January Part 2 - What's Brewing in the Coffee Business?

A coffeehouse chain that's second only to Starbucks

With 400 stores, Caribou Coffee is the second largest chain of company-owned coffeehouses in the U.S. When Michael Coles joined as CEO three years ago, the company had no intention of doing any kind of licensing program either domestically or internationally. But Coles, who had a background in franchising, saw things differently. "I saw no reason not to do an international licensing program. Especially since we had a tremendous demand worldwide for our brand." Caribou sold its first international franchise last year, a 250-store development deal in the Middle East. Negotiations are currently underway in five other countries internationally.

Where did the demand for Caribou come from? "Let's be realistic," says Cole, "there's no question that the demand is based on the success of our biggest competitor, Starbucks, a company that's obviously created a worldwide culture for coffee. It has changed the face of the way we look at coffee, not just in the U.S. but everywhere. They have their brand and their partnerships and there are people out there in foreign countries saying to themselves, 'why didn't we do that?' So those people are looking for a brand to partner with. They are people who have probably found us through their travels and they have obviously done their research."

Selling coffee offshore has its challenges
Cole says expanding through an international franchise program has its challenges. "It's everything from figuring out how to get the coffee there to countries that don't use or know about half-and-half or other products that we can get just by walking to the grocery store. We have to find those products and get them to the franchisee. There's the language issue, making sure that every name you have on a drink is not an insult in a particular country," states Cole. Some challenges are bigger than other, according to Cole. "In the U.S., the majority - maybe 60-65% - of our business goes out the door as take-out. In most foreign countries it is the exact opposite, 65% stays in. And they don't want to drink it in a paper cup, they want to drink out of china. So that's a big difference. Then there are the quirky little things like the size of drinks. Here there is a tendency to have larger sizes. Everywhere outside the US, they want smaller cups like 10 oz and 8 oz. In the U.S. a 12 oz cup of coffee would be considered small."

But Cole says the main challenge is getting good management in place. "There has to be a support system in place that has the ability to train people, the ability to inspect, and also to create a culture within our company (which is primarily company-owned stores) that sees franchising as a good partner for what we do. I would say that is probably one of the more difficult parts of this, making sure that the company has embraced the concept of licensing."

Domestically, Caribou has entered franchising very strategically, meaning it allows the company to expand into places where company-owned stores wouldn't be able to go. For example, there are currently stores under license agreements in several airports. "There are very few airports where an individual or a company like ours can just go into the airport," explains Cole. "You have to be a concessionaire or it has to be a minority partnership." Caribou is exploring other strategic options including stadiums and college campuses where there are opportunities to partner with major concessionaires.

Cole says that as the coffee culture in the U.S. continues to develop, Caribou is poised to beat the competition on the three most important things people look for: friendly service, quality product, and environment. "We really differentiate ourselves with our environment. There was a great story in Ad Age that said 'Starbucks it isn't, and on purpose.' Seattle's Best and Starbucks have created a kind of Italian coffeehouse concept with their décor and furniture. What we have is a very distinctive mountain lodge atmosphere with textured woods, fieldstone fireplaces, hardwood floors, leather sofas, and lantern lights. It's like an escape. It's the kind of place where you can feel like you're anywhere in the world in a lodge or in someone's really nice home that has a fireplace where you can just sit back and relax. It's really become what I call the pub of the 21st century, but yet it's a much more open atmosphere for families and for friends than a pub would have been".

Cole says the demand for high-end coffee is still growing. He states, "At one time, it was commonly believed that you could manage one coffeehouse per 30,000 people. Starbucks is now saying it's one per 5,000 people. And we have been shocked by the size of the markets we've gone into - where we've felt like we might be able to have one store, we now have three. I don't think we're at the end of this. I think we're still right in the middle of it."

Contact Information: Michael Coles, CEO of Caribou,www.cariboucoffee.com, (763)592-2214.

The coffeehouse that's coming to a neighborhood near you

It's a Grind is a franchise company based in Long Beach, California. Franchise locations are coffeehouses only with no kiosks, drive-thru's, or other types of outlets. It is far from being the largest coffeehouse chain, but with a new unit opening at the rate of one every four days, it is the fastest growing coffeehouse franchise in the U.S.

Steve Olson, Senior VP Franchise Development, says it's the company's view that they are in the hospitality business. He says, "We focus on the experience, the personal aspect and relationships. We treat our customers as guests and the coffee is the invitation or price of admission. Some of the large chains are becoming drink factories and that's not us. We are a community coffeehouse, not a corporate coffeehouse."

It's A Grind refers to its stores as community centers. Each store varies from 1000 to 1500 square feet and is located with commuters' convenience in mind. The neighborhood coffeehouse design produces plenty of ambiance with cozy, earth-toned wingback chairs, fireplaces, and bright oil paintings of famous blues singers on the walls. Décor is not dictated, but typically one would find dark wood, slate tiles, and urban metal - elements that come together to create an artsy yet edgy feel. Following through on the blues and jazz motif, there is local live music on the weekends. And of course, there is the obligatory free Wi-Fi.

Customers can get baked goodies and beverages other than coffee, but 95% of what is served is coffee-based. Each order is handcrafted with fresh ingredients. This means steamed milk and espresso won't sit around for two or three drinks. It's made fresh to order. There is also a sample bar of premium coffees that you can try before you purchase. The coffee is fresh, too, roasted in small batches no more than four days ahead in order to achieve maximum flavor potential.

Fine coffee starts with a good bean
The company is very proud of its coffee and measures itself against the finest European coffee masters masters (Illy, Lavazza and Segafredo). "We are known for our smooth taste profile. Just as with wines, everybody has a different profile," explains Olson. "We follow our coffee from the whole beans to the cup and start by selecting beans from 25 - 30 different countries. Where we buy in any given year is going to depend on where the best crops are. Our master roaster is renowned throughout the U.S. and is certainly an artisan of his craft. He teaches for the Specialty Coffee Association, a PhD course called the Gold Cup Certification Program. Less than 1% of the coffeehouses in the U.S. have that designation." Roasting is currently outsourced, but Olson says that will probably change by next year when the company has enough coffeehouses open to economically justify bringing it inside. \

Still, even with a really good product, Olson says the key is still the experience. "Aside from convenience (which is where good site location comes in), the next two most important factors for customers have to do with friendliness of service and feeling valued as a customer. Price isn't even in the top ten factors. 'Do you know my name? Do you know my drink? You should, I'm in here 20 times a month!' Unlike most coffee outlets, we serve our customers at the table. And we do unique little things to enhance your experience that many times you don't see," says Olson.

Specialty coffee is not just for yuppies
The number of specialty coffee drinkers grew tremendously over the past 15 years. "It was doubling from the late 90s up until now," says Olson. "That growth was mostly the Maxwell House coffee drinkers converting over. The latest figure I've seen is 77% of the U.S. population drinks premium coffee now, whether it's hot or cold. But additionally what's happening in the marketplace is age related. There is still growth in the specialty coffee trend, but it's coming from expanding the age spectrum. Our customers are getting both younger and older." It's a Grind takes advantage of that by being family friendly. "We accommodate kids and retirees and everything in between. Our market is now all ages so we don't focus on a certain profile. We are not just going for the yuppy crowd. That makes us different than a lot of other coffeehouses. But that's where the growth is now, the age groups on both ends," says Olson.

Steve Olson, Senior VP Franchise Development, It's a Grind, www.itsagrind.com, (562)594-5600.