COFFEE CHAINS ARE GETTING THE JITTERS
(FORTUNE Magazine) – A shakeout in the $950 million coffee-bar business is brewing as fast as you can say tall skinny decaf. The Specialty Coffee Association of America figures the number of coffee bars will more than double to 10,000 by the end of the decade. That's a lotta latte.
Industry leader Starbucks is starting to grind competitors. The Seattle company's shotgun strategy of getting bars open in a hurry has worked. The company operates 682 stores in the U.S. and Canada, and is determined to have "2,000 by 2000." Sales grew 64% in the first three quarters, ended July 2. Profits more than tripled to $20.6 million.
In many cities, coffee bars are starting to outnumber video stores, and the pressure is mounting. Brothers Gourmet Coffees, a coffee wholesaler based in Boca Raton, Florida, just sold its Gloria Jeans chain of 231 stores to Second Cup, Canada's largest operator, for around $30 million. Second Cup earned about $1.6 million on sales of about $60 million in the year ended last June. Ice cream giant Baskin-Robbins, which bought a chain of 31 franchised stores called Caffe Classico in 1991, sold them back to the franchisees earlier this year. Says Michael Bregman, CEO of Second Cup: "You will have the strong, big players and the small, well-run chains that really understand their particular customer. The victims are going to be marginal players in the middle."
One company looking for a lift is three-year-old New World Coffee, with 27 stores in New York, New Jersey, and Pennsylvania. New World's city stores have struggled, yet the company has been shopping an IPO that, at a proposed $6 to $7 a share, is richly priced. Sales reached only $4.5 million last year.
Even at $3 a pop, selling coffee from expensive locations offers limited potential. So Toronto-based Timothy's World Coffee, which has the bulk of its 28 U.S. stores in the brutally competitive New York City market, hopes to set itself apart with a new age twist on an old concept called Timothy's WorldNews Cafe. Coffee lovers can buy java as well as their favorite magazines (good idea, that) and kick back.
Meanwhile, one of the original urban coffee bars, Chock full o'Nuts, is getting back in the game--in the suburbs. The company's new management team is expanding its Quikava coffee chain: tiny, double drive-throughs that dispense caffeine and road-ready sandwiches and baked goods.
But CEO Marvin Haas is staying away from the Starbucks crowd and is going for suburban commuter locations. Says he: "We really didn't want to be fighting Starbucks for retail sites. We do battle enough with the big brands on the supermarket shelves." Chock's coffee brand has banged its head against giants Philip Morris and Procter & Gamble for years. "We're fourth in a two-man race," he says.
- Susan Caminiti