> Hyman received the expected news that the company was opening up next to one of his stores. But instead of panicking, he decided to call his friend Jim Stewart, founder of the Seattle's Best Coffee chain, to find out what really happens when a Starbucks opens nearby. "You're going to love it," Stewart reported. "They'll do all of your marketing for you, and your sales will soar." The prediction came true: Each new Starbucks store created a local buzz, drawing new converts to the latte-drinking fold. When the lines at Starbucks grew beyond the point of reason, these converts started venturing out—and, Look! There was another coffeehouse right next-door! Hyman's new neighbor boosted his sales so much that he decided to turn the tactic around and start targeting Starbucks. "We bought a Chinese restaurant right next to one of their stores and converted it, and by God, it was doing $1 million a year right away," he said.
The article was written in 2007. The closing sentences seem a bit prophetic:
> "You can't do better than a cup of coffee for profit. It's insanity. A cup of coffee costs 16 cents. Once you add in labor and overhead, you're still charging a 400 percent markup—not bad! Where else can you do that?" Until Americans decide they need to pay four bucks a pop every morning for a custom-baked, designer-toast experience, probably nowhere.
The reality of bottled water profit is that unless you are a retailer, the only way you can make any money is based on insane volume. That requires cash to cover production, machines, warehousing, transportation (this is huge) and terms for your customers. Big box loves to pay in 60-90 days. Try that on for size when you are making pennies on the dollar.
Similar to many other categories, the bottled water industry is experiencing a transition into automated manufacturing. This is putting a ton of the mom and pop bottling businesses out. Its become too difficult for them to compete against 24/7 automated production lines that the big dogs are running. The margins continue to be driven further and further into bare minimum/cost threshold by the buyers as they leverage it to drive in customers(door busters). There is a ton of pressure here and its not letting up. The smaller guys can't afford to put the cash up to secure the new hardware and are closing up shop left and right.
Costco sells bottled water at near break even as a door buster. This strategy is very similar to what you see in traditional grocery stores where Arrowhead or semi-generic brand is selling for $3.50 a case of 24 bottles.
Don't get me wrong - folks like Nestle, Fiji, Smart Water etc. all do well but there is serious cash invested in those efforts. The small and mid size players basically struggle to carve out an existence.
$4 toast isn't nearly as good a business as $4 coffee unless they succeed in making the toast literally, medically habit-forming. That's Starbucks' entire business model: ensure that a caffeinated beverage is part of your morning ritual (afternoon is a nice bonus, but they make a stupendous portion of revenue before 9 AM), get you to do it with the same regularity as brushing your teeth, and ensure that there is a pleasant green priestess very physically convenient when you feel the need to make your obeisance to the caffeine gods.
(Says a habitual coffee drinker who came to the habit late in life, and who is very happy he's moderately dependent on a substance which is highly unlikely to kill him, as opposed to being more-than-moderately dependent on any of the number of substances which would stand substantial risk of killing him.)
<< Says a habitual coffee drinker who came to the habit late in life, and who is very happy he's moderately dependent on a substance which is highly unlikely to kill him >>
Coffee will do more than not kill you; it was recently found to confer a "reduced risk of dying from heart disease and certain other causes"!
<< Compared with abstainers, nonsmokers who drank a cup of coffee a day had a 6 percent reduced risk of death, one to three cups an 8 percent reduced risk, three to five cups a 15 percent reduced risk, and more than five cups a 12 percent reduced risk. There was little difference whether they drank caffeinated or decaffeinated coffee. The association persisted after controlling for age, alcohol consumption, B.M.I. and other health and diet factors. >>
There was a toast bar around the corner from our office. Bread supplied by a bakery two blocks down.
It was frikkin delicious. Swedish toast, with some nordic cheese and jam. Garlic cream cheese with fresh cherry tomatoes. Avocado.
But it doesn't scale. The long queue and wait time deterred customers, with the over flow going to other cafes.
