I'd been thinking for a while that we'd pretty much reached the saturation point for coffee shops. Lately, Starbucks had been opening downtown stores that left little more than a block between locations, and it just seemed inevitable that they'd start cannibalizing each other -- and other coffee operations nearby.
Then I heard about Caribou Coffee's aggressive expansion schedule. In the Washington market alone, where Minneapolis-based Caribou already has 12 locations, it plans to open 10 more this year, with an eventual goal of between 125 and 160 locations.
Am I missing something? How could there possibly be enough demand for all those coffee bars, in addition to the smaller chains and independents that also continue to thrive and multiply? Does the latte business somehow thwart the traditional laws of supply and demand?
In fact, it does, sort of. After hearing the dynamics of the industry explained by a few experts, I understand that one way of looking at gourmet coffee is the way traffic planners see a crowded highway: If you build a fourth lane, it may ease the congestion briefly, but in the long term it will just attract more cars to the road. The trend in the specialty coffee industry remains more, more, more -- and somehow it keeps on working.
"It doesn't make sense to us either sometimes," said Mike Ferguson, a spokesman for the Specialty Coffee Association of America.
There are several reasons the industry has reached 17,400 locations -- far more than the 10,000 outlets the SCAA predicted in 1999 would be the peak. The main factor the industry cites is the touchy-feely notion that we consumers want a place to go -- a place that's not home or work or school or the park. We want a place where we can meet up with friends, have a little conversation, be protected from the elements, see other people, not spend a lot of money and -- oh, yeah -- have a cup of joe. Or not.
When people steeped in this business talk about this "sociological phenomenon," as they all like to call it, it's hard not to think about the theme song from the long-running sitcom "Cheers," which celebrated a "place where everybody knows your name." But "Cheers" was about a bar, and in the coffee world, folks are quick to tell you that people don't want to go to bars anymore, at least for the kind of informal meeting or social break that takes place day and night in the typical coffee shop.
"There are not many places that are as affordable as a coffee shop to go meet with one of your friends and really have 30 minutes or an hour where you literally come away from it feeling like it was a great experience and a great time," said Michael Coles, chief executive of Caribou Coffee. "I think that's what coffee shops provide."
So many transactions now are so impersonal: at the dry cleaner you're a number, to get a phone number you use the Internet, when you call someone you get a voice-mail tree and when your phone rings it might be a recording. It makes some sense that consumers would react by seeking out real people in real places.
What's still hard to understand is how there can be a Starbucks on practically every corner and Caribou could still want to find a spot right between them, or even right next to one of them. It just seems like business suicide.
So far, however, it has worked beautifully. Bruce Milletto, president of industry consulting firm Bellissimo Coffee Infogroup of Eugene, Ore., said he actually advises well-run independents to open as close to Starbucks as possible. "I want to sign a lease right across the street from Starbucks, that's my number one location," he said.
The big advantage is that the owner of that new coffee bar can be sure Starbucks has done its research and opened in that spot because it's a prime market for high-end coffee consumers. Then, once that newcomer is in place, it can go about generating new business, serving mochas to those who don't want to cross the street or offering a real alternative to the bigger, ubiquitous chain. Perhaps it's more tailored to the neighborhood, or just has a totally different feel -- like Caribou's mountain lodge atmosphere.
"Starbucks has raised the awareness level -- they've been the pioneers that have brought specialty coffee to the mainstream," Milletto said. "Once people have their first experience in what they consider a safe place, a national chain, then they tend as consumers to expand their horizons and say, 'Here I am in front of the independent and I'm going to try the independent.' "
It's an age-old practice in retailing, of course, for stores selling similar merchandise or food to locate near each other. Fast-food chains are often clustered together, giving consumers one place they can go for lots of choices. But when it comes to coffee shops, the dynamic is more about being able to take each other's business and grab new customers in a market that is likely to produce them.
"Washington's a good example of that," said Coles of Caribou. "In two of [our stores] you can see Starbucks out the window. Those stores actually have grown at a faster rate than our stores that are farther away."
Starbucks has moved to fill in spots that seem to lack a coffee competitor, partly in a bid to lock up the market. Indeed, one restaurant broker said it's not uncommon for Starbucks to sign a lease that not only blocks other coffee companies from a particular development, but also gives the chain the right to walk away in a few years if its sales don't turn out to be strong enough in that location.
But if Coles and Milletto are right, all that infilling by Starbucks isn't going to keep the outsiders out. Nor will the arrival of strong competitors bring Starbucks to its knees. The overarching reality is that the market for specialty coffee is growing strongly, according to the Specialty Coffee Association, but still represents only 15 percent of all the daily coffee consumption by the U.S. adult population. The rest is drunk at home, and is very definitely up for grabs.
What makes coffee such an attractive target for retailers is the profit margin. Milletto said the ingredients, including the cup, in a $3 coffee drink cost about 40 cents. That means a typical, well-run, well-located coffee shop that rings up $500,000 in annual sales can easily generate $100,000 to $150,000 in profit -- and the best locations make much more.
"The profit margin in coffee is probably as healthy as it is in any product that I know of," he said. Which means that there's plenty of incentive for established chains and upstart competitors to try to get us to drink less of it at home, and more of it with them.
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