Posted on 04/30/2006 7:02:03 AM PDT by SamAdams76
Warren Buffett once called the cigarette the perfect product: "It costs a penny to make. Sell it for a dollar. It's addictive."
Much the same could be said about coffee today. Even a costly coffee drink -- Starbucks sells its lattes for about $3.50, depending on the location -- consists of little more than a cup of water, a splash of milk, a spoonful of coffee grinds and 30 seconds of labor. Starbucks has managed to turn its customers' craving for caffeine into a $6.4 billion a year business. It already has about 6,000 company-owned coffeehouses and claims to open five more each day. All of which explains why so many sellers of fast food and drink seem intent on taking away some of its highly profitable market share.
Dunkin' Donuts, for its part, has tried to rev up its business by adding all sorts of new beverages over the last several years and, according to a recent Wall Street Journal article, introducing new food varieties and a coffee-house ambience to some of its stores. Its beverage offerings include the Coffee Coolatta and, lately, the Turbo Hot, a cup of coffee stoked with a shot of espresso. The changes, along with a new ad campaign, are intended to tell consumers, "We take our product seriously but not ourselves too seriously," says spokeswoman Susanne Norwitz. "We're not about fancy couches and wi-fi. We're about providing a good value and being convenient." Despite that thinly veiled knock at Starbucks, Norwitz insists that the changes aren't aimed at luring customers from the Seattle chain. "We are doing what we have always done," she says. "We are ... speaking to the plainspoken, no-nonsense Dunkin' patron."
McDonald's likewise has trotted out a new line of upscale coffee, co-branded with Newman's Own food company. And even 7-Eleven has taken to serving cappuccinos and boasting of gourmet beans in its brews.
But marketing experts at Wharton caution that these kinds of efforts may be misguided. Some companies seem so obsessed with swiping business from Starbucks, or so afraid of losing customers to it, that they may be abandoning a niche they could continue to defend and profitably serve. Indeed, Starbucks-envy may be leading some to forsake the customers who made them what they are. "In any mature market, there are always going to be price-sensitive customers, quality-sensitive ones and convenience-sensitive ones," says marketing professor Peter Fader. "There will be some customers who love service and some who love the experience. It's just a question of retailers deciding which of those segments they want to go after. Everyone can do well if they cater to their segment."
Selling coffee today that is at least palatable makes sense for many quick-service eateries. For example, at Dunkin' Donuts, which is owned by Dunkin' Brands, coffee and donuts are as complementary as, well, cops and crullers. If the chain doesn't sell a decent cup of coffee alongside its jelly-filled doughnuts -- and these days, muffins and bagels -- it's inviting customers to shop elsewhere, says Wharton marketing professor Xavier Dreze. If customers do that, he warns, "they may not come back."
Made to Order
Starbucks and a host of smaller companies, like San Francisco-based Peet's Coffee and Tea and Minneapolis-based Caribou Coffee, have raised consumers' coffee consciousness, ratcheting up the threshold of acceptability, argues Bill Cody, managing director of Wharton's Jay H. Baker Retailing Initiative. Even people who won't fork over $4 for a flavored latte want something better than overcooked percolator swill. "The average person now expects not just to have a fresh cup of coffee, but to have it hand-tailored to their expectations," he notes.
In addition, coffee is a ritual purchase that drives other purchases, says Rob Price, chief marketing officer for the Wawa convenience-store chain based in Wawa, Pa., and an adjunct professor at Wharton. "It tends to be the unifying beverage around which a lot of other things get sold -- the morning paper, a doughnut or a breakfast sandwich." People also typically buy coffee five or seven days a week, often at the same place. Businesses crave customers with that level of devotion.
And thanks to today's coffee culture, more people are caffeinating throughout the day, which, if you are Wawa, means more selling opportunities. "Good coffee has been really democratized," Price points out. "Some of our competitors on the high end tend to alienate customers by their surroundings and their price, but it's easy to give coffee as an affordable luxury to almost everybody."
His remark is no doubt a reference to Starbucks, as was Norwitz's comments about "fancy couches and wi-fi." Visit Dunkin' Donuts' web site, and you will find even more talk of the company "igniting a revolt against the tyranny of high prices, long waits and confusing sizes." Starbucks, as anyone who has tried to puzzle through its menu knows, calls its sizes 'tall,' 'grande' and 'venti' (although many customers seem to continue to order 'smalls', 'mediums' and 'larges'). Dunkin' Donuts also boasts that its "espresso revolution liberates customers by offering real and authentic espresso drinks at affordable prices in everyday language."
