Starbucked

by Taylor Clark

  In truth, how we characterize a Starbucks’s impact on an area may come down to a matter of taste — whether you see the company’s arrival as revitalization, gentrification, or plain homogenization. As the company’s supporters love to point out, Starbucks has a near-spotless record when it comes to churning out stores that are immediately popular, so how can anyone claim it isn’t wanted? “I find it very ironic that Starbucks often wants to go into a neighborhood and there’s a backlash, then it opens and it’s doing its maximum volume pretty much out of the gate,” said Harry Roberts, the former Starbucks marketing executive. “A market like San Francisco is wildly successful for us, but people down there have put up billboards against Starbucks. Why? The place is packed! What are they afraid of?” Obviously, being popular doesn’t necessarily mean a business is good for the community — Wal-Mart has no trouble attracting customers, despite its drawbacks — but many towns are happy just to have a bustling, chic storefront in their midst. Never mind that Starbucks isn’t adding anything unique, or that it makes an area resemble a strip mall that much more, or that encouraging locals to spend $4.50 every day on coffee may not be the most prudent route to economic stability. For a struggling area, a Starbucks is something to be excited about. And with good reason: the company might not cause a local economic revival, but it’s almost always a sign of it.

  The Hosford-Abernethys and Berkeleys of the world aren’t interested in this kind of “revitalization,” however, because they don’t need it. Above all, their citizens want to feel that the neighborhoods in which they live are filled with an inimitable charm that makes them unlike any other place, which describes everything Starbucks is not. If you’re not adding something distinctive to the community, they say, you’re weakening it; so even though a new Starbucks would draw customers in droves, it still poses a threat. This argument makes some at Starbucks positively indignant. “I was just in a Starbucks near my daughter’s apartment in New York — she can’t afford high rents so she lives on the Upper Upper East East side,” Dave Olsen, the longtime Starbucks coffee expert, told me. “That store attracts people from all over: bicycle messengers, moms with strollers, old farts, students with computers — everybody. So how does anyone look at that picture and say she shouldn’t have that? That’s arrogant. It’s bullshit.”

  But no one is saying these people shouldn’t have a community gathering place. They’re saying they’d rather it be a unique, locally owned coffee-house run by good ol’ mom and pop — the very people whose blood seems to drip from Starbucks’s fangs each time the company occupies a new neighborhood.

  Mortal Combat

  America adores its small businesses. They’re the quintessential underdogs, representative of all the principles — independence, following one’s dreams, striving to succeed — that make this country . . . well, rich. Starbucks, the unstoppable corporate steamroller, threatens this ideal more or less by definition. With the exception of airports and a handful of small, chronically undercaffeinated towns, Starbucks competes with independent coffee-houses most every time it enters a new market. Often, Starbucks will move in right next door to a scrappy mom and pop, prompting a community-wide gasp. The only thing it could do to make its intentions clearer would be to put up a sign saying, we are here to destroy you.

  This experience drives some coffee-house owners batty with panic. After a Starbucks opened in 1999 near an eclectic Seattle café called Coffee Messiah (motto: “Caffeine saves”), its owner, Howard Bialik, gathered a group of regulars and cast “coffee spells” at the new store, culminating with the would-be shamans dumping coffee grounds on the Starbucks’s doorstep. If anyone entered the premises with a Starbucks cup, his employees told him to get out. Finally, Bialik was arrested by Seattle police for allegedly plastering the Starbucks’s windows — plus a trash can, a telephone pole, and a bus sign — with Coffee Messiah stickers. (Bialik later claimed that he only handed out the stickers to others, and the city of Seattle decided not to press charges.)

