Competing against Starbucks Corp. can be a real grind. Just ask Mike Sheldrake.

The owner of Polly's Gourmet Coffee in Long Beach, Sheldrake said he was in danger of losing his business five years ago when Starbucks opened a second store down the street.

He'd already endured the opening of one Starbucks less than a mile away, so this time he fought back by hiring a sales and marketing director who came up with more than 100 suggestions to compete against the Seattle-based giant.

He changed the store's lighting, switched manufacturers of paper cups, and hired a new crew of employees that went through a rigorous training program. To get the community involved,

Sheldrake held a contest for local artists to redesign the store's logo and a panel of local judges picked the best designs.

"Our sales ended up increasing 20 percent or more after that," he said. Earlier this year, when Peet's Coffee & Tea opened a store down the street, Sheldrake barely felt a ripple.

"I expected all the locals to come in and say, 'Poor Polly's, another chain store is coming in,' but nothing happened. We weathered the storm," he said.

Though Starbucks controls 38 percent of the specialty coffee market in the United States, it is still outnumbered by small independents, which hold a 52 percent share. Regional chains such as Peet's Coffee & Tea and Coffee Bean & Tea Leaf control another 10 percent.

"No matter how many stores or how fast Starbucks seems to open, the number of independents remains constant," said Mike Ferguson, a spokesman for the Specialty Coffee Association of America.

Keeping focus

Still there are hazards, and while the number of coffee stores doubled ever year throughout the 1990s, when entrepreneurs with a passion for coffee decided to jump into the craze, many ran aground.

Because coffee is a small-ticket item, retailers need to document everything from sales per hour to the number of muffins sold. Many mom-and-pops, meanwhile, have fallen into a trap by trying to do too many things in the name of cash flow.

"The temptation is enormous for independents to increase their average ticket by adding more food to the menu or paying less for the coffee," Ferguson said. "But the last thing you want is for the restaurants on your street to consider you the competition. It's much easier for them to add coffee to their menu."

Coffee stores can be profitable or they can be money pits. Statistics vary because of the size of a store and overhead costs, but many coffee retailers generate revenues of $250,000 to $500,000 per year per store.

Austin Lee, a supervisor at City Bean Coffee in Westwood, said sales at his location have remained constant, even though Peet's Coffee opened a new store on Westwood Boulevard and Starbucks is across the street.

"We think Starbucks is the one that got hurt badly when Peet's came in," said Lee, adding that City Bean gets freshly-roasted coffee delivered every other day from a facility in Culver City. "And, of course, we get a lot of Peet's and Starbucks customers who come in and want to see what our coffee tastes like."

Many retailers give Starbucks credit for turning more consumers into specialty coffee drinkers.
"Starbucks created more opportunity for us because they educated the market," said Sunny Sassoon, chief executive of Coffee Bean & Tea Leaf in Los Angeles, which grew slowly in the 1980s and 1990s under founder Herbert Hyman. "But I think we are giving Starbucks a good run for their money."

Coffee Bean has tried to beat Starbucks at its own game by clustering its stores close together even on the same block to capture market share. Coffee Bean operates 10 stores within a three-mile radius of Larchmont. Though customers seem baffled with so many coffee stores near each other, retailers believe the strategy works. Older stores in the area consistently churn out strong same-store sales and outperform in small, densely-populated communities.

Steven Krolak, editor of Fresh Cup magazine in Seattle, said consolidation will make it much more difficult for consumers to identify whether their favorite brand is truly an independent operator or one owned by a large corporation. Starbucks bought Seattle's Best Coffee last year and also owns Tazo, a Portland tea company that it purchased in 1999. Both brands are marketed separately from Starbucks.

All told, he thinks there's plenty of room for competition. "You can find many detractors of Starbucks but that certainly hasn't hurt their ability to market themselves," he said.

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