Starbucks, for its part, is little worried about such gibes. In an email, spokeswoman May Kulthol said her company "is proud to be credited with creating the specialty coffee industry in which a variety of coffeehouses thrive today. However, Starbucks believes it is the unique and authentic Starbucks experience as well as our knowledge and passion for quality coffee that differentiates us from other coffee retailers."
Meanwhile, Fader and several Wharton colleagues aren't convinced that Dunkin' Donuts and other coffee purveyors are angling for the same customers or even selling the same thing as Starbucks. Put differently, Kulthol's statement about "the unique and authentic Starbucks experience" is more than just promotional blather. Along with its brews, her firm is peddling a place to hang out with cool music, comfortable couches and free wireless-Internet connections, says marketing professor David Reibstein. The premium prices are, in effect, hidden rent for the freebies.
As part of a case he teaches on Starbucks, Reibstein asks his students to draw three pictures of images that come to mind when they think of the company. Their first image is inevitably a cup of coffee. But the second and third almost never refer to other Starbucks' wares, like pastries or newspapers. Instead, "the students always draw something about the furniture and the funky counter clerks with their piercings and tattoos, or maybe tables with people sitting by themselves with computers, or tables with people sitting together," he says.
Dunkin' Donuts, in contrast, isn't a place where people typically hang out. Many of its outlets don't offer much room to sit and savor your apple fritter or "frosted coffee roll." Some offer nothing more than a stand-up counter. "How is it, then, that Starbucks and Dunkin' Donuts compete?" Reibstein asks. "Sure, they both have a lot of stores, and they sell coffee and pastries. But they are not really competitors at all."
Fader agrees, arguing that businesses of all sorts sometimes stress quality and price too much, just as coffee sellers have become obsessed with the bona fides of their beans. But their competitiveness often pivots on other forgotten needs. "It might be that people want to get out of the store in 45 seconds," he says. "Yet businesses keep adding quality or cutting price, even when it's convenience that people are seeking." If customers come for quick service, then giving them a Starbucks-quality coffee but doubling their wait time adds little to a firm's bottom line. It may even subtract from it.
Despite all the copycat talk about quality coffee, breakfast retailers "seem to have at least stumbled into niches," Fader adds. Starbucks owns the high end, while Dunkin' Donuts has traditionally emphasized convenience, and McDonald's and other fast-food outlets, price. "It's not clear that anyone goes to McDonald's for quality," Fader quips. "There it probably should be the price play."
Wal-Mart vs. Target
Other retailing sectors have shown that segmenting the market in this way makes sense. "Look at Wal-Mart and Target," Fader suggests. "They seem to be in the same market, but you can easily shop in both for different reasons." Though both are classified as discounters, Wal-Mart has historically aimed to have the lowest prices, period, while Target tries to combine stylish clothing and house wares with value pricing. (Recent press reports, however, cite efforts by Wal-Mart to experiment in some stores with higher-end clothing and upscale household accessories as a way of competing in Target's niche.) "In the same way, you can go to Dunkin' Donuts in the morning and Starbucks in the afternoon. And Dunkin' Donuts shouldn't be at all bothered by that. Maybe you are looking for different things at different times of the day."
Even Starbucks, for all of its caffeine-fueled success, faces challenges, including the need to continue growing rapidly without undermining its sleek operations or alienating its devoted clientele. As a publicly traded company, Starbucks has to expand to meet Wall Street expectations. Yet its obvious paths seem fraught with peril.
Adding more food to its menu, which the firm has begun doing, risks gumming up operations and lowering margins. "When I heard they were doing that, I thought they were getting desperate," Dreze says. "That's how you start losing your point of differentiation." Installing drive-through windows, which Starbucks is also trying, likewise could endanger the brand. "If they say, 'Here, just take it with you,' it becomes more [like] just a cup of coffee," Reibstein suggests. "And as a cup of coffee, it's fine, but are you willing to pay that much more for it without the experience?"
Mature companies, or those strongly identified with particular customers, often stumble into trouble when they try to expand beyond their core clientele, says marketing professor Barbara Kahn. She points to Talbot's, a seller of conservatively styled clothing for professional women. The company's customers historically tended to be older women, Kahn points out. "But Talbot's wanted to bring in more than just older women, so they introduced younger styles. In trying to do that, they antagonized the older women and didn't get the younger market."