The owners tried all sorts of gear to make toast reliably, consistently, and faster rate. (I have no idea why that's a hard problem.) They finally ran out of energy (will to live) and closed shop.
400 percent mark up, yes, but you have to meet volume targets if you have to break even given rent and other fixed costs. Let's say, you pay $5000 rent, another $200 a month for equipment like espresso machines, around $600 for utilities, another $600 for supplies, then you need to sell, 6400/0.16 = 40,000 cups of coffee. That is around a thousand per day. Let's relax the constraints and say, expenses are between $1000-$6400/month between 200-1000 coffee cups a day. That doesn't seem like a very easy target to achieve.
You accidentally sold your coffee for $0.16 a cup in your example. Try marking it up to $4.00 and your same math leads you to a nice easy profit selling 50 cups per day.
You get much better value from Starbucks or any coffee ship if you use it as an office and hang around for a few hours working off the wifi. When you think about rent savings combined with a decent working environment, the equation shifts. Not all locations are equally amenable to this of course.
At a nice coffee shop, most of what you're paying for is not the coffee. You're paying for the place to sit down, the convenient access to Internet service, the atmosphere, etc.
If there were more price transparency in the whole situation, it wouldn't be a flat $3 for a basic cuppa. It'd be more like $1 for a to-go coffee and $5 for sitting in. Or maybe a flat low price for the coffee plus an hourly charge for a chair.
At what I consider a "nice" coffee place, I'm paying for a better cup of coffee (preferably roasted in-house or nearby, and a few days ago rather than months ago). What you said is true, but there is some coffee that's priced with a lower relative markup for the drink you actually get.
Starbucks bulk-roasts their coffee, and they use darker roasts than most independent roasters (ensuring consistency across locations), which allows their beans to have a much lower per-unit cost.
I was counting Starbucks in the group of "nice" coffee shops. Their markup on coffee might be somewhat higher (though I doubt it; they may have lower materials cost but they also charge half to 2/3 as much as the indie places I tend to frequent do for a regular cuppa), but I bet any difference is still tiny compared to the facilities and staffing costs.
I was meaning it more as opposed to places that more-or-less just serve coffee out of a window.
It certainly costs me more than $0.16 to make a cup of coffee at home.
My most recent coffee purchase was for 400g and was ~$14 (so not a super expensive brand). I use ~20g per serving, so my bag of beans gets me ~20 servings. That works out to $0.70/serving in coffee.
To be fair, I drink black coffee, with no steamed milk. It's more fair to compare my at home coffee to a regular, $2.00 cup of Starbucks coffee (which is vastly inferior to my at home coffee in quality).
Most of my coffee shop experience has been in lower Manhattan, well after the publication date of the OP...but anecdotally, the premise seems sound to my biased mind. I never had any hesitation plunking $3-$4 for a iced coffee at Blue Bottle/Bluebird/MUD/Abraco (the best place in the East Village IMHO) because I would think to myself, "Well, it's about $2.50 in Starbucks, which is the Walmart of coffee"
In the EV, make sure you throw in 'Ninth Street Esrpesso' (multiple locations: 9th and C, 10th and B, and a couple in midtown), 'Boxkite' to your rotation (St. Marks btw. A & 1st), as well as 'Van Leeuwen' (7th btw. 1st & 2nd). On the west side, there's also 'Ground Support' (W. Broadway btw. Spring & Broome), and in Tribeca there's 'Kaffe 1668' (Greenwich St. btw. Murray & Warren).
I think another way Starbucks helps local coffee shops is by creating an "identity outlet" for the anti-yuppie, anti-corporate crowd. I have friends who never go to Starbucks, and make sure to point that out at every opportunity. So the way they act out that part of their identity is by going to a local coffee shop instead.
I wonder how this works in places that are much more spread out than NYC or San Francisco. I live in Phoenix and there are drive-thru Starbucks at what seems like every intersection but it seems like mom and pop shops are pushed out of this equation here. One popular local shop closed down this year after a drive-thru Starbucks opened up in the same plaza. People here are definitely more in line with corporate (/more convenient?) businesses than the little guys, so maybe that has something to do with it.
