Why Starbucks actually helps mom and pop coffeehouses.

The conventional wisdom debunked.
Dec. 28 2007 7:35 AM

Don't Fear Starbucks

Why the franchise actually helps mom and pop coffeehouses.

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But closures like this have been the exception, not the rule. In its predatory store placement strategy, Starbucks has been about as lethal a killer as a fluffy bunny rabbit. Business for independently owned coffee shops has been nothing less than exceptional as of late. Here's a statistic that might be surprising, given the omnipresence of the Starbucks empire: According to recent figures from the Specialty Coffee Association of America, 57 percent of the nation's coffeehouses are still mom and pops. Just over the five-year period from 2000 to 2005—long after Starbucks supposedly obliterated indie cafes—the number of mom and pops grew 40 percent, from 9,800 to nearly 14,000 coffeehouses. (Starbucks, I might add, tripled in size over that same time period. Good times all around.) So much for the sharp decline in locally owned coffee shops. And prepare yourself for some bona fide solid investment advice: The failure rate for new coffeehouses is a mere 10 percent, according to the market research firm Mintel, which means the vast majority of cafes stay afloat no matter where Starbucks drops its stores. Compare that to the restaurant business, where failure is the norm.

So now that we know Starbucks isn't slaughtering mom and pop, the thorny question remains: Why is Starbucks amplifying their business? It's actually pretty simple. In contrast to so-called "downtown killers" like Home Depot or Wal-Mart, Starbucks doesn't enjoy the kinds of competitive advantages that cut down its local rivals' sales. Look at Wal-Mart. It offers lower prices and a wider array of goods than its small-town rivals, so it acts like a black hole on local consumers, sucking in virtually all of their business. Starbucks, on the other hand, is often more expensive than the local coffeehouse, and it offers a very limited menu; you'll never see discounts or punch cards at Starbucks, nor will you see unique, localized fare (or—let's be honest—fare that doesn't make your tongue feel like it's dying). In other words, a new Starbucks doesn't prevent customers from visiting independents in the same way Wal-Mart does—especially since coffee addicts need a fix every day, yet they don't always need to hit the same place for it. When Starbucks opens a store next to a mom and pop, it creates a sort of coffee nexus where people can go whenever they think "coffee." Local consumers might have a formative experience with a Java Chip Frappuccino, but chances are they'll branch out to the cheaper, less crowded, and often higher-quality independent cafe later on. So when Starbucks blitzed Omaha with six new stores in 2002, for instance, business at all coffeehouses in town immediately went up as much as 25 percent.

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The key for independent coffeehouse owners who want to thrive with a Starbucks next-door is that they don't try to imitate Starbucks. (As many failed coffee chains can attest, there's no way to beat Starbucks at being Starbucks.) The locally owned cafes that offer their own unique spin on the coffeehouse experience—and, crucially, a quality brew—are the ones that give the Seattle behemoth fits. Serve an appetizing enough cappuccino, and you can even follow Hyman's lead and take aim at almighty Starbucks, where automated espresso machines now pull consistently middling shots at the touch of a button—no employee craftsmanship required.

After all, if Starbucks can make a profit by putting its stores right across the street from each other, as it so often does, why couldn't a unique, well-run mom and pop do even better next-door? And given America's continuing thirst for exorbitantly priced gourmet coffee drinks, there's a lot of cash out there for the taking. As coffee consultant Dan Cox explained, "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.