The same sort of demographic "stickiness" prevails among car brands, she notes. Two General Motors' marks -- Buick and Oldsmobile -- long held little appeal among younger buyers, and that partly led to GM phasing out the Oldsmobile line several years ago. While no one is predicting that Starbucks will go the way of Oldsmobile, the company, by wandering too far from its formula, could lose its cachet among urban professionals without attracting new buyers.
The Return of Juan Valdez
A hidden casualty in the coffee wars has been a Colombian coffee farmer named Juan Valdez. Perhaps the world's best-known bean grower, he existed only in ads and was the fictional spokesman for the National Federation of Coffee Growers of Colombia. The group created him to promote its beans in grocery stores -- contending that they tasted better than other grocery store coffee -- and thus secure a premium price from retailers. The Federation even persuaded some retailers to put its logo -- a drawing of Juan and his mule -- on containers of coffee.
The Federation's beans "were among the first grocery-store brands that said, 'We have higher quality,'" notes marketing professor Patti Williams. "And they had remarkably high recognition for Juan Valdez as a character. A tiny little organization developed this brand icon." But the coffee-house revolution eroded the federation's gains. Marketing by Starbucks and regional chains advanced the notion that the best coffee comes from freshly roasted and ground beans, and few grocers offer that. "Now all grocery-store coffee is viewed as bad," Williams adds.
Valdez is fighting back. He, too, has become a "barista" -- an Italian term that many coffee houses use to refer to their espresso makers. The Federation has launched Juan Valdez cafes in New York, Washington, D.C., and Seattle. The Seattle store held its grand opening April 16 and is near Starbucks' original location. But Juan Esteban Orduz, the Federation's president, told The Seattle Times that the cafes don't aim to take on the coffee-brewing behemoth. They are intended to serve, in effect, like "billboards," he says, publicizing high-quality Colombian coffee to a new generation of coffee drinkers.
For what it's worth, I HATE McDonald's new blend. When I was driving, I used to get their coffee to keep my alertness up. It used to be smooth, kind of bland, and just the right kick. The new stuff is fake-gourmet. At the gourmet places, you get to choose the blend....duhhh.
Starbucks, meanwhile, has come a long way. You can now go in there, order an extra large, smooth, coffee, from someone who is friendly and speaks English, cheaper than Dunkin'. They even don't care if you just call it coffee anymore.
Dunkin' franchises around here, meanwhile, have created environments where citizens don't want to work, then "had" to hire Central Americans. Also, they've gotten greedy with the cost of a cup.
The article is right on. I'm thinking with gas prices way up, people are going to be tempted to find a cheaper cup of coffee.
Somw people whine about the price of gasoline, yet don't blink an eye spending $3.50 for some caffeinated water......
Walmart's 100% Arabica coffee tins go for $2.18. Very good coffee.
I wish their coffee menu was written in English. You need a doctorate in Coffee-speak just to understand it.
When I was in Alabama last week, I went to McDonalds because there was no DD or Starbucks around and was pleasantly surprised by the quality of this new blend.
As for Starbucks, you make a good point. Starbucks has a reputation for very expensive coffee but that only applies to their espresso drinks. If you get just a cup of regular coffee, it's no more expensive than just about anywhere else. However, I personally find Starbucks coffee to be too strong and bitter for my taste.
Pre-ground coffee is crap. Spend 20 bucks on a grinder and buy whole beans. The difference is like night and day. You'll wonder why you ever bought (and drank) ground coffee in the first place. And don't get me started on the instant stuff (maybe except for Nestle Rich Blend).
Take a No-Doz. It's cheaper and just as effective. Wash it down with some tap water.
Just my rambling two cents. :o)
I'm sure many complain about gas prices while they are in line buying their lattes too.
I like McDonald's new coffee. But that's what makes a horse-race, I guess!
My sister was on a flight about ten years ago with a coffee salesman who told her that people in New York put in literally twice as much coffee per pot as people in other parts of the country. That's probably changed now, not because New Yorkers use less, but because other folks are using more. Interesting how tastes change over the years.
I didn't say it was Walmart's pre-ground was excellent, but IMO very good.
Well, we used to like Starbucks, until we were given a Saeco Coffee/Espresso machine, as a gift.
