Growing Concerns

Expansion in the specialty coffee industry can take numerous forms. For retailers eyeing business growth, the challenges are many, but the payoffs can be extraordinary.

by Warren Lutz

When a customer at the Bean Appetit Coffee House in Wasco, Ill., mentioned that a new library was being built in a nearby town--with room for a cafe--owner Kimberly Day found herself at a crossroads. "I always planned on expanding," Day recalls. "Just not so soon."

Day decided to take the leap. Several months ago, she opened her second shop in a 300-square-foot space attached to the brand new Batavia Public Library. And so far, it's working out.

Her inventory costs, shared over two stores, are comparatively lower, and the library delivers a steady stream of customers. But dividing her attention between two locations hasn't been easy. Caffeine is a poor substitute for sleep, Day says, as she commutes between stores. "You really have to dedicate yourself."

Day is far from alone. Many coffee businesses are wrestling with growth, and the challenges are as varied as they are difficult. Yet it's not like retailers have much of a choice. As the specialty coffee industry barrels ahead, increasing competition, new product lines and uncertain economic waters demand an offensive approach to survival.

"The people that adopted a philosophy of what this industry was like five years ago, hypothetically, are dying on the vine," says Bruce Milletto, owner of Eugene, Ore.-based consulting firm Bellissimo Coffee Info Group. "Because there's so many new products available, there's so many new avenues of profit."

Micromanagers Beware

Growth in the industry comes in many forms--from drive-throughs to franchises to expanded food and drink lines. Yet whether your dream is to become the next Starbucks or simply add menu items, there are plenty of obstacles lying in your path--not the least of which are psychological in nature.

"Initially, I was terrible at delegating," says Oren Bloostein, owner of Oren's Daily Roast in New York City. How terrible? When he opened his first store in 1986, Bloostein found himself unable to leave his first hire alone with a customer. "I was just making sure she was doing everything the way I wanted it done," he says.

To grow a coffee operation means putting others in charge of running stores, designing ads, building new locations and hiring new employees. And unless they loosen the reins--as Bloostein eventually did--many owners find themselves fixated on mundane chores with no time to think creatively about the future.

Jack Groot, owner of JP's Coffee & Espresso Bar in downtown Holland, Mich., recalls working 100-hour weeks trying to get his business off the ground. Today, a manager who has been with JP's for seven years oversees day-to-day operations, allowing Groot to focus on growth. "I'm a firm believer in delegation," he says.

Not every job should be passed off. Bloostein still buys the beans and hires roasters. "I sample everything, so I know what the stores have to work with is top-quality," he says.

Bringing in Experts

Being able to delegate responsibility is one thing. But opening new locations and launching new businesses often demands more resources than are on hand, which is why more business owners are tapping outside expertise to handle the details of expansion.

Before opening a juice and smoothie bar next to his coffee shop in May of 2000, Groot hired designers, an advertising agency and a consultant to craft the business plan. Currently trying to franchise his coffee business, Groot again hired a consultant and the best attorney he could afford to put together the details. "I rely on people that can do jobs that I can't," he says.

A similar strategy has worked wonders for Long Beach, Calif.-based It's A Grind Coffee. Husband-and-wife owners Marty Cox and Louise Montgomery were already operating five successful cafes, each generating more than $500,000 annually, when they hired Steve Shoeman, a franchising veteran, to take It's A Grind to the next level. "He convinced me that franchising was the smart way to grow," says Cox.

The chain now has 142 stores under development in California, Arizona, Nevada, Colorado and Texas, and its owners project 2002 sales to reach $12 million. Cox admits franchising would be impossible to do alone. "We're almost running two different companies," he says.

For most existing retailers, growth begins with streamlining one's existing operations--a job suitable for consultants. A growing number of Bellissimo clients are existing retailers, says Milletto, who adds consultants can often provide a fresh look and suggest efficiencies so owners can devote more resources toward expansion.

