The Rise (and fall?) of a Caffeine Empire

A few years ago, no one would have predicted a site like www.SaveOurStarbucks.com. Created by entrepreneur Paul Konrardy after the financially troubled coffee chain announced in July that it would be closing 600 American stores, the site gives loyal customers a place to sign petitions urging the corporation to take their beloved shops off the chopping block. It used to be that people signed petitions to keep Starbucks out of their neighborhoods. That’s if they were feeling nice. Others resorted to more drastic measures, from smashing windows to milder forms of vandalism.

To coffee aficionados, Starbucks has long symbolized the takeover of independent local businesses by a bland corporate behemoth. Now, as Starbucks scrambles to restore its image, it has become increasingly clear that Starbucks was perhaps the most important incubator of American coffee culture. But the very qualities that inspired Starbucks’s rise—better coffee, specialized espresso drinks, a welcoming ambience—turned out to be boons for indie shops determined to do all these things better.

In the United States, Starbucks is still by far the largest player in the specialty coffee industry. But it’s no longer the player. Struggling to balance profitability while playing catch up to independent shops, the once unstoppable corporate giant has found itself outdone by the little guys.

Lifted by the giant

It’s easy to understand the ambivalence many people feel toward the store. As Taylor Clark documents in Starbucked, his entertaining history of the company, the chain’s expansion was incredibly rapid. It opened 250 new stores in 1995. Then 340 the year after that, 400 a year later, all the way to a total of 3,500 stores by 2000. The company now has more than 16,000 stores worldwide. Some were acquired by buying out existing companies. Others were intentionally opened near competitors like Peet’s in a cutthroat effort to siphon off sales. If the company objects to its domineering image, it can’t complain that it didn’t earn it.

 

This antipathy was reflected in my own experience as a member of the libertarian think-tank world and a barista at one of Washington, D.C.’s leading independent shops. As I learned more about coffee, Starbucks seemed increasingly evil. The company was losing its focus on coffee quality, replacing skilled baristas with super-automatic machines, and burying its burnt espresso under heaps of milk and sugar. And wasn’t it driving independent shops like the one I worked at out of business? Yet my libertarian leanings had taught me to be wary of knee-jerk negativity toward corporations, and I suspected there was more to the story than anti-Starbucks sentiment might suggest.

For example, the charge that Starbucks was driving other shops out of business was never justified. Competitor Peet’s weathered the attack and continues to thrive. Relative newcomer Caribou Coffee has expanded to become the nation’s second largest coffee chain. Most importantly, there are more independent coffee shops today than ever before. The Specialty Coffee Association of America (SCAA), a trade group that tracks the market for high-end coffee, reports spectacular growth in the industry. In 1989, the SCAA estimated that there were just 585 coffee retailers in the United States. By 2006 that number had risen to nearly 24,000. Sixty percent of these shops are independently owned or part of micro-chains of less than ten units. Similarly, market research firm Mintel reports that independent shops were responsible for over 33 percent of coffee and doughnut sales in the U.S. in 2006, with Starbucks trailing at 29 percent and Dunkin’ Donuts at 22 percent. All of these numbers come prior to Starbucks’s store closings.

Starbucks didn’t take over the coffee retail market so much as it helped raise it out of its infancy. When current CEO Howard Schultz, then director of marketing, came back from a business trip to Milan with the vision of selling espressos, cappuccinos, and lattes in Starbucks stores, the idea gained little traction. The owners at the time preferred to stick with their current business model—focusing on roasting and retailing coffee beans—and were reluctant to get into food service. But Schultz made the formula work with his own coffee shop start-up, Il Giornale, and he eventually merged the two companies under the Starbucks moniker. As he expanded the chain, he gave many Americans a safe, trendy environment in which to enjoy their first taste of quality espresso coffee.

Starbucks was the gateway drug to specialty coffee. Customers tried it there first and then graduated to the often-superior products sold by indie shops. Even Duane Sorensen, owner of the proudly anti-corporate Stumptown Coffee in Portland, Oregon, concedes that Starbucks raised standards in the industry. Ward Barbee, publisher of the coffee publication Fresh Cup, is even more effusive. “Every morning, I bow down to the great green god for making all of this possible,” he told the Willamette Weekly in 2004. In short, Starbucks and indie shops grew up side by side. Indie shops learned from Starbucks’s retailing genius and built off its customer base. Then the indie shops left Starbucks in the dust.