Now we just wait till we get home to have a cup of coffee because none of the coffee shops coffee, can compare.
The machine was a gift (not the high end of their machines, but still pricey), and I thought I'd never spend that kind of money on a machine myself...but, after drinking the coffee (which is excellent, and all our guests think so too), and realizing the money saved by not drinking coffee away from home, I might reconsider.
Yuk. There is an experience with a good cup of coffee that cannot replicate your cheaper No-Doz solution for staying alert. Just like a good glass or wine, a quality glass of beer or a tumbler of aged bourbon, the mild intoxicating effect of the "drug" (alcohol) is secondary to the experience of enjoying the beverage. I suppose instead of the bourbon, you could mix some isoprophl alcohol with some tap water and get the same effect (of intoxication) for cheaper but you take away the entire experience of savoring a fine drink and take away most of the purpose.
Correction: I didn't say Walmart's pre-ground was excellent, but IMO very good. Sorry.
If you use the drive-through, order a "senior" cup. I don't know if they do it everywhere, but around here it's only $.50, and is just the right size.
< sarcasm >
Bottom line: Coffee TASTES good, especially when I add the coffee to my cream and sugar. It gives the caffeine JOLT. It's legal, moral and innocent.
It only "costs" 2 WW points -- zowie!!!!
I didn't start drinking coffee until I lived in Saudi Arabia, working for Saudi ARAMCO. Those Muslim Saudis got me hooked on coffee. They all drank American coffee; they said it tasted the best. Harhar.
I drink as I write.
Hmmm, just what is the "right size" for a senior?
For $.50 it can't be too big.
Coffee is a choice, Gas is a necessity. And if you would argue that you can just walk it will be as shallow as the comparison of pricing of apples to oranges.
Even better, buy green. It keeps. Roasted beans at the grocery store doesn't work, because roasted beans go stale in a matter of a week or two. Typically they don't have enough turnover. It's not bad coffee, but it isn't what it could have been. I like Sweet Marias - fast service, internet-based. It's not a snob thing, it's the way people bought and consumed coffee since day one.
It's all lightness, flavor and joy...
Unless you're a compulsive dumbass like me, drink two to three pots a day for years and end up with caffeinism.
Between the heart palpitations and roving fasciculations, my doctor forced me to stop caffeine cold turkey.
All you people who can still drink coffee SUCK!
But you're correct in that comparing the two is invalid.
Of course, you still have to pay for the furnishings & other equipement, as well as the rent, utilities, employees, etc....
But the point of it being a relatively high-margin business is taken.
I REALLY like Panera's coffee, and their espresso drinks. It's Costa Rican and it's really delicious. I buy the beans, and grind it at home before making each pot.
Panera has the free wi-fi, the couches, the less expensive coffees in four flavors--the regular, the decaf, the featured coffee, and the brewed hazelnut. All of them are fresh-ground, and the decaf is the bar-none best decaf I have ever tasted.
Plus, their food is waaaaaay better than Starbucks, and their servers are much more polite; no tattoos or pierced tongues that I've seen.
I'm thinking of buying their stock.
Wasn't criticizing the high-profit margins of the coffee shops. My statement was more in admiration than of criticism. Kind of makes me want to open a coffee shop myself.
I always use Nestle Rich Blend when I don't fresh brew and just love it.
Barney's!
I'm no senior, and it's just right for me. I think it's between a medium and a large.
Yes, I'm a coffee snob but it is my one remaining vice. I don't drink, smoke or gamble so I can easily justify $15 or $20/ lb for coffee.
Love your tagline!
A couple of comments:
Did you ever notice any "junk science" articles coming out about the "dangers of evil caffeine"? I haven't, not really. I don't think the lamestream media and snake-oil salesman have gone after coffee as they've attacked fast food or smoking. That's because they simply haven't FOUND anything wrong with it, YET!!! But they will, I'm sure. The media's job is to find fault with everything out there.
Why haven't the libs DEMANDED a congressional probe into "big coffee", what with their astounding profits per cup? All of these companies should be on national TV, indictments should be handed down, windfall profits taxed, they should do a perp walk, toss them in jail NOW! I cannot believe the libs in Congress aren't demanding Juan Valdez's immmediate impeachment.
BUAHAHAHHA.../sarc bigtime.
Any opinion on whether or not Jamaican Blue Mountain coffee is really worth the $30-$40/lb. you pay?
