Joe, that little coffee shop: Starbucks Beware

A little story in today's New York Times reminded me why America is great and why big, successful companies are perpetually at risk. This little story makes a big, big point: that passion, creativity and knowledge of product and market can enable you to compete against dominant market leaders. The punch line is this: a little coffee shop down the block from my old apartment on West 13th Street in NYC, called Joe, is doing a nice business. So nice, in fact, that the owner, Jonathan Rubenstein, has expanded to two new sites and is looking for a third. So you're probably wondering, "Hey, stupid, who cares?" Well, I know this place and I know what is around it, Starbucks, Starbucks, Cosi, Cosi, diners, etc. So why has this place flourished amidst a sea of much larger, better heeled, or longer-lived competitors? I'm so glad you asked.

1. Unbridled Confidence

“It never occurred to me we would fail, or what if nobody walked in the door,” Mr. Rubinstein said last week over a cup of Vienna-style drip coffee at Joe, a cafe on Waverly Place in Greenwich Village that he opened in 2003. His recipe is a fanatic devotion to coffee quality and an atmosphere that doesn’t feel like a chain.

Only someone incredibly stupid or unbelievably confident (or both) would open a coffee shop within spitting distance of two Starbucks without having any experience in either coffee or retail. But it is personalities like this that create disruptive applications and/or experiences. This guy's got the stuff. And it looks like his early confidence was well-founded. 

2. Obssessive Attention to Detail

Within a block of two Starbucks shops, Joe draws a steady stream of customers for its lattes and other brews. Employees spend more than three months learning how to make them and must pass tests before they are allowed to run the $14,000 espresso machine.

The cafe, with exposed brick walls, 12 round yellow tables for two, and benches out front, has prices comparable to those at Starbucks, a company Mr. Rubinstein studies carefully. A 12-ounce latte costs $3.65.

Jonathan has created a service culture and staffed his shops with capable, personable people. I am always happy going in there, and even though the place feels warm and not at all chain-like the look (down to the swirl of coffee on my steamed milk) and taste of my cappuccino is the same, every time. Further, the product is priced fairly. In fact, I would pay more for my coffee at Joe than I would at Starbucks, where my coffee is frequently made by a less-than-personable barista who makes it differently than at the other 10 Starbucks I frequent. The same criticism applies to Cosi. Detail has been lost at both Starbucks and Cosi as store growth has gone parabolic. They've both got serious recruiting and retention problems. This will make them vulnerable to small, high quality venues such as Joe.

3. In Touch with the Market

The waits can be long. “Brutal, but worth it,” said one young woman who waited 10 minutes to place her order on a recent Saturday. Richard Châteauvert, a regular customer, said he loved Joe’s neighborhood feel and the fact that it was a small business.

Mr. Rubinstein realizes that “we’re on the verge where we can’t accommodate everyone.” Brisk business has already prompted him to expand to a second cafe, at 9 East 13th Street, and to an outpost in Alessi, an Italian housewares store, at 130 Greene Street in SoHo. Sales are strong. The first two cafes should bring in a combined $1.4 million in revenue this year, Mr. Rubinstein said, and both turned profits within weeks of opening. The business has 10 full-time employees and 25 part-timers.

When you are delivering a commodity product (the coffee itself) in a non-commodity fashion (the experience of being served and sitting at Joe vs. Starbucks) and people are queueing up for the privilege of patronizing your establishment, things are going pretty well. Joe knows its customers, knows what people are NOT getting at Starbucks and are giving them that homey, cared for feel. People want this and Joe is delivering this. My sense is that many more people want it, and that Joe will be one of those in NYC to capitalize on the Starbucks backlash.

4. Condescending Competitors

Starbucks said it welcomed the competition. “There is room for many coffeehouses in the marketplace that can meet different customers’ needs,” said a spokeswoman, Valerie O’Neil.

I'm sorry, but I think this is a stupid thing to say which clearly demonstrates complacency. What Starbucks is really saying is "Hey, we've got no chance to deliver a product as good as yours and we won't even try. We're willing to cede a little corner of the market to you." Who's to say that this little corner of the market doesn't grow as people get increasingly irritated with the increasingly inconsistent and unpleasant experience at Starbucks stores?  My response as a senior member of Starbucks management would be "Oh, crap, we've got some problems when a little nothing store can thrive and grow in the shadows of two of our stores. We'd better figure out what is wrong and fix it - now." Valerie's Presidential-sounding response shouldn't be music to a Starbuck's shareholders ears - it should be a cause for concern. A little to fat and a little too happy, methinks.