The Battle for Sameness

Day jokes that her biggest challenge was to clone herself. Impossible, perhaps, but she did try to make her second store a clone of her first, down to the layout. "The new coffeehouse is still based on its owner," she says. "I'm very particular about the way things are done."

Still, adjustments had to be made. The Bean Appetit in Wasco does most of its business before 10 a.m., when customers are fueling up for the day. The Batavia store is busiest in afternoon, after-school hours. "It's an entirely different crowd," says Day, who has expanded her menu to include more snack foods preferred by younger patrons.

For larger businesses, consistency becomes more challenging. It's A Grind gives potential franchisees an operations manual and 14 days of mandatory training inside its new espresso training center. If franchisees don't pass the training course, their stores don't open.

Meanwhile, Boise-based chain Moxie Java holds storeowners accountable for quality through onsite testing at the risk of losing their three-year licensing agreements. "They have to maintain a consistent product," says president and CEO Rick Dean.

The drive for uniformity also extends to ambiance. It's A Grind, like other chains, maintains control over store design and setting with every location sharing the same upscale, blues-and-jazz motif, wingback chairs, stained concrete floors and purple and rust tones. And yes, the music played inside must be jazz.

Loans and Location

When it comes to starting a coffee business, any investment scheme seems to suffice. Using plastic to launch one's dreams is not uncommon, nor are donations and loans from family and acquaintances.

Taking on investors to grow an existing business may help, but caution is advised here. "I think the safest thing to do is to make sure they're not working partners," says Milletto. That way, "they have input, but they don't have day-to-day say in the business."

Bloostein shunned taking on business partners for this very reason, and funds growth primarily through operating capital. "If I had a partner, I would have a responsibility to answer for my actions," he says.

Moxie Java employs a similar strategy. When Dean bought the company a year ago, he immediately paid off all the bills, and now funds growth from ongoing licensing sales. "I don't owe anybody any money at all," he says. "I want to have the company grow on its own merits."

Many existing retailers may find bank loans easier to come by with some experience under their belt. Day, who had "minimal" retail experience when she took out a loan for her first store, found this to be the case. "I had some credibility this time around."

But even with financing readily available, finding the right spot for business is tricky, to say the least.

Finding property along the morning commute lanes of major thoroughfares and exceeding specific traffic counts is paramount to It's A Grind's franchising strategy. "The real estate process for a location requires a lot of advance planning, a lot of advance relationships," says Cox. "(Starbucks) has been at it longer, but we're starting to make those development relationships."

Even after you've found a spot, unplanned hurdles can appear. In 1994, Oren's Daily Roast secured its first and only corner site, at 71st and Lexington in Manhattan. A lease was signed and plans submitted. Bloostein recalls checking with city records to make sure there was no trouble with the building. "We thought we were so smart," he says.

Because the site was located in a historical neighborhood, it was subject to approval by the city's landmark commission, which found there were indeed violations on the building. Through no fault of his own, Bloostein was stuck without a building permit for two months. "We were already on the clock," he says.

Even in great locations, glory can be elusive. JP's Coffee and Espresso has a prime location in a vibrant downtown, with 200 businesses nearby and nary a Starbucks in sight. Groot thinks there's room for competition. But in a recent two-year period, five stores have come and gone. "It's been a couple years since there's been anybody close to us," he says.

Getting Schooled

A common trait shared by those that have undergone successful growth is an academic attitude. "People coming into this business are much more educated, and they're really doing a lot of homework," says Milletto. By homework, he means attending trade shows, visiting successful operations and reading every trade periodical they can get their hands on. "It's crazy not to spend whatever it is to find out what's happening in the industry."

Although there were relatively fewer resources available in the mid-1980s, Bloostein began educating himself long before opening his first store. "I planned and I planned," he says. "I was doing everything I could to make it as risk free as possible."

"I came into this business for a couple of reasons," he adds. "One of them was to run my own business and run my own company, and do it in a way that made me happy. But there was no way I wanted to get into a situation where I had to stop doing it."

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Originally published - December 2002
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