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Small Coffee Shops Turn the Tables

By Michael S. Rosenwald
Washington Post Staff Writer
Monday, July 14, 2008

After Starbucks Coffee recently announced it was closing 600 stores, the questions started almost immediately -- for Howard Schultz, the man who turned the Seattle company into a coffee behemoth, and for Dale Roberts, the proprietor of the Java Shack, a tiny coffeehouse in Arlington.

"How is everything?" people asked Roberts. "I didn't realize things were so bad," they added. They asked whether he was going to survive, fearing he could be another caffeinated casualty of the high gas prices and shrinking wallets that Starbucks blames for its problems.

Schultz's answer to the questions is to get a little smaller to concentrate on doing things better. He even closed his stores for three hours to retrain his baristas in the art of coffee making.

Roberts's answer to all the questions: "We're fine."

In fact, he is more than fine. His first-quarter sales were up 23 percent. The second quarter: up 12.5 percent. His foot traffic is up. His business is energized. Not only has Roberts survived an onslaught of Starbucks shops -- there are several within a couple of miles -- now he feels he is doing to them what everyone thought they would do to him: beating 'em.

"I think the independents are probably hurting them," Roberts said, sitting at a corner table in his shop as a young woman wearing a Superman shirt strolls in. "I think there is a surge of people wanting to go back and feel at home with coffee." He's not blind to the irony: "We were the people they were trying to get rid of."

To be sure, Roberts's shop and other independents are not solely responsible for Starbucks' troubles, which many analysts are blaming on extreme over-expansion. But analysts and other coffee business owners say the massive size of the Seattle-based chain, and its feels-the-same-way-everywhere atmosphere, has provided an opening for smaller, craftier operations to thrive, even in the face of $4 gas and sagging home values.

Martin Mayorga, a Nicaraguan immigrant whose coffee-roasting operation has blossomed into several Mayorga coffee shops in the Washington region, said his prices are a little higher than Starbucks', but his retail business is growing by about 9 percent. "It's an odd time," he said. "From what we hear, we think things should be worse than they really are. I almost feel like I'm missing something. Maybe I am benefiting from the decrease in foot traffic."

It is possible that some Starbucks customers are migrating to stores like Mayorga, according to David Morris, an analyst who researches the coffee industry for Mintel International. But he cautions that even with its problems, Starbucks still dominates coffeehouse sales in the United States, controlling about 45 percent of the coffeehouse market to independents' 34 percent, according to Mintel research.

"But with a company like Starbucks, you have a mammoth uniform chain, with thousands of stores, so the key for independents is ensuring they can be different," he said. "There is a tremendous opportunity to differentiate against a big chain. Independent coffeehouses can do that pretty well."

Roberts's coffee empire is no more than 1,500 square feet, and that's including the outdoor patio. The walls inside are yellow and blue. University of Kansas pennants, an homage to the state where Roberts grew up, hang on the wall, not far from artwork by local artists. The tabletops inside -- all six of them -- are plastered with family pictures of a close friend, who took on the project herself to cope with her husband's death. Outside, he lets customers paint the tables.

Behind the counter, the Java Shack's baristas make the espresso themselves, no matter how many salesmen come through trying to sell Roberts an automatic machine that would steam the milk all on its own. He has said no every time. The person making the drink talks to the customer who ordered it. The scene is what Schultz originally intended with Starbucks, but even he now admits that atmosphere has drifted away as the company has grown.

"I remember going to Starbucks 10 years ago, before there were that many coffee shops around, and thinking that it was neat," said Julia Young, sitting a few tables from Roberts and working on her dissertation in Mexican history. "They initially projected a small business. But once they began opening store after store, that went away."

Besides the coffee, Young said she likes the Java Shack because it's "nice to feel like you can come to a place and see the same friendly faces."

But the little independents that could are not immune to many of the problems Starbucks faces, including the soaring cost of milk and delivery surcharges for other products. Analysts say that Starbucks can weather those surges better than independents because it buys in large quantities from major distributors. Roberts, the Java Shack owner, looks for milk deals at Costco.

To help cope with higher costs, the Java Shack, which is a certified green operation that uses paper cups made from cornstarch, is charging 10 cents extra for anyone wanting a to-go cup. Roberts reasons that not only does it help offset his costs, it encourages people to be less wasteful. "To get people to be environmentally conscious, sometimes you have to push people a bit," he said.

At Mayorga, the company is focused on expanding its foot traffic as much as possible to help deal with higher costs. It's also reaching out with marketing campaigns and forming partnerships to carry products from other local food companies so they will carry Mayorga coffee. The Silver Spring coffeehouse has started a catering operation, too.

"Times like this make you very introspective and you examine everything you do to try and do it better," Mayorga said, sitting in a leather chair at his Rockville coffee shop in King Farm.

In the Washington area, the only location Starbucks has said it will close is in Collington Plaza in Bowie. The firm has also said that it will slow the pace of expansion.

Are people like Mayorga happy that Starbucks is having problems?

"God knows there are many people who would love to see me fail," he said. "I've learned never to be happy when someone else fails."

But he's an entrepreneur, too, and he knows to jump through an opening when he sees one. He is negotiating to lease a new space in Maryland where Starbucks planned to open but backed out because of its problems. The real estate broker called him instead. Mayorga wouldn't identify the location, but he says it's a prominent one.

"It's a crazy thing," he said. "This great opportunity opened up."

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