A good friend of mine owns a small coffee company in San Antonio—probably one of the best roasters in the country. He loves Starbucks. Nobody would ever venture into the world of high-end specialty coffee is Starbucks didn't serve as the gateway.
I recently found maybe 6 "third place" style cafes (for laptop camping) in the entire Phoenix valley that weren't chains. Years ago, IIRC, I found none open after 5pm.
To have "local culture" you need to get people out of their cars, houses, offices. Tellingly, the best cafe I found was next to a church and affiliated somehow.
yeah it helps out mom and pop shops cause starbucks coffee is fucking repulsive and customers should go literally anywhere else for a halfway decent cup
Until 2012 there was an intersection in Vancouver with Starbucks on 2 of the 4 corners and a different coffee shop on the third corner. So even Starbucks knows this.
This is funny. There are several coffee shops in my town that you can see while sitting in Starbucks. I was super confused till I went out and tried them all. I still go to Starbucks since they are cheaper and better tasting then the rest but I can see the logic.
I think coffee is vastly overpriced compared to Europe. I always drink gallons of the stuff whilst in Europe for several reasons, not the least of which is that it's better over there. The experience is nicer. I have a favourite small European country where I can literally buy two espressos or two cappuccinos for the price of one here. I grew up in Europe and have always preferred the European idea of cafes to the North American variety. I can also usually get a decent meal in a European cafe, albeit a one or two course meal. One can still smoke outside at the tables in quite a bit of Europe. North Americans have their knickers in a twist over smokers.
I'm not sure what the issue is with North Americans having "their knickers in a twist."
It's a proven health issue, even if the smoke is inhaled second-hand. I'd say it's more of a responsibility for smokers in general: if you want to smoke, I won't judge, but please respect me in turn and understand that you may be near people who would like not to be getting the smoke second-hand.
While I totally agree with you, and try to avoid imposing on others with my vaping (albeit less harmful than cigarettes, people don't like the smell, the clouds, the scare, etc.) I think that the damage caused by secondhand smoke outdoors is probably negligible. It's not lingering in the air the same way it does indoors.
It doesn't have to linger if it's blowing towards me, either by wind or your actions - it's still getting in my hair and clothes and food and making them all stink. I totally can't understand anyone simultaneously saying that European cafes are better because (a) better tasting coffee and (b) more smoke around. If you're smoking while you drink your coffee then you're ruining the flavour anyway.
Yes, I was bit confused about the comments above stating that Starbucks was the Walmart of coffee and very cheap. It's far more expensive than most other options over here in Europe.
They helped a local 30-year-old coffeehouse by buying them and their neighbor at above market rate. Backed by illegal secret tax deals, as it turned out.
In Moscow (Russia) there are two major coffee shop chains: Coffee House and Shokoladnitsa, Starbucks being a rare and expensive beast. And you know what, these two are always next to each other, like 20m nearby or on opposite sides of a street. I suppose they understand this 'overflow' phenomenon perfectly.
42 comments
[ 5.1 ms ] story [ 100 ms ] thread> Hyman received the expected news that the company was opening up next to one of his stores. But instead of panicking, he decided to call his friend Jim Stewart, founder of the Seattle's Best Coffee chain, to find out what really happens when a Starbucks opens nearby. "You're going to love it," Stewart reported. "They'll do all of your marketing for you, and your sales will soar." The prediction came true: Each new Starbucks store created a local buzz, drawing new converts to the latte-drinking fold. When the lines at Starbucks grew beyond the point of reason, these converts started venturing out—and, Look! There was another coffeehouse right next-door! Hyman's new neighbor boosted his sales so much that he decided to turn the tactic around and start targeting Starbucks. "We bought a Chinese restaurant right next to one of their stores and converted it, and by God, it was doing $1 million a year right away," he said.
