PRINT THIS STORY:

CHANGE TEXT SIZE:

EXTRA CAFFEINE

Caribou Coffee adds cafés in quest to raise profile in Starbucks’ shadow

BY JIM MCCARTNEY

In the gourmet coffee shop market, Starbucks has pretty much had the floor all to itself. That could change — in some Midwestern and Southern states, at least.

Minneapolis-based Caribou Coffee, a chain of coffee shops that puts the emphasis on good coffee and friendly service in comfortable, ski-lodge-style settings, is looking to double its size and raise its profile.

Caribou had been vying for the second-place spot (a very distant second to giant Starbucks, to be sure) for years now, with limited success. Following a rapid expansion during the early-to-mid-1990s, the company ran into a capital crunch. But now, with a deep-pocketed investor greasing the wheels and a recently crowned chief executive in the driver’s seat, Caribou may be on the road to major playerdom, some analysts say.

“They do well in differentiating their atmosphere, service, even style of roast,” said David Geraty, a restaurant analyst at RBC Capital Markets, Minneapolis. “They have a good chance to emerge as the clear No. 2.”

Last summer Crescent Capital Investments, an Atlanta-based private investment firm that bought 88 percent of Caribou in December 2000, decided that Michael Coles was definitely the man to execute a bold new strategy. Coles had launched the Atlanta-based Great American Cookie Co. in 1977 and built it into a 350-plus-store chain before selling it to Capricorn Investors, which also owns Mrs. Fields Original Cookies. He became interim head of Caribou in January 2003. Now installed as CEO, Coles says he plans to expand the chain to more than 500 company-owned stores in as many as 18 markets by 2007, from the current 254 shops in 10 markets.

“Michael has an entrepreneurial spirit and mind-set that will serve Caribou well,” says Charles Ogburn, executive director of Crescent Capital. “With the company poised to expand rapidly, we wanted someone who knows how to grow a company organically.”

Further, Coles is not one to shrink from a challenge. Here’s a man who in 1996 ran for Congress against House Speaker Newt Gingrich, and ran for the U.S. Senate in 1998 against U.S. Sen. Paul Coverdell, R-Ga. Since June, Coles has added nearly 50 stores, and the chain now employs 3,900. Besides its home state, Caribou operates stores also in Washington, D.C., and in Georgia, Illinois, Maryland, Michigan, North Carolina, Ohio, Virginia and Wisconsin.

Plans call for rolling out as many as 75 new stores this year and 90 to 100 units next year, Coles says. Caribou posted more than $120 million in sales last year, and officials say the company has been profitable for several years straight. Most of the growth will focus on Caribou’s 10 core markets (which include the Twin Cities, Chicago and Detroit), but the company also wants to expand into Cincinnati and into Richmond, Va., among others, says Coles.

“There is no other category with such a huge gap between Nos. 1 and 2,” said Coles. “We see enormous potential.”

Supporting that growth will be the company’s new 130,000-square-foot headquarters, distribution and roasting facility, now under construction in Brooklyn Park, Minn., says Chris Toal, Caribou’s vice president of marketing. “This will give us the capacity to accelerate our growth,” Toal said.

But even if Coles succeeds in doubling Caribou, the chain will still be only a fraction of the size of Starbucks. After all, the Seattle-based coffee behemoth boasts $4 billion in sales and some 7,200-plus sleek, European-designed stores.

But the market remains fragmented and continues to grow. There are about 14,000 coffeehouses today, a more than 10-fold increase since 1990, according to the Specialty Coffee Association of America. The U.S. coffee retail industry is estimated to produce more than $9 billion in annual sales. Industry consultants contend that there is plenty of room for expansion among coffee retailers, noting that the market is nowhere near saturation in the vast majority of U.S. cities.

“We’ve been given an opportunity that we would like to take advantage of,” said Coles.

The likelihood of Caribou’s elevation to second place was boosted last spring when Starbucks bought Seattle’s Best, a chain of 150 coffee shops in Atlanta, Boston, Chicago, Los Angeles, Portland and Seattle.

So far the Twin Cities is the only market where Caribou can say it’s larger than Starbucks, having more than twice Starbucks’ 45 stores there. But it is a very different story elsewhere. Starbucks has a total of 1,135 stores in Caribou’s markets, outnumbering it on average by a 4:1 ratio. In Illinois, for instance, Caribou has 45 cafes to Starbucks’ 303; in Georgia, Caribou has 16 to Starbucks’ 107; and in North Carolina, Caribou has 18 to Starbucks’ 69.

Among the ways Coles plans to expand and change Caribou over the next four years:

• Tinkering with its lodge-style theme. Coles says he wants to tone down the references in the stores to Alaska (founders John and Kim Puckett say they were inspired to start the chain while climbing an Alaskan mountain) and that he would prefer customers think of Vail or Aspen, Colo., instead. Ideas include the use of large pictures showing people kayaking or bicycling with a cup of Caribou coffee in hand. “We want to portray the outdoor experience in our stores,” Coles said.

• Exploring joint ventures in the United States (for units inside airports, for example) and offering franchising opportunities abroad. (All U.S. stores are company-owned.)

• Expanding and improving the food offerings — adding warm cinnamon rolls and fresh-baked doughnuts. Caribou will unveil a major food initiative this summer, Coles says. Currently it sells muffins, sandwiches, cookies and other items, all supplied by outside vendors.

Caribou is augmenting its mall strategy through a number of other ventures, including a commercial division to supply coffee to restaurants, grocery stores and institutions. The chain is also opening coffeehouses on the corporate campuses of Best Buy, General Mills and West Publishing and putting more shops inside airports, preferably in partnership with a large airport vendor.

Caribou needs prime locations in high-traffic areas. But given the intensity of the competition for such locations, that’s no easy prospect. Caribou executives recently hired real estate experts to facilitate the search.

Caribou stores typically span 1,600 square feet and, in keeping with the ski lodge look, contain rustic furniture, comfy leather chairs, knotty-pine cabinets and a fireplace.

The chain is open to a wide variety of real estate, from freestanding locations to downtown office buildings to regional malls to strips, says Toal. Caribou also has drive-through operations, and kiosks in Byerly’s and Lunds supermarkets in the Twin Cities and Heinen’s in Cleveland. Currently, most of its cafés are in neighborhood shopping centers.

The Pucketts, the mountain-climbing couple from the Twin Cities suburb of Maple Plain, founded Caribou in 1992. At first, the chain grew quickly, expanding into markets where Starbucks hadn’t yet gone. Then came that struggle for cash to expand, though, and things stalled. The Pucketts sold most of their equity to Crescent Capital in 2000; that eased things financially and brought new visions along with new management. The Pucketts remain minority investors.

There is a danger of growing too fast, says Geraty. Will Caribou be able to maintain, for instance, its successful culture and friendly image?

Coles says his plan is really quite simple; Caribou needs to focus on its strengths: excellent coffee, appealing ambience and good service. Even then, he says, there are perils, especially given the power of the competition. “There’s no room for error.”

© 2008 ICSC. All rights reserved. | Terms and Conditions | Privacy Policy | Contact ICSC | ICSC Home |