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State of the Industry 2005

By Timothy J. Castle and Joan Reis Nielsen

While some may take exception, it can be pretty fairly stated that there has never been a better time to be a specialty coffee retailer, whether you are thinking of opening your first store, or about to open your one-hundredth or even your one-thousandth. As an industry on the whole, we have far exceeded the number of stores that many observers 10 years ago would have said constitute saturation in the North American market. And most specialty coffee retailers today are still on a track of aggressive growth for the next several years. Some chains are opening more than a store a week and you-know-who hopes to expand from 9,100 stores now, to more than 30,000 world-wide over the next several years.

Ironically, it is this growth of the specialty coffee industry itself that has made it easier for retailers to grow even faster than they would have predicted a few years ago.

More stores have made it possible to educate more consumers, faster. Educated specialty coffee consumers have become addicted to their favorite coffee drinks and want them with increasing convenience and frequency.

This is testimony to the great job that most specialty coffee retailers are doing, creating increased interest on the part of consumers by the increased presence of specialty coffee. The alternative could easily have been consumer burnout.

In this light, it has to be said that the “arch enemy” of many specialty coffee retailers (Starbucks—there, we said it), should actually be thanked for creating interest in specialty coffee and knowledge about the product in general, and specifically in communities where there previously was no knowledge of or interest in specialty coffee.

After the record-breaking attendance (10,100 at last count) in Seattle at the 2005 SCAA Convention, we asked Ted Lingle, executive director of the Specialty Coffee Association of America, about his take on the state of the industry. Not surprisingly, he says, “The industry is in great shape with an ever-increasing number of consumers drinking specialty coffee beverages either every day or at least once every week. The greatest challenge is for the industry to maintain its quality levels in the face of higher coffee prices.”

Jay Isais, director of green coffee, manufacturing and distribution for Coffee Bean & Tea Leaf, concurs. “It is an exciting time for specialty coffee retailers,” he says. “Consumer awareness of specialty coffee and tea is at an all-time high. It is very satisfying to have been part of forming consumer expectations that are now, in turn, driving us as roaster/retailers to continue to meet and exceed them.”

Chad Trewick, senior director of coffee and tea of Caribou Coffee, offered his personal opinions: “Our industry continues to forge ahead, converting more and more consumers to specialty coffee. But yet, I believe we remain intimidating and out of reach for some people. Much like the wine industry has, we need to make strides toward teaching consumers about the magical process of coffee and all the subtle nuances to be had in a good cup of coffee. Wouldn’t it be great to hear your customers engaged in a dialogue about the hint of currant tartness in that cup of Kenya you painstakingly sourced?”

The wine analogy was heard again from George Jage, of World Tea Expo in Las Vegas, yet from a tea perspective. “The tea industry’s biggest challenge right now is dealing with its growth. As the specialty tea market continues to explode, wholesalers are challenged to find the right outlets and distribution channels to get the best product in the consumer’s hands.

And with this increase in tea awareness, especially in single estate teas, we face another challenge. Specialty tea can be overwhelming to many consumers—Mai pu tan, pu-erh, silver needle, lung-ching, FBTOP—it can create a barrier of entry for the uninitiated. But as consumers begin enjoying the more mainstream brands, they will start exploring the deeper secrets and knowledge of tea. I often compare it to the wine industry. Many consumers start by drinking mass-marketed brands and ‘two-buck chucks’ before venturing into more expensive and usually, more amazing wines.”

SCAA’s chief communications officer, Mike Ferguson, states, “The retail sector remains strong, while independents (single-unit owners) continue to hold over 50 percent of the market share in terms of coffeehouse operation—no matter how fast the national and regional chains grow. The challenge going forward remains meaningful penetration for the home consumption market for specialty coffee.”

Jerry Baldwin, one of Starbucks Coffee Corporation’s original co-founders, the past chairman of Peet’s Coffee & Tea and a current director of Peet’s, makes an observation and poses a question: “At SCAA this year, I was astonished to see that attendance was 10 times the 1993 Seattle SCAA, and the number of manufacturers of roasters and brewing equipment entering the field had proliferated to a bewildering array. But the perennial questions persist. Whether a company should focus on continuous improvement of roasting and brewing, shooting for the very best, or settle for less?”