  Bialik’s terror, at least, is understandable. If a Starbucks opens up right next to an independent, one of them has to crumble, right? And considering the chain’s track record and massive war chest, it probably wouldn’t be Starbucks. Indeed, the idea that the company is systematically eliminating locally owned cafés through predatory tactics seems so obvious that few think to question it. Take the Delocator project, a Web site designed by three Los Angeles artists in 2005 as a means of combating this trend. The site’s sole function is to list independently owned coffee-houses in any ZIP code the user types in. Its fight-the-corporate-coffee message proved popular enough that Delocator.net attracted over a million hits just in its first month. In a brief manifesto, the project’s creators explain why they undertook this crusade: “Currently, independently owned cafés are under attack; and their numbers have been sharply decreasing for many years.” But this statement isn’t merely a bit off the mark — it’s completely false. The opposite is true: the number of independent coffee-houses in America is exploding, and it’s mostly thanks to Starbucks. Paradoxically, the surest way to boost sales at your mom-and-pop café may be to have a Starbucks move in next door.

  This isn’t to say that Starbucks is helping on purpose. The company has certainly tried to pick off its locally owned competition in a variety of ways, a few of them yielding modest success. In his book, Rubinfeld maintains that Starbucks always “respected good local operators that provided high-quality coffee and unique environments,” but he never claims the company didn’t try to pull out the rug from under them by bidding on their leases. In one much-discussed case, Starbucks offered to triple the rent that a Mill Valley, California, coffee-house owner was paying for his space and to throw in a $30,000 signing bonus to top it off. Norman Weintraub, who ran the café, didn’t find out about Starbucks’s proposal until his landlord told him he’d have to match the terms or clear out. (Weintraub paid, but not happily.) When the company’s massive bid came to light in the media, Starbucks representatives said what they always say: that the landlord was behind it all, greedily trying to squeeze extra cash out of everyone, and that Starbucks would never knowingly undercut a mom and pop. (Occasionally, the company has proved the truth of this argument in court. A Canadian judge ordered one landlord to pay over $80,000 in court costs and legal fees after he secretly pitted Starbucks against a beloved Toronto café called Dooney’s in 1995; the landlord’s scheming had led to a gigantic contractual mess. As soon as Starbucks signed a lease to take over the Dooney’s space, public outcry forced the company to sublet it back to the café and take out full-page ads in the Toronto Star explaining that it had not intended to force out Dooney’s.)

  Scheming landlords aside, Rubinfeld insists that there’s nothing unethical about offering to pay rates many independents could never afford — that’s just the way the market works. “What happened [in Mill Valley] was sort of like, ‘Get over it,’ ” he told me. “If Starbucks didn’t take that corner, then Petco would, or Chico’s, or someone else. You could call it controversial. You could call it whatever you want.” In the hypercompetitive atmosphere of Starbucks headquarters, no one was going to weep for those who couldn’t keep the pace. “Putting mom-and-pop coffee shops out of business was discussed a lot within Starbucks, but I don’t think management lost any sleep over it,” said Jerome Conlon, the “Big Dig” researcher. “They just put together strategies to combat it in public forums and moved on.” The fact that Starbucks drew fire for commonplace practices — like negotiating noncompete clauses in its leases — only increased management’s belief that it was unfairly maligned. “You know, it wasn’t that long ago that we were the underdog, and people were rooting for us and raving,” Schultz said. “Then we started succeeding, and people said, ‘Wait a minute . . .’ So I think it’s human nature.”

  But while Starbucks technically isn’t doing anything worse than competing aggressively when it poaches leases, there’s something alarming about the eagerness with which it has
approached the task. “It was sort of piranha-like,” Tracy Cornell, the real estate agent who once posed as a medical patient to get a space, told me. “It was just talking to landlords, seeing who was behind on their rent. All I needed was an opening like that, where the landlord wanted out. I was looking for tenants who were weak.” Another former Starbucks employee claimed that she was present at a real estate negotiation between Rubinfeld and a strip-mall landlord, wherein Rubinfeld kept pointing out occupied units and asking if the tenants kept up with their water bills.

  If there is a piece of real estate Starbucks wants, it charges ahead, regardless of who occupies it — even if it’s someone who considered Schultz a friend. Roger Scheumann, who worked with Schultz at Starbucks as a teenager, says he was in the midst of leasing a location in Bethesda, Mary-land, for his tiny coffee chain when Schultz stormed in and made an offer to buy the building. (The landlord declined.) “It was typical Howard — very hard-charging,” Scheumann shrugged. “We got all cranked up about it, but he was just being himself, competing.” Incidents like this have made some coffee-world gossips believe Schultz will go to any length to beat potential rivals. “Howard doesn’t play fair — you know that, right?” said Fortune Elkins, a prolific coffee blogger. “Howard will buy the building next to you and put up a sign that will block yours. He will buy the lease next to yours. He will even — it has been alleged — go to the zoning commission and pay to make traffic go one way toward Starbucks. Howard doesn’t screw around.”