Indie culture ascendant

After Starbucks ran out of ways to squeeze profits out of its coffee beans, it looked for other ways of getting the most value out of its retail space. It acquired its own music label and sold the CDs in stores. It added breakfast sandwiches and other food items to the menu. It even tried a movie tie-in, plastering stores with advertisements for the 2006 drama Akeelah and the Bee. The “Frappuccino” was its biggest breakthrough, a wildly popular milkshake with only a tenuous connection to coffee.

But as the mission shifted, the coffee suffered. Super-automatics replaced traditional espresso machines, relegating baristas to mere button-pushers, and coffee was delivered in pre-ground bags—two changes that improved speed of service but had a negative impact on drink quality.

Even as Starbucks was losing its focus, a hip, independent coffee culture was coming into its own, completing the transformation of coffee from grocery store staple to connoisseur beverage. At every stage in the process, from sourcing beans, roasting, grinding, and brewing, a community of coffee obsessives tinkered endlessly to make the ultimate cup of joe.

Coffee enthusiasts sometimes describe modern American coffee consumption as coming in three waves. The first wave was represented by coffee as a commodity, notable more for its caffeinating virtues than for its flavor. The second wave drew Americans away from their Folgers and Mr. Coffee brewers and into retail shops for better coffee and espresso beverages. Some of today’s elite roasters, retailers, and baristas like to describe themselves as part of a third wave, taking attention to quality and detail to new heights. Starbucks was very much a part of the second wave. The question now is whether it has any chance of competing on the terms of the third.

Order an espresso drink in a devoted independent shop and a Starbucks, and it’s easy to see the difference. For one, the Starbucks will probably be faster. You won’t see the barista touch the coffee, since the machine handles all the steps of espresso extraction. They’ll pour the milk by hand, but before they hand it over the counter they’ll slap a lid on, obscuring the beverage from view. It’s a neat and anti-septic process.

At the indie shop, the baristas get their hands dirty. They grind the espresso one serving at a time, usually dosing, leveling, and tamping by hand. The milk is steamed in small pitchers and poured with a flourish into the waiting espresso to make a design. It’s a bit of theater to show off the barista’s skills.

Though the latte art is incidental, the skills are absolutely necessary—as any barista worth his tamper knows, making good espresso isn’t easy. The barista must juggle a number of variables to get the right result. Is the equipment clean? Is the water temperature stable? Are the beans fresh? Are they too fresh? Is the grind setting dialed in? Has the ambient temperature or humidity changed? Has the right amount of grounds been dosed into the portafilter? Are the grounds leveled evenly? Are they tamped evenly and with the right amount of pressure? Did the shot run too long or too short? All these factors and more affect the quality of the shot, and that’s before steaming the milk is considered.

The espresso side of the business has been the most visible, thanks in large part to the media appeal of latte art and barista championships. In these competitions, baristas compete publicly to serve four espressos, four cappuccinos, and four signature drinks of their own creation to a panel of judges. It’s an intense process, with scores based on cleanliness, presentation, taste, technical prowess, and other factors. Winners of regional competitions advance to the national championship and the national champion gets to represent the U.S. in the World Barista Championship. Winners get fame, cash prizes, a cover shot in Barista magazine, and rock star status in the coffee world. (Needless to say, none of these champions have come from Starbucks.)

 

The coffee side of the business doesn’t enjoy quite the same sex appeal, though it’s equally important. The last decade has seen leading roasters seek out ever more particularity in their coffees. The comparison is often made to wine, with perhaps a touch of envy. An oenophile would not be satisfied with a wine classified as just an “Italian red” or a “French white,” but for a long time country or region of origin was all that many coffee retailers provided. Now buyers like Peter Giuliano of Counter Culture Coffee in Durham, North Carolina are forming direct relationships with coffee farmers. Spending months abroad, they tour farms and co-ops, helping to improve the quality of the crops and paying top dollar for the right to sell it. As a result, it’s not uncommon today to see coffee labeled not just by country, but also by region, co-op, farm, or even individual micro-lot. Though the best coffees remain a bargain compared to sought-after wines, coffee prices are catching up. Panama Esmeralda, one of the world’s most celebrated coffees, sold for a record $130 per green pound at auction this year. Customers are on board too, handing over $99 for just a half-pound bag. Starbucks has been long the butt of jokes to people who can’t imagine paying $2 for coffee, but these prices make Starbucks look like a bunch of pikers.