Business challenges
We asked these distinguished gentlemen what they saw as their biggest business challenges right now and in the coming year. Ferguson says, “For the SCAA, one of our biggest business challenges is growing the number of retail members. Currently, about 50 percent of the coffeehouse owners, representing approximately 9,000 coffeehouses in the United States, are members of the association. That leaves around 9,000 coffeehouses with no affiliation with SCAA. The SCAA and its committees are working hard to become increasingly relevant to the retail sector.”

“One of our greatest challenges continues to be conveying the colorful stories of our coffees to the Team Members who work in our stores and thereby to our guests,” Trewick reports. “Consumers, in general, are more and more aware of where the products they buy are coming from and how they impact the communities producing them. Companies really need to dig in and understand where ALL of their products are coming from. We are lucky in the sense that we work in coffee—it is a great product to learn about at its origins. So many lives are touched by it, that it is really important to keep standards high even as we grow. We want to represent all of those lives in a way that makes us proud in the product we serve.”

Isais sees the challenge this way: “There is a trend toward automation and depersonalization in some coffeehouse concepts, which may improve efficiency, but at the expense of the personal interaction that is so valued in our industry. We are very committed to maintaining and improving the experience for each of our customers. One has to remember that we are serving products born out of the hard work and passion of special people. Consumers of specialty coffee have come to understand this and expect our care and attention to equal their high expectations.”

With any luck, the popularity of specialty coffee will not only hold up in the face of any economic downturn, it may even increase as other venues, i.e. restaurants, become prohibitively expensive. This seems to have been the case in times of previous economic decline, but the industry was not as vibrant then, nor did it have as much to lose. The other caution here is that sectors of competition did not exist then, that do exist now. In coming times of possible economic hardship, a consumer might consider getting their latte or cappuccino at a gas station instead of their favorite coffeehouse. If times get economically adverse, coffee drinkers may seek out a great cup of drip coffee to replace the latte they had in the past. It may behoove the cautious specialty coffee retailer to make sure that they’ve got a vibrant drip coffee program and that they promote it enough so that their cost conscious customers can easily find this delicious, cost-effective alternative on the menu—before they go to one of the many fast food outlets that now offer “premium” coffee, but not at the premium price.

Drip coffee programs also allow the specialty coffee retailer to promote their whole bean program much more than do espresso drinks. People understand that they can probably make great drip coffee at home (and they can). But they may be dubious because they probably didn’t have any luck with espresso-based drinks at home. A healthy drip coffee program also allows you to route long lines in your store in two directions and to sometimes quintuple your sales volume via whole bean sales.

Baldwin states, “As you know, Peet’s doesn’t see itself as a coffeehouse. Although we do sell beverages and some of our stores do have seating, our main purpose is to sell coffee beans for off-premise consumption. As a result, we focus our energy on execution rather than the next big thing.” Ferguson emphasizes, “Roasters should measure their success as much by how many of their whole beans are being carried home as they do by how many wholesale accounts they supply. Every wholesale account should be put into review for potential as a whole bean sales outlet.” Trewick adds, “Furthermore, I would like to see someone out there sell a cup of drip coffee for what it’s worth—say $5. So much goes into the entire seed-to-cup process, and yet a cup of great drip coffee is still under $2!”

Smart consumers
Whether the emphasis is placed on drip coffee or espresso, however, it is clear that the consumers are becoming increasingly sophisticated about where coffee comes from and how it gets into their cup. Slowly (not as fast as some in the industry had hoped!), consumers are starting to ask what makes a particular coffee unique and why it’s worth the premium they’re being asked to pay. To answer these questions, retailers and their employees will need to know more and more about coffee, from seed to cup—and they’ll need to answer questions concisely, but eloquently.

This hurdle, of effectively communicating information to the customer, is just one aspect of the much larger and complex challenges of recruiting, training and retaining employees. So, what’s it going to take to be successful in the specialty coffee retail business tomorrow?

The universal answer is: TRAINING OF STAFF!
“A well-trained staff and a well-crafted mix of high-quality products—that’s what it is going to take to be successful in the specialty coffee retail business tomorrow,” Lingle states. Ferguson adds, “Truly unique and quality-driven coffee retailers must create a new tier of what it means to be in the specialty coffee business. This no longer means having an espresso machine, it means having staff that create miracles on the espresso machine, beginning with properly prepared espresso, which is still a rarity. Simply serving a selection of single-origin coffee is no longer enough. You have to serve ‘double-take great’ single-origins and blends that can keep up with them. Finally, the new tier of specialty coffee retailers will be just as devoted to running a quality business as they are to quality coffee.”

