Starbucks Paved Way, and Now It Must Pay

With Rivals Springing Up Everywhere, Is It Too Late for Chain to Rebrand Self?

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Ford, Sears, Keds, Diner's Club. The brandscape is full of names that grew whole business categories and then watched others follow their lead and eat their share. Now that may be the real threat to Starbucks.

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The marketing world loves to discuss Starbucks' efforts to rebuild the brand, so it's not surprising that most experts and bloggers welcomed CEO Howard Schultz's announcement last week that he intended to improve the chain's latte drinks, offer customers a loyalty program and generally "fight to the death not to allow any company to take our position away."

To be sure, Starbucks is still the dominant force in the U.S. coffee market, accounting for $6.6 billion of what the Specialty Coffee Association of America estimates to be a $13.9 billion market. But Starbucks has also, essentially, been a catalyst for the growth of other chains, each of which has carved out its own brand-experience niche.

"We couldn't do what we do today if Starbucks hadn't paved the way," said Marc Johnson, director-marketing for Intelligentsia Coffee & Tea. Founded in 1995, the Chicago brand is sold in about 850 coffee shops, restaurants and grocery stores.

'Third wave'
Mr. Johnson, part of Starbucks' sales team in the mid-1990s, said his company is in the "third wave" of coffee in the U.S. The first wave, he said, was the arrival of coffee in the grocery stores, and the second wave was the advent of Starbucks and Peet's. He said his company's opportunity for differentiation is in staying small enough to have closer-knit relationships with farmers.

"Our coffee isn't cheap. ... But we know all of the reasons it's more expensive, so that our customers see the value in what we're producing,"he said.

Peet's Coffee & Tea, founded in Berkeley, Calif., in 1966, posted $168 million in 2007 retail revenue. Los Angeles-based Coffee Bean & Tea Leaf, founded in 1963, now has 400 locations in 14 countries. Coffee Bean has attracted customers by offering more tea drinks, food and, in some cases, more seating room. Caribou Coffee, which started in Minneapolis in 1992 and tries to differentiate itself with a less pretentious atmosphere, now has about 500 stores in 19 states and posted $240 million in U.S. coffee house sales.

Robert Nelson, president of the National Coffee Association, said Starbucks did such a good job educating the consumer about the coffee experience that now they look for different fixes at different times.

"What we have found is that people try coffee, people like choice, they may drink a different type of coffee from a different vendor this afternoon and again in the evening," he said.

Past the brink?
Although some think Mr. Schultz can head off all these competitors, others believe it may be too late.

Robert Passikoff, president of Brand Keys, said Starbucks fell for the second-consecutive year on his firm's brand loyalty index, now trailing McDonald's in the coffee category.

Ric Rhinehart, executive director of the Specialty Coffee Association, pointed to Starbucks' focus on convenience and speed of service as when trouble started to brew. "If you do that, you start to attract competition of Dunkin' and McDonald's, and McDonald's understands convenience probably to a level that no one else does," he said.
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