Coffee Franchises Brew Success In A Starbucks Dominant Market

Guess who the biggest rival to Starbucks is? Would you think Dunkin Donuts? You should, says Jett Mehta, a Dunkin Donuts multi-unit franchisee in New York. "Starbucks may own their experience, but Dunkin is nipping at their heels," he says. "Starbucks can't touch Dunkin in new England."

In fact, Mehta says, it's not about the donuts: "Dunkin Donuts is a beverage business-it's all about coffee. In western New York, 50% of our sales are beverage-based, or premium things like bulk beans. Donuts are only about 25%."

Starbucks has known this from the beginning, apparently. Consumers are becoming coffee connoisseurs, and there are several new or relatively new entrants into the coffee wars.

Starbucks itself is in a growth mode. Add to that not only Dunkin Donuts, but Krispy Kreme, Gloria Jean's Coffees, It's a Grind, Saxby's Coffee and Tea, Java Dave's Coffee House, Bear Creek Coffee, The Coffee Beanery, Port City Java, World's Best Coffee, Rockn' Joe, Java Jo'z, PJ's Coffee and Tea, and Javaology, and it begins to look like a java franchising tsunami. All of them, of course, are trying to out-Starbucks Starbucks.

Is Starbucks vulnerable? Not in the sense that they can be replaced, according to the caffeine gurus. But there's plenty of room for the others.

According to the Specialty Coffee Association of America, next to military arms and oil, coffee is the largest commodity-based industry in the world. It has an annual sales volume of over $10 billion. It is consumed by 65% of North Americans and is the second most popular drink in the world next to tap water.

Bruce Milletto, president of industry consulting firm Bellissimo Coffee Infogroup of Eugene, Ore., says "Starbucks has raised the awareness level -- they've been the pioneers that have brought specialty coffee to the mainstream. 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.' "

The new chains are taking a different tack, says Steve Olson, director of development for It's a Grind. They're trying to create a place where people can gather and feel part of something. Their settings run the gamut, from Caribou Coffee's lodge surroundings, to the Caribbean feel of Javaology, to the jazz clubbiness of It's a Grind.

"What looks like a simple business is actually complicated," says Olson. "You're really selling an experience. Price is not a top ten factor when people choose a coffee house. They like friendly employees who know their name--like Cheers. We're becoming a community center for neighborhoods."

The industry has reached almost 18,000 locations according to the Specialty Coffee Association of America -- far more than the 10,000 outlets the SCAA predicted in 1999 would be the peak.

Think it's hit a peak? Not, says Olson, if you consider the 23,000 locations for Subway, and add the tens of thousands of other fast food places. "The market is tremendously underserved," he says. "Now 77% of the population is drinking gourmet coffee, either hot or cold. In 1998 it was 35%."

So, credit Starbucks, but don't expect the trend to stop. Perhaps Precision Tune should rename its waiting rooms JavaTune.