I actually think the lattes at Dunkin' Donuts are pretty good - better than Starbucks. Wegman's grocery store also has good lattes.
Or perhaps they will just turn coffee shops into tax collectors, with the governmnet making much more from each cup of coffee than either retail merchant or manufacturer. There will be a rash of fake medical discoveries about how bad coffee is, then media will focus on its addictive nature. You see the pattern.
" Somw people whine about the price of gasoline, yet don't blink an eye spending $3.50 for some caffeinated water......"
Just a matter of priorities.
But they'll scream anyway!
I have a circulation-syndrome-thing (nurse-relative found a name for it) and a couple of cups of a hot drink with caffeine is all that's really needed to keep the blood flowing.
A "sintax" on coffee is definitely in the Proho's cards. They already tried to impose one in Seattle and it almost succeeded. Somewhere in the country they will fake up alarmist data and try again.
"Yes, I'm a coffee-snob..."
No, you're not. Just enjoying coffee the way everyone did for 99 and 44/100ths of its history. Coffee has an interesting history in the US. Every town used to have a coffee merchant or two, along with local breweries for that matter.
A "house blend" was, I'm sure, excellent coffee. Throw in a couple world wars, and convenience and packaging of canned, pre-roasted and ground coffee ruled the day for decades. Yuppies only think they discovered sex, drugs and rock and roll, coffee and wine, etc.
While attending to the customized needs of the older generations, Starbucks is/has successfully enculturated the younger generations and established new categories, language and physiological addictions. They're doing the same in China. Those are their customers for the next 30+ years
Starbucks is perceived as a successful triple bottom line corporation with high stability. I know that they WASTE a ton. And... as excellent as the health benefits are, baristas must advocate for themselves to guarantee them.
Starbucks can do all this and much much more, without objection due to excellent marketing. And people continue to buy the products despite the high cost.
We are a very confused culture.
I don't think it's worth it. I have purchased 1/4 lb and was not impressed. If you want to splurge buy genuine Hawaiian Kona, IMHO
Yes, I have had the 100% Kona and like it a lot, but some people don't care for it, surprisingly. To me, it has a earthy taste, yet is smooth and sweet--nice combination of flavors.
Interesting fact: people frequently go in to a Starbucks or what have you and order a Caffe Americano.
Ever notice how they make it? They take an espresso and water it down. The term originated from the French as a derisive term to describe the American habit of adding water to their coffee instead of drinking it straight like the French.
Now Starbucks are showing up in France and selling Cafe Americanos. Very interesting, methinks.
Isopropyl alcohol is not the same thing as ethanol that you find in alcoholic beverages. Remember, you use it as an antiseptic. In large doses (as in a drink), it is toxic. It will inflame your entire digestive tract. It may well kill you.
ISOPROPYL ALCOHOL CAN AND WILL KILL YOU.
Just adding that as a warning to anyone who might consider doing that. Very bad idea. There is a reason that Everclear or moonshine costs more than a bottle of rubbing alcohol.
Ahh -- yes, we use Sweet Maria's too, they're great (although their online order form is a little hard to use.) In fact we roast the coffee in a regular convection oven out on the back porch (cheaper than a special coffee roaster.) Works great, we get great coffee and it's very cost effective.
Like the old commercial says: I am a coffee achiever. (LOL). I drank the stuff since childhood. My favorite is Walmart's Great Value 100% Columbian coffee which sells for around $6 per 34.5 oz canister. My second and third favorites are Brown Gold and Yuban which I usually buy for special occasions. I have my own personal ways to concoct mochas and the like so I don't bother with flavored coffees which usually give me a headache.
The secret to great coffee is a clean maker, pure water, delicious sweet cream, good company, good book, and/ or internet site like the FR.
Here's a great article on the subject:
I guess it's all a matter of taste, but... I've tried it before and I don't particularly prefer it. I think it's really meant to be blended with other coffees.
Ah, Barney's is a my ole favorite. I love their flavored coffees. I'd pass four Starbucks to go to a Barneys.
That said, we don't have one in Memphis. :(
"Consider that with a $5 bag of coffee beans at home, you can make about 100 cups of coffee with it."
If anyone has a TJMaxx or a Marshall's nearby, check out their food section for really good buys on bean coffees. I can usually find beans from Hawaii and Jamaica for about $5.99 a lb. :)
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