  The idea that Starbucks even controls the direction of traffic in our cities is a little much, but Elkins is correct in one regard: Starbucks will park a store next to any competitor it can’t oust by other means, in hopes of siphoning away business. “Back in the nineties, Howard Schultz let it be known that ‘If we can’t buy you out, we’ll squeeze you out,’ ” said Martin Diedrich, whose Diedrich Coffee chain was profitable until a disastrous IPO and overzealous expansion plans dragged it into debt. The first time he ever saw Schultz in person, Diedrich was at work building his third coffee-house, in Newport Beach, California, on a Sunday afternoon. Despite the dust that coated the windows, Die-drich made out the shape of a limo pulling into the dirt parking lot outside. A figure hopped out and walked up to the window, clearing away the grime and cupping his hands so he could peek inside. It was Schultz. “I was standing right in front of him, and as soon as he saw I was there, he immediately jumped back into the limo so he wouldn’t be recognized,” Diedrich recalled. Soon thereafter, he says, Starbucks made its debut in Orange County, and each of its first three outlets was “literally within a block” of his three coffee-houses. “I have to believe it was intentional,” Diedrich said. “It couldn’t have been mere coincidence.”

  A complete list of the company’s aggressive actions could fill volumes. “I don’t have any stores where Starbucks isn’t within two blocks of me,” said Oren Bloostein, owner of the nine-store New York chain Oren’s Daily Roast. “They’ve opened in the same building as me. They’ve tried to get my lease terminated. They’ve approached my landlord, to see if he would somehow find a way to kick us out.” Penny Stafford, who runs a small coffee-house in Bellevue, Washington, says employees from a Starbucks down the street have passed out samples right on her doorstep; she is now suing the company in federal court, claiming Starbucks is an unregulated monopoly. When the chain entered Saratoga Springs, New York, it offered the owner of a café called Madeline’s Espresso Bar the lowball sum of $105,000 to sell her business. (It had grossed $750,000 the year before.) After she turned the company down, Starbucks planted a store across the street. A company representative later called the buyout bid a “goodwill gesture,” telling US News and World Report, “If she was clearly afraid of us, here was an opportunity to get out.”

  But generally, independents have little reason to be afraid. For most locally owned coffee-houses, a new Starbucks nearby is actually cause for celebration.

  The Revenge of Mom and Pop

  When Starbucks first besieged Los Angeles in 1991, Herb Hyman was as alarmed as any local coffee-house owner would be. Though his successful Coffee Bean and Tea Leaf microchain had enjoyed a decades-long relationship with the Hollywood elite, Hyman worried that this juggernaut from Seattle would crush the business he had worked thirty years to build. Starbucks even promised as much. “They just flat out said, ‘If you don’t sell out to us, we’re going to surround your stores,’ ” Hyman recalled. “And lo and behold, that’s what happened, and it was the best thing that ever happened to us.”

  Soon after declining Starbucks’s buyout offer, Hyman received the expected news that the company was moving in next to one of his stores. Instead of panicking, as many have done (Martin Diedrich started hyperventilating when he heard Starbucks was opening near him, for example), Hyman called his friend Jim Stewart of Seattle’s Best Coffee, who had plenty of experience competing with Schultz. He asked Stewart what really happened when Starbucks built a store nearby. “You’re going to love it,” Stewart replied. “They’ll do all of your marketing for you, and your sales will soar.” His prediction proved correct. Each new Starbucks created its own buzz, drawing out people who had never strayed from Folgers to try a latte: After they were hooked, these converts started exploring other coffee-houses, and it just so happened that there was another one right across the street. The increased attention to coffee immediately boosted Hyman’s sales. “I told my people to get real estate wherever Starbucks went — it didn’t matter how much it cost,” he told me. “We bought a Chinese restaurant right next to one of their stores and converted it, and by God, it was doing a million dollars a year right away. It was just incredible.” With the extra profits, Hyman built up his company and sold it off for a tidy sum, and he credits Starbucks for much of his success. He’s not alone.

