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Topic: Coffeehouses survive Starbucks (3 msgs / 257 lines)
1) From: Irene and Lubos Palounek
There is an interesting article on Page One of today's Wall Street Journal:
Coffeehouses survive Starbucks
Despite Starbucks Jitters, Most Coffeehouses Thrive
By KEVIN HELLIKER and SHIRLEY LEUNG 
Staff Reporters of THE WALL STREET JOURNAL
---
Cheers, Lubos
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2) From: Mike McGinness
From: "Irene and Lubos Palounek" 
<Snip>
Journal:
<Snip>
I haven't read the article (yet) but love the title's distinction.
Coffeehouses versus Starbucks. Just from the title sounds like maybe the
writers get it...
MM;-)
Variable Variac Rockin' Rosto Roasting in Vancouver, WA USA
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3) From: Matthew A. Hodges
For those that may not have access to a WSJ.
Regards,
Matt
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Despite Starbucks Jitters, Most Coffeehouses Thrive
By KEVIN HELLIKER and SHIRLEY LEUNG 
Staff Reporters of THE WALL STREET JOURNAL
KANSAS CITY, Mo. -- The news gave quite a jolt to the owners of
a coffeehouse here called Broadway Cafe: Starbucks Corp. was
planning to open one of its outlets next door.
Fearing that their cafe wouldn't survive a war with the coffee
giant, the Broadway's customers and owners collected a thousand
signatures on a petition asking city leaders to thwart the plan.
But Starbucks won city approval and pushed ahead.
That was four years ago. Today, the Broadway Cafe remains open.
In fact, sales at the 10-year-old coffeehouse have grown
stronger since Starbucks arrived. With reluctance, Jon Cates, a
co-owner of the Broadway, concedes that that might not be a
coincidence. "Starbucks helped our business, but I don't want to
give them any credit for it," he says.
Unexpected Boost
The battle between independent coffeehouses and Starbucks may be
one of the most hostile -- and most misunderstood -- rivalries
in retailing. Starbucks is prospering, with earnings up 22.4% in
the first nine months of the year that ends Sept. 29, and a
compound annual growth rate from fiscal 1997 to 2001 of 26.8%.
Conventional wisdom, meanwhile, says Starbucks is clobbering the
independent -- invading its turf, stealing its customers,
bankrupting its owners.
In fact, most independents are doing fine -- and not just in
spite of Starbucks, but perhaps because of it. Here in Kansas
City, nearly all of the coffeehouses operating before Starbucks
arrived in 1998 remain in business. Since then, other
independents have opened, pushing their numbers well beyond the
25 stores Starbucks has in the market. Like Broadway Cafe, many
of the independents operate within a stone's throw of a
Starbucks outlet.
Nationwide, independents accounted for more than half of the
industry's growth between 1996 and 2001, when the number of U.S.
coffeehouses doubled to 13,300, including Starbucks, according
to Mintel Consumer Intelligence, a Chicago market-research firm.
Moreover, the large majority of independent coffeehouses started
within the past decade have survived, industry experts say. By
comparison, close to half of the country's sit-down, slow-food
restaurants are less than two years old, according to D&B,
another market-research firm.
Educating the Market
Many coffeehouses have found proximity to Starbucks to be a
blessing. A small Seattle chain called Tully's Coffee Corp. has
even developed the strategy of placing its stores near a
Starbucks shop. Chicago entrepreneur Doug Zell in 1995 started
his Intelligentsia Coffee Roasters within walking distance of
two Starbucks outlets. "It's double-digit growth every year,"
Mr. Zell says.
A third of Americans who drink coffee away from home order
gourmet coffee from a specialty shop, according to Mintel. Many
people believe that Starbucks increases the overall market,
attracting new customers to the product who then patronize the
independent provider next door. "When a Starbucks opens, it
educates the market, expanding it for everyone," says Bruce
Milletto, president of Bellissimo Coffee InfoGroup Inc., a
Eugene, Ore., company that provides consulting services to
independent coffeehouses.
The coffeehouse may be that rare thing in retailing -- a concept
that doesn't heavily favor chains. Never mind that critics of
Starbucks routinely compare it with Wal-Mart Stores Inc.
Starbucks simply doesn't enjoy the advantages that have made
Wal-Mart the bane of countless Main Street retailers -- lower
prices, longer hours, wider selection. The Starbucks offering
isn't less expensive or more extensive than the independent's,
and the chain's hours often are shorter.
This may be why, contrary to popular perception, independents
still dominate the industry. Independents and small chains boast
a 61% share of the industry, says Mintel. In fast food, by
contrast, independents and small chains hold only a 27% share,
according to Technomic Inc., a Chicago food-consulting firm.
Indeed, the coffeehouse industry boasts only one big chain --
Starbucks, with 3,167 company stores in the U.S. Of the
countless others that have tried mimicking it, not one has
matched its success. The nation's second-largest chain, Diedrich
Coffee Inc., of Irvine, Calif., boasts only 237 U.S. stores.
A big reason for the success of independents is that they're
less like restaurants than like neighborhood taverns -- a
concept no chain ever threatened. As at taverns, many customers
come alone in search of company. The ideal setting is
comfortable, intimate and personal. It doesn't look like 3,000
other joints with the same name. Often, the person behind the
counter is the owner.
"This is like 'Cheers' without the alcohol," says Seine Riley, a
morning regular at a Chicago coffeehouse called Katerina's,
referring to the television sit-com. On a recent day, the dozen
customers there all knew each other as well as owner Katerina
Carson. At night, Katerina's offers jazz performances, poetry
readings and old-movie screenings. The place is well-appointed
-- upholstered chairs, antique tables, a copper coffee bar --
and intimate, like a living room.
