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Caribou Coffee taking on king of the hill

By Jim McCartney

The concept for Caribou Coffee was conceived on a mountaintop, but the company doesn't expect to see the summit again for quite some time.

Caribou Coffee is taking on java giant Starbucks by opening cafés that resemble an Alaskan lodge.

Caribou executives know it's an uphill battle they face, given who has already claimed victory at the top of the mountain.

Perched at the coffeehouse peak, of course, is Seattle-based Starbucks, the predominant coffeehouse chain in the world, with 2,079 stores worldwide -- including 187 overseas.

"Our intent is to be a national player," said Jay Willoughby, a restaurant executive who was hired as president of the Minneapolis-based Caribou Coffee chain in 1997.

With 123 stores, Caribou Coffee may be the nation's second largest nonfranchised chain, but it is still mountains away from Starbucks.

Though Starbucks dominates the gourmet coffee-shop industry -- a fast-growing and highly fragmented business -- there's plenty of room for others. While Starbucks posted sales of $1.3 billion last year, the specialty-coffee industry is estimated to produce about $3 billion in sales. The Specialty Coffee Association of America, Long Beach, Calif., predicts there will be 10,000 gourmet coffee shops in the United States by year-end, up from 3,500 shops in 1997.

Given that half of all U.S. residents drink coffee, and the growing trend toward upgrading to gourmet coffee or espresso-based specialty-coffee drinks, the market still has plenty of growth potential. What's more, people seem to see coffeehouses as social gathering places.

"Once you drink gourmet coffee, you don't go back to Folger's," said Alan Hickok, a securities analyst with U.S. Bancorp. Piper Jaffray in Minneapolis. "Sales of specialty coffee are very durable -- you simply have to have your cup of coffee. You'll be willing to sacrifice a lot of other things before you'll give up that."

Quality coffee also is perceived by many to be an affordable luxury; customers increasingly are willing to spend a bit extra for a better-tasting jolt of caffeine.

But growing market aside, Willoughby knows that it's a tricky business to go from a small regional chain to a national one. It takes business experience and financial discipline to launch a national expansion. In fact, that's the main reason the food industry veteran was hired -- to guide the young company and add the industry experience lacked by its young founders, John and Kim Puckett.

"There's a lot of instability with rapid growth," Willoughby said.

Realizing this challenge, the Pucketts and their investors conducted a wide search for a top executive before choosing Willoughby, a 24-year veteran who had worked both at Boston Market and PepsiCo's restaurants, which include Taco Bell, KFC and Pizza Hut (since spun off as an independent company). Willoughby's main responsibilities include stores, stability, branding and positioning. Kim Puckett, chairman, has been chiefly responsible for store design, while John Puckett, CEO, has concentrated on business strategy and coffee-buying.

Willoughby's first goal was to get the chain to the point where it was making a profit. A sound system of warehouse and field operations has to be in place so that the goods are moving to the stores quickly, efficiently and cost-effectively.

Expansion

Also, for the last two years the company has concentrated on adding stores only in markets where it already operates, such as Minneapolis-St. Paul; Chicago; Detroit; Atlanta; Charlotte and Raleigh, N.C.; Cleveland; and Columbus, Ohio.

"We felt we had to strengthen our base," Willoughby said. Now, Caribou is the largest or second largest coffeehouse chain in the markets where it operates, he noted.

Another mission was, and remains, to ensure that store managers and employees develop a "first-name" basis relationship with their regular customers. That meant finding a way to get managers to stay at their stores. As a result, the chain ties the managers' bonus raises directly to the number of years they have been at their store. It's a bit early to conclude just how effective the strategy has been.

Finally, Willoughby wanted to bring more "clarity and definition" to the brand that is Caribou Coffee.

The Caribou Coffee concept was created after the Pucketts backpacked through Alaska -- a story that has become legend at the company. On the summit of Sable Mountain in Denali Park, the couple wanted to match in the business world the spirit of accomplishment they achieved climbing the mountain. They also wanted to bring the mountain experience to their stores, and create a place where people could "escape the daily grind.''

In an effort led by Barry Judge, Caribou's vice president of marketing, Caribou conducted consumer research and brought in an advertising agency, Carmichael Lynch of Minneapolis, to mold just how to position the Caribou Coffee brand. One way to define it is to describe its "attitude."

They came up with these catchphrases: "Outdoorsy. Leave smiling. Hand-made. Norm! Down to earth. Clever. Transformational.''

Now Willoughby feels the company will be ready soon to go from being a Midwest regional player to a national one. But before that can happen, Caribou Coffee will need to raise money. One option is an initial public offering on the stock market, a stronger possibility now that the chain has become profitable.

But if Caribou Coffee is to become a strong national chain, it must be able to hold its own with Starbucks. While Willoughby concedes that Starbucks has done well in focusing on service and product quality, he said that Caribou competes effectively by offering a slightly different roast of coffee and a warmer, more relaxing in-store environment.

Caribou also takes a lot of pride in the freshness and quality of its coffee, as can be readily seen at its Minneapolis headquarters where it tests, roasts and packages most of its coffee. The company custom-roasts its beans in small batches to enhance their characteristics, and it has a stringent freshness policy: Coffee is packaged immediately after roasting, and it is not sold more than 21 days after roasting or more than seven days after the opening of the package.

Caribou's interior design is also clearly differentiated from Starbucks. While Starbucks coffeehouses have a sleek, urban feel to them, Caribou strives for an Alaskan lodge setting, with knotty pine cabinetry, and sometimes a fireplace and cushy chairs or sofas.

So far, Caribou has shown it can hold its own against any competitor.

"In markets where they compete head-to-head with Starbucks, they've done just fine," Jaffray analyst Hickok said.

Locations

Caribou's retail strategy is quite simple -- put stores wherever there are a lot of people. In the Twin Cities, for instance, you can find Caribou stores in downtown Minneapolis, the Minneapolis-St. Paul International Airport, suburban strip centers and urban neighborhoods.

Caribou also can be found in many of the area's major shopping centers, including Rosedale, Southdale and Mall of America. Although the company feels its ideal size is 1,500 square feet, stores range in size from 500 to 2,000 square feet.

One strategic approach has been to develop partnerships with other retailers, such as Eatzi's, or building stores next to -- and sometimes connected to -- Bruegger's Bagels, Blockbuster Video and Border's Books. The company also sells its coffee in upscale grocery stores, such as Lund's and Byerly's in the Twin Cities and Heinin's in Cleveland.

Is there room for a challenger to Starbucks? Hickok certainly thinks there is, and he sees potential in Caribou.

"There's no consumer category, with the exception of Microsoft, where consumers have been satisfied with having just one choice," he said. "Absolutely, there's room for a No. 2.''