  “Anyone who complains about having a Starbucks put in next to you is crazy,” said Ward Barbee, founder of the specialty-coffee trade magazine Fresh Cup. “You want to welcome the manager, give them flowers. It should be the best news that any local coffee-house ever had.” Barbee, a legendary coffee-industry personality who died in 2006, was no great fan of the chain’s product — in fact, he often boasted that he invented the phrase, “Charbucks, home of the Scorchiccino” — but he long maintained that Starbucks unwittingly does more to help mom-and-pop cafés than it does to harm them. “They didn’t close the independents,” he told me. “There are more now than there have ever been.”

  While almost all of the chains that have tried to replicate Starbucks’s success have plummeted toward insolvency, business has been good for locally owned coffee-houses that keep their ambitions in check. Here’s a statistic that might be surprising, given the dominance of the Starbucks empire: according to Specialty Coffee Association of America figures, 57 percent of the coffee-houses in America are mom and pops. Even between 2000 and 2005, long after the ascendance of Starbucks, the number of independent coffee-houses in the United States increased more than 40 percent — from 9,800 to just under 14,000. Starbucks’s share of the market keeps inching upward (over the same period, it tripled its U.S. store count, from 2,700 to 7,500), but the proliferation of its stores hasn’t fazed the mom and pops at all — quite the opposite. The failure rate for new coffee-houses is incredibly low — only 10 percent, according to the market research firm Mintel — which means a sizable majority of the independents stay in business regardless of where Starbucks drops its stores. “This isn’t like the restaurant business, where the vast majority fail,” explained Dawn Pinaud, the early Starbucks employee. “Very rarely does Starbucks ever put people out of business.”

  It’s so rare, actually, that of the scores of specialty-coffee industry sources I spoke with for this book, not one could recall a nearby Starbucks hurting sales at one of their coffee-houses for longer than a few months. (Or at least they wouldn’t admit it.) Kelly Traw, the head of marketing at Espresso Specialists, Inc. — the nation’s top espresso machine vendor — put it like this: “Desp
ite all of the furor about Starbucks coming into town, they’ve probably never put any of our customers out of business — the ones who are doing it right.” But how can this be? If Starbucks is saturating cities with stores and doing its best to draw sales away from locally owned cafés, shouldn’t mom and pops be on the wane?

  One reason this isn’t the case is because Starbucks doesn’t enjoy the same competitive advantages as other megaretailers. Look at why Wal-Mart has decimated its locally owned competition: it has lower prices than any of its rivals, its hours are generally longer, and its range of products is larger. None of this is true of Starbucks. The company’s prices are typically higher than even the most quality-obsessed independents, and as a rule, it never gives any kind of discount on its drinks. Starbucks stores often close in the early eve-ning, yet locally owned coffee-houses can lure in students and night owls well into the wee hours. And while all coffee bars offer the same basic beverage lineup, mom and pops have the ability to serve a variety of freshly made sandwiches, salads, and so on; the fare at Starbucks, on the other hand, sometimes stretches the definition of what one can reasonably call “food.”

  independents can easily contend with Starbucks if they just pay a little attention, and, crucially, if they resist the temptation to mimic their corporate rival’s every move. “Anybody can compete with Starbucks,” Scott Bedbury told me. “It costs frickin’ nothing — the price of an espresso machine and eight hundred square feet. You can’t compete with Wal-Mart, though.” Many coffee-house owners have tried to joust with Starbucks by making their businesses more like it: imitating its decor and toning down any eccentricities. But this is the strategy that caused nearly every chain to fail. You can’t beat Starbucks at being Starbucks. As the coffee consultant Bruce Milletto explained, nimble independents have a huge advantage over a slow corporate behemoth. “The indie can always compete with the chain, and even do a better job,” Milletto said. “You can turn on a dime and switch strategy to-night. You have the ability to produce a better product, and you can design and market your coffee bar to your community.”