Vying with Starbucks: A Love-Hate Thing

As Starbucks' expansion loses steam, independent coffee shops reveal the subtle ways they compete with the coffee powerhouse

By Ricky McRoskey

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In July 2004, Kinley Pon was throwing his annual block party at his El Paso (Tex.) coffee shop, Kinley's House, on the same day that a Starbucks (SBUX) across the street was having its grand opening. Pon, 51, says he had planned the party for months—a day-long event with musicians, belly dancers, and local law enforcement intended both to promote his business and to raise awareness about drunk driving. Pon was surprised when an employee from the new Starbucks store walked across the street and started passing out Starbucks promotional cards to customers—on Pon's own patio. A spokesperson for Starbucks couldn't cite a specific policy regarding the distribution of promotions on a competitor's premises. "They did it for a week," says Pon. "But I allowed it to occur, because my reasoning was that they were going to pass them out anyways."

There's a love-hate relationship between Starbucks and the thousands of independent coffee shop owners in the U.S. For years, the Seattle-based chain has brought coffee drinking into the mainstream and revitalized the business of java, yet its ubiquity has also made survival more difficult for mom-and-pop coffee houses. In 2007, there were roughly 26,300 coffee cafés, kiosks, and carts across the U.S., and about 60% of those were independent, according to Mike Ferguson, the marketing communications director at the Specialty Coffee Association of America. On July 1, Starbucks announced it would be shuttering 600 locations (BusinessWeek.com, 7/1/08). On July 17, it listed the names and locations of the 600 specific stores it was planning to close of its roughly 11,000 U.S. stores. The closures prompted the question: What have independent coffee shops been doing to compete with the $9.4 billion company, the largest coffee retailer in the world?

Many cafes have survived by serving coffee differently from Starbucks. Skip DuCharme, who has run his 27-employee Lakota Coffee Co. in Missouri since 1992, says that the store's most popular drink is a latte served in a signature large green bowl that requires two hands to hold. A Starbucks opened down the street from DuCharme's place in January 2006, and since then, DuCharme says, his tactics have helped his business create a more at-home atmosphere than his competitor's.

"In Starbucks, everything is based on 'to-go,'" he says. "We give [our customers] real latte mugs."

Power of Freebies

Other stores give customers free refills on coffee—a strategy Starbucks tested in select stores in January. "A free cup of coffee goes a long way," says Theresa Tocio, co-owner of Tocio's Sunburst Café in Naples, Fla., that offers customers unlimited refills for the $1.50 they pay for a 12-ounce coffee. When a Starbucks opened inside a Target (TGT) next to her shop, Tocio and her husband offered free coffees to Target employees on break, since she says the workers weren't offered Starbucks discounts.

"The independents that are successful are really serving a different type of product," says Andrew Hetzel, a coffee industry consultant. "They have their own unique style and brand." For some, that means selling food or drinks that Starbucks doesn't have. Many stores that begin as coffee-and-pastry shops evolve into full-scale food cafés, giving customers more choice than chains can offer. At Jammin' Java, a coffee house based in Fayetteville, Ark., customers can buy everything from breakfast burritos to turkey sandwiches along with their coffee. "I started to see that I was doing almost as much business at lunch as I was doing coffee in the morning," says owner Brandon Karn, who launched the store in 2002.