coffee business strategies

The Seattle Times today released video of the interior of Starbucks’ new 15th Avenue Coffee & Tea concept and what’s most impressive about the design is that it, essentially, copies most other independent coffee shops started in the past 3 years. Take a look at it for yourself:

Note the “we ran out of cash” school of interior and menu board design, the late-model La Marzocco Linea from their own liquidation sale, Melitta filter cone brew bar (particularly ironic, since these bars became popular after Starbucks bought the Coffee Equipment Company, taking the popular Clover machines out of the arsenal of independents) and most notably the parting shot advertising “daily cuppings at 10:00 AM.”

Like the automotive companies that look back fondly of their glory days by recreating 60’s muscle cars rather than exploring new designs, Starbucks has created 2008’s hottest new coffee shop, but the real truth will be found under the hood — in the cup.

The Seattle Times article references that the shop will use a blend of coffees used at Starbucks’ Brazilian chain stores, not an entirely unexpected move since a dramatic change in flavor profile will be necessary to truly set the new decoy apart from its hunter.

I’m sure that there will be a lot of curiosity by the onlookers in the coming days, but will consumers take the bait?

Next door salon owner Howie Sennet is quoted in the article as saying:

Authenticity can’t be bought or copied,” he said. “They should use this as a lesson to find their own identity within themselves.”

I couldn’t agree more.

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Starbucks (NASDAQ:SBUX) today announced that they will beat industry analyst projections for Q309, but almost entirely as the result of cost cutting initiatives and store closings, followed by decreased (ceased) short term borrowing and increased grocery store distribution. Though a positive result for the short term, the company saw an 5% decrease in US same store sales and projects further decreases in future years, though at a slowing pace. After making the “easy” cuts, what is the plan to turnaround sales?

Starbucks management has successfully reduced costs, but where is the plan to increase same store sales and reverse the commoditization of its brand that has led to vulnerability from competition? Despite past public assurances by Schultz that the company is returning to its roots, management actions have demonstrated anything but.

An article from the Associated Press today summarizes:

Starbucks has introduced instant coffee, changed its food recipes and begun a multimillion dollar ad campaign to keep customers from defecting to lower priced competitors like McDonald’s Corp (NYSE:MCD)., which is rolling out espresso drinks to its 14,000 U.S. restaurants.

Offering more and different products can increase overall sales in the short term, but ultimately drives the most brand loyal consumers -those customers or roots on which the company was founded- in search of alternative options. While Starbucks has faltered in recent quarters, small specialty independent chains and other coffee businesses have thrived, in part as the result of Starbucks’ missteps, which send alienated customers in search of other options.

On the upper end of the specialty coffee market, small chains and independents continue to grow at a blistering pace as consumers -even those adversely affected by the economy- continue to reward or console themselves with coffee’s affordable luxury. On the bottom, c-stores have made substantial investments into coffee service programs that capitalize on the blue collar market demand for caffeine in beverage form — and in the middle, QSRs like McDonald’s and Dunkin’ have taken deep cuts into Starbucks’ former territory. Being pressed at all sides, the decision to offer a wider array of products appears as if the company is searching for any additional opportunity to increase revenue rather than projecting a clear message of what it does best.

Schultz did not introduce any initiatives on the call but said Starbucks will update its packaging for the coffee it sells in grocery stores to include a coupon for free brewed coffee in its retail stores.

The suggestion that couponing and packaging offer the best hope of reducing the slide of same store sales is a troubling one. As with ice cream and instant coffee, these too are short term solutions to a long term identity crisis in an increasingly sophisticated market.

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Remember experimenting with alcohol and changing your name? Well, it must be Starbucks’ freshman year at college because they will be launching a new “neighborhood” concept store next week under the name “15th Avenue Coffee & Tea” that adds beer and win to the menu.

As always, I had a few thoughts on the subject, which were kindly quoted by the Associated Press:

Andrew Hetzel, the founder of coffee consulting group Cafemakers, said Starbucks may also be renaming its stores to provide a testing ground for changes and, possibly, to bring in a new brand of consumer.

“It looks to me that they are testing a specialty sub-brand to see if they can capture some other segment of the market that would otherwise be disillusioned by a large corporate chain,” Hetzel said, adding that opening only one at first “gives them a live shop to test changes in menu offerings, store design and, perhaps, procedures quickly” without disrupting operating stores branded with the Starbucks name.

You can read the full story tomorrow in many newspapers that subscribe the AP feed, or find it online now on news websites, like CBS News. These syndicated articles tend to disappear after some length of time, so if reading this long after the event, you may need to search online to find a different copy. It’s unlikely that I will return to update the link.

In addition to what was quoted in the article, I have a few more thoughts:

The best of any specialty food businesses cannot exist on a large scale, so a smaller scale business will ultimately need to be spun off if Starbucks wishes to compete in the high end specialty coffee market.

Think of the situation in terms of a restaurant — the best fine dining restaurants are normally one single unit or a very small chain. Once you expand to two locations and beyond, it becomes increasingly difficult to maintain the same customer experience that could be found at the first. Chef skill, front of house training and availability of ingredients all become increasingly complex to maintain to a consistent level, so often sacrifices need to be made in the name of consistency over quality so that customers know what to expect when they walk through the door of every location. These problems multiply with 10, 100 and 1,000 units, and you can see what sacrifices Starbucks has made in order to grow beyond 16,000.

Just like a fine dining restaurant, the best of coffee shops have highly skilled baristas and often use unique coffees that may not be available in the quantities possible to serve a consistent menu at more than a handful of locations. I expect that we will be hearing more about this new concept over the next several months and possibly years.

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Mega-kudos go out to talented coffee consultant, co-World Barista Championship board member and friend Fritz Storm, who was today named the latest “family member” for Le Meridien hotels LM 100 luxury design concept. Storm joins Illycaffe Chairman and CEO Andrea Illy to head up coffee effort.

“LM100 is not a club, it’s a family of international creators that are reinventing Le Méridien with the vocabulary of their challenging experience,” said Jérôme Sans. “This group will grow naturally in order to keep the dimension of dialogues, discoveries and creations.”

I have heard rumors that Kaldi, the Ethiopian goat herder fabled to have discovered coffee 1,500 years ago has also been in discussions with Le Merdien to join the consulting team, but calls were not immediately returned by his agent in Century City.

Read the full Starwood press release from Businesswire

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Greg Lamm of the Puget Sound Business Journal looks at Tully’s new plan for expansion and quotes my analysis of the situation.

Franchising makes good business sense for Tully’s because it spreads the risk to the franchisee, said Andrew Hetzel, a specialty coffee industry consultant and blogger based in Hawaii.

“They become less of a coffee company and more of a quick-service restaurant,” said Hetzel, adding that coffee aficionados in Seattle and other cities have plenty of small specialty alternatives to Starbucks and Tully’s.

I’m a blogger? Interesting, no one has ever given me that title, but I suppose that I do write about topics of interest (to me) in a blog, so the title apparently fits.

Read the article Tully’s new blend: add stores

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