club for razors, and Amazon Subscribe & Save for just about anything you need to order regularly).
A&W, like many companies that are taking closer looks at subscription businesses these days, has simply decided to think about the definition of "replenishment" more broadly. They may not offer a package of goods that they can ship to my house regularly, but they do happen to sell a caffeinated product I use to replenish my energy levels several times each day... and that frequency represents a tremendous business opportunity.
And all of this begs the question: if a quick-service-restaurant can sell coffee by subscription, what type of subscription might your business be able to offer to your consumers?
The answer might not be obvious. But then again, neither was "unlimited coffee" from a fast-food restaurant best known for its root beer.
If you found this post interesting and want an even better understanding of how and why businesses are starting to consider offering subscription services, I highly recommend you read The Subscription Boom: Why an Old Business Model is the Future of Commerce. I found the book so interesting and insightful that I made it required reading for MBA students who take the "Retail Marketing Strategies" course I teach for the Schulich School of Business.
Note: this post was updated to reflect the third category of subscription offerings (curation) which I had initially bundled into "content" for the sake of simplicity. I subsequently decided that accuracy was more important than simplicity, and that "curation" deserved to be recognized as the separate category it actually is.