5. Ruthless Focus on Quality

As Joe itself becomes a chain, Mr. Rubinstein is struggling with how to manage the growth of his business without diluting Joe’s charm. He gets frequent calls to sell franchises, but says he wants, indeed needs, to stay small. “I have to go to every store two times a day or I go nuts,” he said. “At some point, we will stop growing and just work on bettering and perfecting what we do.”

At this phase of Joe's existence Jonathan is right. Better to focus on refining and perfecting the model than expanding rapidly. Get the model right, learn how to scale and do so - deliberately. This will drive a stake into the heart of the marginal Starbucks, Cosi and other crappy-experience stores. Why would anyone in their right mind go to one of the mega-chains that have lost touch with their customers versus a place like Joe? Answer: they wouldn't.

This is classic Schumpeter creative destruction in action, admittedly on a micro-scale as we speak. I've written a lot about this and believe strongly that creative destruction is a healthy, and unavoidable, fixture of economic development and a natural part of the company life cycle. Success, without question, sows the seeds of failure, as rapid growth has diluted the Starbucks culture and experience and rendered them vulnerable to a down-home, grass roots entrant like Joe. Further, times change, value propositions shift, and the $5 for a consistent venti skim latte just doesn't exist any more. Yeah, people are now spending $5 for this when they don't have many good alternatives, but what about when more Joe's (or places like them) spring up around town? Invariably, they will. I'll tell you one thing - I'd sooner spend my $5 at Joe or even at a Dean and Deluca than I would a Starbucks any day. Better preparation, better experience, and I feel better giving a smaller establishment my money than the Seattle behemoth.

Anyway, kudos, Jonathan. You're on a roll. My best to you for continued success and for keeping the inexorable process of creative destruction going.

Comments

[Eliot]

“There is room for many coffeehouses in the marketplace that can meet different customers’ needs,” said a spokeswoman, Valerie O’Neil.

Why exactly is this statement "condescending"? Seems pretty straight forward to me. It's certainly no less attractive than the statements made by Mr. Rubinstein. Seems like you're imbuing the sentences with extra meaning.

[James]

I have found your site very interesting. Please give the updates.

Cheers,
James
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http://www.coffeebreakusa.com/

[Kris Tuttle]

There's lots of room at the upper end of the coffee market. Some people I know have started roasting their own beans.

This is also another great example of the opportunity we have in the US. Not everyone agrees with the statement but if you are passionate about something and work hard at it you will find success and the sky is the limit.

There are places like France that do what they can to deter individual initiative and business success but nobody in the US should be complaining that they "don't have any good opportunities."

[Matt]

Yes, this one store will be successful, but that's also why Starbucks doesn't need to be worried. It's like saying McDonald's should be afraid of the diner down the block. Good companies realize there are some customers they don't want (think Capital One) and make a killing on the ones they do want. If Joe tries to expand past a small franchise (and I'm not being condescending here, he'd be doing much better in business than me :) do you really think that he'll be able to maintain the quality of staff (months of training) and high traffic? Fortunately for him, it's fashionable to be a coffee snob these days (especially when you're an NYU student, or Greenwich Village resident)...but I think you said it best: "I feel better giving a smaller establishment my money than the Seattle behemoth." So if Joe got big, how would you like him then? Unless you're saying that there are a few Joes in every city (or every few blocks for that matter)...if I were Starbucks, that still wouldn't scare me. Dunkin Donuts coffee on the other hand...that would scare me.

[Yaser Anwar]

Starbucks has brainwashed an entire generation of people who now think SBUX is the best coffee in the world. Starbucks has sold people the belief that they are some of the worlds best coffee afficianados. They have convinced people to believe that if they can say their drink in the right order (which starbucks has invented) and carry a SBUX mug or cup on the subway that they are somewhat better than the next guy.

Starbucks has sold the ultimate image of popularity. If you don't drink SBUX coffee, that means you can't afford it, which means you are not fit to be accepted. Starbucks has sold an image for $10.95 a lb. which cost them $1.00 lb. It has capitalized of Vanity.

A friend of mine works there, this is what she told me- "My big problem is the 'just say yes' policy. Which according to my boss means-) do whatever it takes to shut the customer up. I've only been working there for 2 weeks, and already I'm beginning to loath a society that struts around like Paris Hilton just because they have a green and white paper cup."

I do not drink coffee so I'm not really aware of the "SBUX Experience" but what SBUX has done is create an experience out of a commodity & sold the image to the people. For good or bad it is only successful because it caters for the society we live in.

[howard Lindzon]

The lady uttering pont 3 should lose her job. Of course Starbucks could do that if only at 10 percent of their store.

better answer. We must have let our guard down. We have stuff in the works that will make Joe's sorry they tried :)