Rise of the Specialty Small Coffee Business

They are evangelists for the power, mystery, taste and complexity of the caffeinated beverage and its sly ability to bring people together.

Rhinehart, the executive director of the California-based Specialty Coffee Association of America (SCAA), a 3,000 member trade association, said coffee is a “remarkably recession-proof product, along with alcohol and tobacco.

“Coffee is ubiquitous, affordable and if you’re working, it’s a big piece of your life. It also transcends employment status. It did pretty well during the recession and is doing well as the economy recovers. Now outside-of- home coffee consumption comprises more than 30% of consumption.”

Rhinehart’s observations are borne out by a March study from the National Coffee Association (NCA) of the U.S.A, which found daily consumption of gourmet coffee beverages is up to 34% from 31% in 2013, while daily normal non–gourmet coffee drinking has dropped from 39% last year to 35%.

Rhinehart said American’s aren’t necessarily drinking more coffee, but are changing where they drink coffee and the quality of the coffee they’re consuming.

 

Growth in the Specialty Small Coffee Business

He said, “We’ve seen some growth in competition for Starbucks,” much of which has come from entrepreneurs who started their own specialty small coffee businesses.

“If you’re not risk intolerant, you can start your own small coffee business because the capital investment is lower than starting a restaurant,” he said, adding that many of the new cafe owners are focusing on younger, higher end demographics and less on “soccer moms” and the Starbucks demographics.

“We estimate there are upwards of 50,000 coffee retailers across the country,” Rhinehart said. He said espresso-based beverages entered the American consciousness outside of immigrant communities in a big way in the past 10-15 years and continue to grow in popularity.

“This is a drink that is tailor-made for you, something that never existed before or will after. The concept of a handmade drink introduced a value proposition, a drink just for you,” he said. “There is a certain intimacy apart from it being a pure transaction. The trend today is to convert that personalized interaction to a drip coffee world.”

What has compelled these new café owners to launch a small business coffee shop during the worst recession in 50 years? And how do they compete with national giants like Starbuck’s, Seattle’s Best, Caribou Coffee and Peet’s Coffee & Tea?

Saadat Awan, owner of the soon to be opened Woodcat Coffee Bar in Los Angeles’ Echo Park neighborhood, is emblematic of this new breed of coffee shop owners passionate about good coffee and its role in Americans’ lives. He’s not deterred by the sluggish economy.

“I played music in bands and worked with architectural engineering firms and worked in the coffee business and found I was happiest when I made coffee for people,” he said. “I’m doing what I always wanted to do.”

Awan hopes to create a coffee-focused shop that won’t feature sandwiches, art shows or bands making guest appearances.

“I want to provide really good coffee at a good price with no attitude,” he said.

Awan praised the Starbucks chain of coffee shops.

“Starbucks is great. But it’s like comparing a really great specialty steak house featuring grass-fed, aged beef to a chain house that serves millions of steaks a year. We’re in a different niche, but I think we can co-exist. I think the specialty coffee business can’t really compete with Starbucks on an equal footing. But we can provide a completely different experience.”

SCAA Senior Director of Symposium Peter Giuliano, a 25-year veteran of the coffee industry, said he’s seeing an uptick in independent specialty coffee shops.

“It feels like a trend,” Giuliano said. “We think there is a slow, steady rise that parallels the growth of the specialty coffee movement. We credit the start of the specialty coffee revolution to Peet’s Coffee opening in San Francisco in the 1960s. That inspired another wave with Coffee Bean and Tea Leaf and Starbucks in Seattle opening in the ‘70s and ‘80s. Now the people who grew up drinking good coffee are opening their own coffee shops.”

More than Coffee

Giuliano said coffee carries an allure that extends beyond the beverage itself.

“One of the great things about small coffee businesses is they are assets to the community: they serve as meeting places, a kind of a third place, not where you work or live but a place you can go to spend time and interact with people. People need that.”

He said as more Americans work from home and not offices, they go to coffee shops for social interaction and stimulation. In the 1980s and 1990s, specialty coffee shops did 90% of their business before 10 a.m.

“We’ve since noticed that the army of people working at home goes to coffee shops all day long,” he said.

When Sara Peterson launched Scout Coffee Company six months ago in San Luis Obispo, Cal., with her husband, John Peterson, it was the culmination of a decade’s worth of planning. The couple had worked for the coffee roaster Verve in Santa Cruz, Cal., all the while seeking a location and saving money to open their own business.

“If you offer a great product with an awesome atmosphere and terrific service, you can make it work,” she said.

