Ad execs have long relied on truckloads of coffee to stoke their creativity. Now one agency is counting on a java company, Bay Area-based Peet’s Coffee & Tea, to help reinvent the industry’s jittery business model. Last month, Peet’s hired Razorfish (PUB:FP), a global digital agency, to revamp its e-commerce business. But instead of working for a fee, Razorfish is earning a share of the profit from the rejiggered site—when and if it rises. “We’re all in,” says Pete Stein, Razorfish’s global chief executive officer. “None of our costs are paid for if profits don’t go up.”
The relationship between the cost of advertising and the resulting impact on revenue has always been tenuous. In recent years, as media buyers stopped paying the hefty commissions that once sustained Madison Avenue, ad agencies have had to adjust by charging fees for billable hours, and profit margins have shriveled.
This financial pressure is forcing executives to consider new strategies, says Eric Johnson, founder and CEO of the agency Ignited. As a result, it’s not uncommon to see agencies introducing proprietary mobile apps or investing in early-stage startups. “All of us have dabbled in different ways of trying to have compensation better aligned with results,” he says—for example, by negotiating bonuses tied directly to the performance of the client’s product. “This is just a more direct and clever way for an agency to share in the risk and upside.”
Before committing to this compensation structure, Razorfish researched the industry, Stein says, and concluded that online sales of consumable goods of all types are “going to really spike” in the next five years. Internet sales of coffee, tea, and hot chocolate in U.S. homes and offices reached $12.5 billion in 2013, up from $9.7 billion in 2011, according to StudyLogic, a market-research company. Last year the category’s sales rose at almost twice the rate online as at traditional retail outlets. StudyLogic Executive Vice President Samuel Nahmias attributes the growth to the rising demand for single-cup servings like the ones used in Keurig (GMCR) and Nespresso machines.
Peet’s started its e-commerce division in the late 1990s and is well positioned to grow, as a result of the decision last June to jump into the single-cup game. (A company spokesperson declined to say how much annual revenue the Internet division generates, or whether it’s profitable.) “This category is just beginning, and obviously there’s a lot of growth,” David Burwick, president and CEO of Peet’s, told Bloomberg TV in September. Today, visitors to peets.com can purchase a range of products, from bags of Arabian Mocha-Java to single servings of French Roast, along with tins of exotic teas and a variety of Peet’s-branded mugs, baseball hats, and cycling jerseys.
Stein says that in the long term, Razorfish will likely build an entirely new e-commerce platform for Peet’s. In the meantime, the agency has already identified several short-term fixes—such as improving Peet’s paid-search results—that Stein says will boost performance.
It’ll only get easier as delivery services get faster and consumers feel safer entering payment information into their mobile devices. “We’re seeing that in China today,” Stein says. “We think that’s a precursor to what’s going to happen here.” He’s not the only one. Recently, Toms—the socially conscious shoe brand—announced it was getting into the coffee business, in part by starting an online subscription coffee club that will compete directly with Peet’s. Expect more interlopers to follow. It’s not often that businesses can find a market that combines two of the world’s most powerful addictions, coffee and the Internet, in one place.