How To Stay One Step Ahead In The Coffee Wars

WRITTEN BY: GARY M STERN
For Investors Business Daily

When Avis trailed Hertz in car rentals in the 1960s, it turned being second place into an asset.

 

“We’re No. 2 and we try harder,” its ads proclaimed.

 

But being second, third or lower down in market share, especially when vying against a dominant leader, can make it tough to grow.

 

Take coffee specialty stores.

 

No. 1 Starbucks enjoys a nice lead vs. much smaller rivals like Caribou Coffee and Coffee Bean & Tea Leaf.

 

Grant Cardone, author of “If You’re Not First, You’re Last,” says first place is “the only place that matters. It’s a position that allows you to weather all storms, gets you extra attention and has the competition chasing you.”

 

If the No. 2 can find a niche that can drive revenue, it can begin competing against the dominant force. But that can entail a hard climb, analysts say.

 

Is Bigger Better?

 

Starbucks has 11,128 U.S. retail stores, including 6,764 company-owned outlets. It generated $9.8 billion in 2009 revenue.

 

Caribou has 500 stores and $263 million in 2009 revenue. Privately held Coffee Bean has 800 stores, but only 290 in the U.S.

 

While some rivals pay little or no attention to the leader, Caribou pokes fun at Starbucks. Its Web site says: “You won’t hear us talking about vision or mission. That’s corporate speak. We talk about aspiration, experience and values.” That’s a clear reference to Starbucks, positioning Caribou as spunky and independent, not corporate.

 

At Los Angeles-based Coffee Bean, espresso is brewed in manual machines, not in automatic makers like Starbucks. “Coffee Bean is about premium coffee, delivering a quality experience and not rushing people through the line,” said Bob Kaufman, the firm’s vice president for business development.

 

Of Coffee Bean’s 800 outlets, 510 are overseas, mostly in Korea, Singapore and Malaysia. And 500 of the 800 are franchise-owned. But the chain has just 35 franchisees, since most own multiple outlets. Coffee Bean likes to cluster stores to build brand awareness, rather than open one in a new city.

 

Kaufman says Coffee Bean is developing stores where people want to buy hand-roasted coffees and teas and isn’t overly concerned about what Starbucks is doing.

 

“We don’t look at our competitors to figure out what to do,” he said.

 

Indeed, Coffee Bean is holding its own. It plans to open 100 mostly franchised stores in 2011, 75 globally and 25 domestically — including an East Coast expansion in the U.S.

 

Do What No. 1 Can’t

 

What the No. 2 must do is “identify all the weaknesses of (the leader) or things No. 1 can’t do and exploit them,” author Cardone said. If the upstart can find a niche that can drive revenue, it can begin competing against the giant.

 

Industry leaders can’t rest on their laurels and can lose their edge. Rivals know that and rely on their entrepreneurial spirit to find a way to undo the leader. “Microsoft can’t ask its staff to work 12-hour days, and soon Google won’t, but startups can,” Cardone said.

 

The trap for a No. 2 is competing on price, which rarely wins. Instead, Cardone suggests thinking outside the box and innovating to create an edge.

 

When Howard Behar, former president of Starbucks, joined the company in the late 1980s, it had 28 stores. The co-author of “It’s Not About the Coffee” credits the Seattle giant’s growth to buying quality coffee without worrying about price. He says this added great taste in a welcoming environment where people can gather.

 

Starbucks was in the right place at the right time. In the early 1990s,when it decided to expand, it secured angel investments and venture capital and went public in 1995 with only $150 million in revenue.

 

“We likely couldn’t do that today,” Behar said.

 

In the early years, Starbucks wasn’t overly worried about other establishments. “Our competition back then wasn’t the other coffee shops, but people’s state of mind about what a cup of coffee could taste like,” Behar said.

 

More recently, Starbucks has faced increased competition since Dunkin’ Donuts upgraded its java, McDonald’s introduced premium blends and Tim Hortons, which is dominant in Canada, entered the U.S. market.

 

Starbucks acquired Seattle’s Best, which has 160 retail stores, in 2003 and is rumored to be mulling a purchase of Peet’s Coffee & Tea, which has 192 outlets.

 

Behar says that in 2007 Starbucks got tripped up chasing earnings.

 

“The pressure to grow got too heavy, and we became a store-opening machine vs. a human coffee shop,” Behar said.

 

Starbucks was spreading faster than it could train managers to run stores, overexpanding just as the recession hit. In 2009 it closed 500 stores and saw revenue dip from $10.4 billion to $9.5 billion. In 2008 it brought back founding CEO Howard Schultz, who had resigned in 2000. Since Schultz’s return, sales have been rising.

 

So can smaller be better? “We like to think we’re nimble,” Kaufman said of Coffee Bean & Tea Leaf, suggesting that much-larger Starbucks has a harder time being flexible.