The empire strikes back

The indies’ rise did not go unnoticed by Howard Schultz. “[We] desperately need to look into the mirror and realize it’s time to get back to the core and make the changes necessary to evoke the heritage, the tradition, and the passion that we all have for the true Starbucks experience,” he wrote to then-CEO Jim Donald and other board members in a 2007 email leaked to the weblog Starbucks Gossip. “While the current state of affairs for the most part is self induced, that has lead [sic] to competitors of all kinds, small and large coffee companies, fast food operators, and mom and pops, to position themselves in a way that creates awareness, trial and loyalty of people who previously have been Starbucks customers. This must be eradicated.”

Schultz came back as company CEO amidst a steep decline in Starbucks’s stock value. He aimed to put the focus back on the coffee and restore Starbucks’s reputation for quality. In a dramatic show of intention, he ordered all American stores to close for a few hours on February 26 for a barista training session. Indie baristas were unimpressed—the sessions, they claimed, were just a publicity stunt. A few hours of training on a super-automatic machine wouldn’t make much of a difference, especially compared to the weeks or months many of them put in before they were allowed to serve a customer.

It wasn’t all fluff, though. Some of the new practices, such as using smaller pitchers of milk and freshly grinding all their coffee, were real improvements. And the Pike Place Roast Starbucks introduced along with a retro throwback to their old logo was notably less bitter than the usual dark roasted brews. But this was just playing catch up to the indies until Schultz made a big announcement at the 2008 shareholders’ meeting: Starbucks had just bought out the Coffee Equipment Company, makers of a high-tech, one-cup-at-a-time brewer called the Clover that had become the darling of the specialty coffee world.

The Clover is a wonder of engineering. In principle, it employs an old method of brewing coffee: Grind the beans, immerse them in hot water, let them sit, then filter and enjoy. A cheap French press operates basically the same way. So why all the hype—and the $11,000 price tag? What makes the Clover so desirable is that it gives baristas unprecedented control over the amount of water used, its temperature, and the extraction time. Every cup is freshly ground and brewed on the spot in less than a minute, compared to about four minutes for a press. More importantly, clean up is as easy as wiping the filter with a squeegee and rag.

Most shops rely on large drip brewers and insulated coffee pots. This limits the number of coffees they can brew at any one time and makes it hard to keep pots at peak freshness. The Clover is different. Shops that took a chance on it could offer an entire menu of coffees and brew each one on demand. It brought to regular coffee some of the theater that had been saved exclusively for espresso and gave customers a wider array of choices. Leaders in the industry saw great potential in the Clover to generate interest in coffee.

Unfortunately, Schultz saw that potential too. Soon after the announcement that Starbucks had bought the Coffee Equipment Company, Starbucks confirmed that no more Clovers would be sold to outside shops and that it was shutting down CloverNet, the online resource used to track sales and brewing parameters. The move came as a shocking blow to existing Clover owners and those who aspired to own one.

But the appeal of the Clover was never all in the technology. Sure, it brews a great cup, but so does a French press or a vacuum pot or a pour-over filter—three other methods of single-cup brewing that are enjoying renewed interest from high-end coffee shops. The Clover’s greatest virtue was that it re-focused customers’ attention on coffee. It brews precisely, but it can’t magically make mediocre coffee taste better than it is. And that’s where Starbucks will have a hard time competing: They have the muscle to buy technology, but sourcing great beans, roasting them, and delivering them fresh to their stores is another matter. The company’s business model is based on large purchases and longer holding times between roasting and brewing. It may try to duplicate the success of its more nimble competitors, but it certainly won’t be easy to do.

Coffee blogger Tonx, an early fan of the Clover, congratulated the Coffee Equipment Company for its sale and expressed optimism about what Starbucks’s purchase meant for coffee. “The sky isn’t falling so much as the ground is slowly rising,” he wrote. “Schultz speculated in his presentation that some people might even be tempted to [gasp] start drinking coffee black, no sugar. If that’s the meme SBUX wants to push, I’m confident that it will be quality-focused microroasters that reap the most benefit over the long term.”

And with that Starbucks comes full circle. After years of rapid expansion and raising the bar for its competitors, Starbucks now finds itself shuttering stores and learning from independents. Starbucks has lost stock value and the indies have lost the Clover. But in the end, it’s customers who have come out on top. Shops of all sizes have realized they can’t compete with bad coffee, and are bringing the focus back to where it ought to be. Starbucks isn’t going away, and there’s no sign that the cozy independent is fading either. Instead, the very stores Starbucks helped to create are putting pressure on it to improve. The independents may have forged the third wave of coffee consumption, but don’t count Starbucks out yet.

-Jacob Grier is a freelance writer, barista and bartender. He writes at www.jacobgrier.com. Photography by Katherine Ruddy.

 

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