Since Starbucks opened down the street two months ago,
Katerina's sales haven't dipped. But Ms. Carson is convinced
Starbucks would like to hurt her business. Never mind that at
least 100 independents operate alongside more than 90 Starbucks
locations in Chicago. Ms. Carson once patronized an independent
coffeehouse that didn't survive the arrival of Starbucks.
"Starbucks is a corporate monster," she says.
'The Old Wal-Mart Thing'
Occasionally, the opening of a Starbucks does precede, and
perhaps instigate, the closing of a nearby independent. When
this happens, and contrary to what the numbers show, it's
typically viewed as the rule rather than the exception. Most
independent coffeehouses in Indianapolis have survived the
opening of about two dozen Starbucks. But when Cafe at the Point
shut its doors early this year, the Indianapolis Star devoted a
column to it, quoting the cafe owner as saying, "A big company
like Starbucks can come in and lose money for two years until
they wipe everybody else out. It's the old Wal-Mart thing."
The perception of the battle as pitting Goliath against pitiable
Davids helps explain why independents are faring so well. For
one thing, sheer terror goads many independent owners to improve
their shops when Starbucks enters the neighborhood. Kansas
City's Broadway Cafe banned smoking and began roasting its own
beans when Starbucks opened next door. Similarly, the arrival of
additional Starbucks in Long Beach, Calif., prompted the
five-store It's a Grind chain to spend thousands on cosmetic
improvements as well as staff training, customer service and
quality control. Sales have been rising by 8% to 15% since
Starbucks moved close to the It's a Grind stores in 2000.
The image of Starbucks as a decimator of independent shops can
also turn customers into activists. When the chain announced it
would enter the Ocean Beach neighborhood of San Diego last year,
protests arose. Twelve months later, Starbucks is open and the
protests continue -- even though the area's independent
coffeehouses are thriving. Since Starbucks opened nearby, two
stores called Newbreak Coffee have watched sales rise 15%.
Co-owner Norma Slaman says: "Competition is good."
Like a tavern, the local coffeehouse can become a key component
of an area's character. In reviewing neighborhood coffeehouses
for a Kansas City Star article this June, writer Lauren Chapin
recommended 23 of them -- not one of them a Starbucks. "I chose
to just do local coffeehouses because they simply have better
atmosphere, more local color, more joie de vivre," she says.
America's 'Third Place'
For its part, Starbucks agrees that atmosphere is important.
Howard Schultz, Starbucks founder and chairman, said a
coffeehouse must provide not only great products but also
hang-out appeal. His goal was for Starbucks to become America's
"third place" between home and work. In an interview, Starbucks
Chief Executive Orin Smith concedes that independents can
provide a more-distinctive atmosphere than Starbucks. But he
says not everyone wants "old couches and chairs to lounge around
on."
Of course, most independents didn't exist before Starbucks
demonstrated the tremendous potential of the coffeehouse market.
But that doesn't mean Starbucks believes it should own the
entire market. "We have created the umbrella under which they
are thriving," says Mr. Smith. "They can do well right next-door
to us." Mr. Smith says the U.S. coffeehouse market is five to 10
years from saturation.
Even when it sets up shop beside an independent store, Starbucks
says it isn't applying a squeeze. And Doug Weltner believes it.
The landlord of Kansas City's Broadway Cafe, he was skeptical
when Starbucks approached him about leasing the space next door.
Why fill one slot if the effect would be to empty another? "But
Starbucks convinced me that it wouldn't hurt the Broadway Cafe,
and it didn't," he says. Starbucks, he says, told him that
independent coffeehouses that didn't panic fared well.
Still, suspicion of Starbucks remains deep. When Starbucks asked
Jeff Schmidt whether he'd consider selling LatteLand in Kansas
City, he didn't even ask how much. "I don't think they really
wanted to buy it," he says. "They just wanted a peek inside my
business." Starbucks declined to comment on the matter.
Before opening City Market Coffee Co. in Kansas City, Courtney
Bates made certain Starbucks couldn't open next door: She
insisted on a clause preventing her landlord from renting to
another coffeehouse.
It's doubtful that many independents are as profitable as
Starbucks shops. The size of its orders means that Starbucks
receives purchasing discounts that fatten its profit margins.
Even amid the current economic weakness, its sales and earnings
have been climbing steadily. In the quarter ended June 30,
Starbucks posted a 20% rise in earnings from the year-earlier
period, to $56.2 million, or 14 cents a share, on a 29% rise in
sales to $972 million.
But the profit margins on gourmet coffee drinks are so high that
independent operators can thrive even without volume purchasing
discounts. That's especially so for coffeehouses that roast
their own coffee beans because of the plunging prices of raw
beans.
The three-store Kansas City coffeehouse chain of Diane and
Oliver Burnette more than pays their bills, including
Catholic-school tuition for one child and daycare expenses for
another. "It's the American dream -- running your own business,"
says Mr. Burnette, whose stores, called Muddy's, are posting
double-digit growth within walking distance of Starbucks shops.
Starting a coffeehouse requires only a fraction -- from $50,000
to $250,000 -- of the more than $500,000 needed to start a
McDonald's franchise. Along with dot-coms, it's the business
that has been most alluring to the young entrepreneur, not least
because the entry fee is relatively low. Ms. Bates, who was 21
when she founded City Market Coffee, six years later bought out
her financial partner: her father. "I just paid Dad off, and at
27, I own my own business and love it," she says.
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