The article was written in 2007. The closing sentences seem a bit prophetic:
> "You can't do better than a cup of coffee for profit. It's insanity. A cup of coffee costs 16 cents. Once you add in labor and overhead, you're still charging a 400 percent markup—not bad! Where else can you do that?" Until Americans decide they need to pay four bucks a pop every morning for a custom-baked, designer-toast experience, probably nowhere.
Lo and behold, $4 toast is a thing:
http://www.psmag.com/health-and-behavior/toast-story-latest-...
Similar to many other categories, the bottled water industry is experiencing a transition into automated manufacturing. This is putting a ton of the mom and pop bottling businesses out. Its become too difficult for them to compete against 24/7 automated production lines that the big dogs are running. The margins continue to be driven further and further into bare minimum/cost threshold by the buyers as they leverage it to drive in customers(door busters). There is a ton of pressure here and its not letting up. The smaller guys can't afford to put the cash up to secure the new hardware and are closing up shop left and right.
Costco sells bottled water at near break even as a door buster. This strategy is very similar to what you see in traditional grocery stores where Arrowhead or semi-generic brand is selling for $3.50 a case of 24 bottles.
Don't get me wrong - folks like Nestle, Fiji, Smart Water etc. all do well but there is serious cash invested in those efforts. The small and mid size players basically struggle to carve out an existence.
(Says a habitual coffee drinker who came to the habit late in life, and who is very happy he's moderately dependent on a substance which is highly unlikely to kill him, as opposed to being more-than-moderately dependent on any of the number of substances which would stand substantial risk of killing him.)
Coffee will do more than not kill you; it was recently found to confer a "reduced risk of dying from heart disease and certain other causes"!
<< Compared with abstainers, nonsmokers who drank a cup of coffee a day had a 6 percent reduced risk of death, one to three cups an 8 percent reduced risk, three to five cups a 15 percent reduced risk, and more than five cups a 12 percent reduced risk. There was little difference whether they drank caffeinated or decaffeinated coffee. The association persisted after controlling for age, alcohol consumption, B.M.I. and other health and diet factors. >>
http://well.blogs.nytimes.com/2015/11/18/coffee-tied-to-lowe...
It was frikkin delicious. Swedish toast, with some nordic cheese and jam. Garlic cream cheese with fresh cherry tomatoes. Avocado.
But it doesn't scale. The long queue and wait time deterred customers, with the over flow going to other cafes.
The owners tried all sorts of gear to make toast reliably, consistently, and faster rate. (I have no idea why that's a hard problem.) They finally ran out of energy (will to live) and closed shop.
[1] http://www.businessinsider.com/movie-theater-concession-pric...
wow
If there were more price transparency in the whole situation, it wouldn't be a flat $3 for a basic cuppa. It'd be more like $1 for a to-go coffee and $5 for sitting in. Or maybe a flat low price for the coffee plus an hourly charge for a chair.
Starbucks bulk-roasts their coffee, and they use darker roasts than most independent roasters (ensuring consistency across locations), which allows their beans to have a much lower per-unit cost.
I was meaning it more as opposed to places that more-or-less just serve coffee out of a window.
My most recent coffee purchase was for 400g and was ~$14 (so not a super expensive brand). I use ~20g per serving, so my bag of beans gets me ~20 servings. That works out to $0.70/serving in coffee.
To be fair, I drink black coffee, with no steamed milk. It's more fair to compare my at home coffee to a regular, $2.00 cup of Starbucks coffee (which is vastly inferior to my at home coffee in quality).
Thank you for the laugh. I never thought of it quite that way, but it's true if one considers it and the alternatives.
To have "local culture" you need to get people out of their cars, houses, offices. Tellingly, the best cafe I found was next to a church and affiliated somehow.
http://www.cbc.ca/news/canada/british-columbia/kitty-corner-...
It's a proven health issue, even if the smoke is inhaled second-hand. I'd say it's more of a responsibility for smokers in general: if you want to smoke, I won't judge, but please respect me in turn and understand that you may be near people who would like not to be getting the smoke second-hand.
Again, not sure what the issue is.