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Shopping Centers Today -> August 2005
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EXTRA CAFFEINE
Starbucks isn’t the only option for a coffee break these days
By Maura K. Ammenheuser
Shopping center landlords increasingly crave caffeine, and Starbucks is not the only option for a fix these days.
The U.S. is positively percolating with coffeehouses, as consumers find their favorite jolt in the form of $3-and-up lattes, cappuccinos, iced mochas and, for diehards, just black coffee. Little surprise, then, that a decent coffee retailer is increasingly seen as de rigueur for any self-respecting shopping center.
Starbucks is by no means getting all the action, though for sure it dominates, with nearly 9,500 units worldwide (6,751 in the U.S.). The Seattle-based behemoth posted $5 billion in revenue last year. But there are plenty of smaller regional chains, many of them expanding. These readily admit they cannot compete on scale with Starbucks — none have more than a few hundred units — but they insist they can on ambience, because their own stores offer a cozier atmosphere and superior java.
They are all part of a coffee craze. In 2003 there were 11,250 coffee cafés operating in the U.S., up nearly 20-fold from 585 stores in 1989, according to the most recent stats available from the Long Beach, Calif.-based Specialty Coffee Association of America. These café’s sales totaled $6.12 billion in 2003, of which Starbucks accounted for 37 percent, says Mike Ferguson, an association spokesman.
Little wonder, then, that as the public clamors for coffee, so do landlords.
Gotta love ’em
“If you didn’t have it here, it would definitely be missed,” said Patsy Sanquist, area marketing director at Simon Property Group’s The Shops at Mission Viejo (Calif.), which boasts a Gloria Jean’s, a coffee chain that favors malls. “It would be a mistake not to have it.”
Coffeehouses “provide a place for our shoppers to congregate, relax or meet up with friends or family,” said Terry W. McEwen, president of Poag & McEwen Lifestyle Centers, Memphis, Tenn.
“Any coffeehouse brings in people,” said Kathleen Duffy, director of property management at Wohl Investment Co., Irvine, Calif., which leases 17th Street Promenade, a Costa Mesa, Calif., open-air center that added a Diedrich Coffee shop in May. Irvine-based Diedrich has 200 company-owned stores and franchises under three brands: Diedrich, which is steadily expanding in Southern California; Coffee People, in the Portland, Ore., area; and Gloria Jean’s.
When news of the Diedrich lease got out, the other merchants said, “‘Oh, good, they’ll bring in business,’” Duffy recalls. Indeed, a month later, “traffic has picked up” at shops sharing Diedrich’s building, she says.
The coffee shop operators themselves are not reticent about the advantages they bestow on shopping centers. Coffee shops attract morning commuters, livening up centers at hours during which things are usually quiet, says Paul Goldman, vice president of real estate at Los Angeles-based Coffee Bean & Tea Leaf, which has more than 300 units in the U.S. and abroad.
They draw hundreds of people daily, says Steve Olson, senior vice president of franchise development for It’s A Grind, a Long Beach-based chain of about 60 franchised units.
“A coffeehouse brings in shoppers and helps keep them there,” said Judson Kleinman, president of Corporate Essentials, a New Jersey beverage firm catering to offices.
Café olé!
This brewing boom is about more than just java, sources say.
“The coffeehouse has become the place for social interaction,” said Diedrich CEO Rocky Laverty. People spend more money on their coffee now because the quality is better and because “it’s not $4.50 for a drink — it’s $4.50 to make my day.”
A good barista knows the regulars’ names, says Olson. “It’s like you’re at ‘Cheers,’ ” he said.
Coffeehouses typically offer comfy, living-room-like seating in spaces of 1,000 square feet to 1,500 square feet, pastries and other food, Internet access (often) and live entertainment (sometimes).
There are many other chains, including Minneapolis-based Caribou Coffee, with 310 units, Peet’s Coffee & Tea, based in Emeryville, Calif., which had 92 units as of last year, and Seattle-based Tully’s Coffee Corp., with 350 company-run and licensed retail shops. Last year 16 percent of adults drank gourmet coffee daily, according to the association, so the market for daily joe is hardly saturated. And the American taste for coffee is not going away, experts say.
“It is not a trend,” said Kleinman. “It is now a part of our culture.”
Once customers discover high-quality coffee, they will not tolerate nongourmet grounds, says Bob Phibbs, a Long Beach-based retail sales and marketing consultant. And it will stay that way “as long as the best operators don’t make it into a commodity,” Phibbs said.
Coffeeland coup
Historically, landlords have tended to favor Starbucks over the smaller, lesser-known private chains, but that is not necessarily the case anymore, sources say.
“Initially, Starbucks got everything,” said Olson. “They pay full price. … If it’s a bidding war, you’re never going to compete with them.” But “more and more, we’re getting locations because it’s much faster for us to get into that space. … Landlords now have viable choices.”
Duffy confirms that Starbucks is more likely to pay top dollar for a site and says that could be said of Diedrich too. Both are public companies with deep pockets, she says. “The smaller chains, [with] individual owners, can’t really afford to pay that.”
Starbucks’ financial success combined with “the experience they have created within the store” attracts landlords, says McEwen. But plenty of others have those qualities these days, he notes, including Caribou Coffee, The Coffee Beanery and Gloria Jean’s. “We are talking to several others now,” McEwen said. “We have also done deals with companies such as Panera Bread, Atlanta Bread and Bear Rock Café, which sell a lot of coffee.”
With Starbucks now so ubiquitous, landlords have come to see that they need an alternative coffee chain if they are to stand out, and an independent chain is probably it, says Goldman.
The non-Starbucks folks say they offer the classic perks of a smaller business: drinks customized to local tastes, attention lavished on individual stores and a conscious appeal to those who love to hate the market leader. Such people include Alex Chu, a San Diego resident who bypasses Starbucks in favor of Diedrich’s because “I’m kind of anti-monopoly.”
It’s still a business
But it is not enough to be unique. It is important for coffeehouses, like all retailers, to be in the right location, too. “Remember, you’re dealing with addicts here,” said Phibbs. “They want their coffee every morning.”
All of which has led to something of a scramble for the best real estate, sources say.
There can be other growing pains too. When Diedrich bought Coffee People and Gloria Jean’s in the late 1990s, for instance, the company had difficulty “digesting” some of the acquisitions, recalls Laverty, who became CEO in 2003. Only in recent years has the company had the revenue to update the stores, he says. Diedrich sold its 316 international Gloria Jean’s franchises this winter and shelved plans to expand the Diedrich brand to Colorado, Florida and Texas to keep its geographic focus tight.
Diedrich also went public in 1996 and has suffered some of the woes that can follow an IPO. At press time the company was re-auditing its report for the current fiscal first half and those of 2002, 2003 and 2004. The initial reports stated fiscal 2004 total revenues of $54.6 million, slightly off the previous year’s $54.7 million, with retail revenues at $31.6 million, down from $33 million. (The company’s 2005 fiscal year was ending at press time.)
The restatements are needed because of accounting issues related to leases, among other things, but they are unrelated to cash flow and do not affect store performance, says CEO Laverty.
Indeed, such revenues would indicate the company has little to worry about. There are still a whole lot of people drinking a whole lot of coffee.
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