She said the public response to Scout Coffee has been overwhelmingly positive. “On weekends we have lines out the door into the streets. We have an awesome staff we’ve spent a lot of time training. We feel like we’re a part of the community.”

The Petersons have tapped into a demographic that not only embraces small businesses that serve superior products, but also supports them.

‘We buy and serve the top 1% coffee in the world and people can taste the difference. Once they try us, they come back for more.”

Nick Cho, co-founder of San Francisco’s Wrecking Ball Coffee Roasters, a roasting company with a retail location, had run coffee shops before. Cho said despite the difficult economy, coffee has done well. Cho said the economic outlook is good for independent specialty coffee shops. “The market is not saturated and there is still room for another 20,000 to 30,000 of us.”

Cho, a national figure in specialty coffee with his partner, Trish Rothgel, said coffee uniquely represents an intersection between food and beverage and a lifestyle brand.

“People do identify with the coffee they drink. Like the blues jeans you wear, they reflect your individual tastes. The growth in independent shops is partly due to the fact that many people don’t identify with national chain, but want to be more neighborhoody, interesting and unique.”

Alex McCracken, co-owner of The Wydown Coffee Bar, in Washington, D.C., wanted to open his own shop, but the economy was tough and coffee prices unstable and he saw his native St. Louis market as too saturated. So he and his brother moved to Washington, which he saw as overripe and underserved.

“This is a very educated, densely populated city where 40% of the residents don’t own a car and there are only a handful of good coffee shops,” McCracken observed.

He said St. Louis really embraces the car culture.

“You had to have food and a drive-through and that gets expensive. My “Aha!” moment was when I was standing by Nick Cho’s coffee shop with no food and no drive-through and thought: St. Louis coffee shops can’t do this.”

McCracken said he studied French literature instead of business, otherwise he would have learned about a key statistic: population density.

“The busiest location in St. Louis might have 5,600 people per square mile. But in my DC neighborhood it’s 30,000 people per square mile. You’re paying the same price for the espresso machine, your chairs and countertop, and maybe a little more for labor and rent, but your potential customer base is two, three or even five times bigger.”

Mike Marquard, founder and co-owner of Blueprint Coffee in St. Louis, said Blueprint and many specialty shops welcome their Peet’s and Starbucks’ competitors.

“They create customers for us. They prepare people to pay more for coffee, but are limited by their size,” he said. “The more they enter the market, the more we take customers away from them. We are the next phase in that customer journey for someone looking for great coffee.”

 

Business Advice From Specialty Coffee Pros

Mike Marquard, co-founder and co-owner of Blueprint Coffee in St. Louis

“You have to understand a profit and loss statement for your business, what it should look like and how it applies to you. A good budget shows what your costs should be, what you can expect to pay out in payroll and expenses and what kind of profit you should expect. People who don’t, go out of business and don’t know why. It’s only romantic for a year. If you have a wife and kids, you have to pay bills.”

“When I hear complaints, it’s not usually about the price, but the service. Your customers will tell you what you need to focus on. You’d better be listening.”

“It’s hard to be accountable when it’s just you. We are a strong group of owners who keep each other accountable and focusing in on the numbers. It’s not too difficult once you learn it and it helps you to stay honest.”

“Owners need to be both a service person passionate about coffee quality and creating an excellent experience while spending the rest of the day running a business with your eye on staffing and pricing.”

Alex McCracken, The Wydown Coffee Bar in Washington, D.C.

Be patient when seeking a location. “We had a few deals fall through, but we wanted an A plus location. If a great location becomes available, often there will be other bidders and I’m going to lose before I even begin in a bidding war with Chipotle or Starbucks. But we found the right realtor and developer who wanted independent businesses, not chains, and we’ve got a great location in a booming neighborhood.”

“You take leaps of faith when you launch a small business. You accept checks from friends and investors and family. Things will break down and you need to know what to do when that happens. But if you make too many mistakes, you’ll get burned and go out of business. Nobody wants to pour their lives into something and go out of business. So the best advice is know what you’re getting into first.”

Saadat Awan, owner of Woodcat Coffee Bar in Los Angeles

“Don’t lose sight of the little things, such as utilities, especially water service.

“You should make sure the utilities are functional and work well. I know that’s pretty basic, but if you overlook it, it can really hurt you down the road.”

“I also sought advice from other cafes around here who recommended that I use permit expediters. That really helped to speed the permit process, which can be lengthy in big cities like L.A. My best advice is don’t go in over your head and don’t overcomplicate what you’re going to do.”

 

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