Baldwin tells it straight. “There are many operators who either have not educated themselves or have failed to train their staff. Coffee in general is much better than it was in 1960, but the number of operators who consistently buy, roast and brew at high-quality levels remains disappointing to me. Especially in small operations, it is possible to seek highest quality, knowledgeably, as a goal and let the big guys settle for consistency. All it takes is the owner’s dedication to learning and training. I strongly believe that Peet’s success has come from our quality orientation and our execution rather than from our ‘business’ knowledge.”

Looking ahead
What industry trends do these experts believe might be brewing? Trewick believes, “Gone are the days of anonymous coffee sourcing—specialty coffee buyers travel the globe to ensure we know how our purchases affect the people who produce our coffees. This is not a trend, it is the new way of buying coffee and buyers who don’t see that by now are missing out.” But on a lighter note, he suggests a new trend. “Coffee-oriented tourism could really catch on! Just think of it: you enjoy that latte every day, but to really experience where it comes from.”

Jage sees it clearly: The trend is specialty tea. Specialty tea is often compared to where specialty coffee was 10 years ago and is continuing to gain in popularity. Ready-to-drink teas are another area of explosive growth as convenience is always important to consumers. There are numerous companies that are selling high-quality premium tea in bottles. Other exciting products like tea energy drinks are also gaining popularity.

Ferguson sees burgeoning roasting/retailing on the horizon. “Ten years ago, communities were seeing their first coffeehouses opening up. While there are still plenty of towns without a coffeehouse, most people know what a coffeehouse is. Now, we see communities getting their first roaster/retailer. Existing retailers are looking for ways to differentiate their business and feed their evolving passion for getting inside the coffee. Roasting in a retail setting provides both. The untapped niche is, again, home consumption. Specialty coffee has not even scratched the surface when you consider how much coffee is consumed at home every day.”

Isais notes, “Drive-through locations are very hot right now and we will continue to see a proliferation of them as well as more convenience-oriented locations. On the coffee side, the trend is to market single origin coffees with more specific emphasis given to region and farm/estate branding. The competition for traditional coffee and tea retailers is fierce, and new operators without prior experience will be challenged. Consequently, I feel we will see more new competitors succeed with ‘gimmick’ niche or themed concepts, rather than with traditional coffeehouse operations.”

People and places
Two other phenomena, not specifically addressed by our panel of experts, are worthy of mention: The World Barista Championship and the increasing shortage of great real estate. The World Barista Championship, and the other barista competitions that lead up to it, have not hurt specialty coffee retailers over the past few years. These competitions have been getting consistent coverage on local and national news outlets throughout the United States, Canada and beyond. Increasingly, being a “barista” is no longer seen as the dead end it would have been a few years ago—nevermind if people knew what a barista was! Even if a specialty coffee retailer can’t afford to send their best baristas to compete in the regional, national or world championships, it does not hurt to let customers know that the baristas behind the espresso machine are highly trained, dedicated professionals—just like the ones they’ve seen on TV!

One of the biggest challenges for the specialty coffee retailing industry today is not finding additional customers, but finding the real estate locations in which to put them. Site selection—no, make that site identification—is becoming an increasingly important function to any growing multi-unit specialty coffee operator. New and would-be operators increasingly find that they must make their stores “destinations” because they can’t find locations that provide the obvious foot traffic and neighborhood demographics—the larger operators have already opened coffeehouses there! In addition, large chains often make deals with developers to partner with them on all NEW projects, making it even harder for smaller companies to gain a foothold.

Despite the obvious challenges of opening and operating a specialty coffee retail operation today, the rewards are very much there for dedicated businesspeople who love coffee and tea—not least of which is being around the stuff day in and day out. If that sounds good to you, then chances are good you’ll find some customers that agree with you. Or, as Chad Trewick says so passionately, “I hope that people continue to break into this industry—their fresh perspectives and ideas are what teach us all and keep us on our toes!”

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