Nancy’s coffee case study
Nancy’s coffee case study
As the busy president of the $7 million Nancy‟s Coffee Café chain, Beth WoodLeidt wasn‟t able to visit each of their thirty suburban coffee shops as much as she would have liked. Whenever she did journey out like she was doing today, it was with a passion for building brand and enhancing profitability.
Beth approached one of her more challenging locations—in a mall in central New York— and surveyed the space with a practiced eye.
…that front table needs a wipe… the display shelves are dusty…the OneCard holder is hidden behind the tip jar…isn’t it too early in the day to be out of plain bagels?…
She greeted the staff that she knew warmly, introduced herself to new faces, and ordered a cappuccino from a slightly nervous young hire at the counter. As the teenager set about to whip up the best coffee drink of her brief career, Beth took the manager aside to offer a quick rundown on areas for improvement.
Beth was just finishing up with her quality assessment when her cell phone buzzed with a call from a former corporate colleague that she had often confided in about the challenges of running a retail business. Beth took a sip of her frothy brew, winked her approval to the relieved girl who had brewed it, and headed out into the mall to chat. When her friend noted that Beth sounded tired, the forty-year-old CEO closed her eyes and nodded into
Gosh, I am tired! Remember about a year ago I started saying that I wanted to figure out where this business was going? Well, I’m still asking the same questions like, how can we attract the capital we would need to grow faster; what is the best exit strategy to shoot for; and what is the best way to enhance the value of what we are building?
Sure, we’ll add another two more stores this year, but that’s just not doing it for me. It’s early winter, 2003—and that means I’ve now been running this thing now for over ten years. And, as you know, the story hasn’t really changed; we’re still too small to be acquired, not valuable enough to be worth selling outright, and yet the business is large enough to need someone thinking about it almost all the time; yes, that would be me. We’ve hit a bit of a long plateau here; it’s passed time to make some critical decisions.
From Nuts to Beans
In 1973, Nancy Wood—then a 36-year-old mother of three—founded a mall-kiosk business to sell dried fruit and nuts. When demand for that fare appeared to be softening, she began the search for a more viable product line. After connecting with master coffee roaster Irwin White at a fancy-food trade show in 1978, she decided to turn her lifelong passion for great coffee into a new business. Nancy‟s eldest daughter, Beth, recalled that the concept was a bit ahead of its time:
My mother took her kiosks and slowly began to convert them over to coffee bars she had named the Coffee Collection. She started introducing Kenyan and Columbian coffees, but people responded ‘no way; there is Folgers, and there’s Maxwell House, and Dunkin’ Donuts.’ It was a very strange thing to many people who were being asked to pay a whole dollar for a single cup of coffee—or told they could grind their own fresh-roasted beans at home. They looked at my Mom like she was nuts. In those days it was very much about
educating the consumer.
By the late 1980s, Nancy‟s son Carter and her daughter Roxanne had joined the venture full-time. While Beth had been contributing to the effort by periodically reviewing the aggregate financials for her mother, she had never taken much interest in the enterprise. So it was, with her mother‟s blessing and encouragement, that Beth earned her BS at Babson College in Wellesley, Massachusetts, and soon began a rewarding management career in consumer product marketing. Newly married, Beth happily immersed herself in the busy corporate world of high-profile projects and after-hours brainstorming sessions—first with Pepsico, and later, with Johnson & Johnson: I loved the work. I had a good salary, a 401K, stock options, bonus check, company car, great suits; I am loving life.
Then suddenly, everything changed!
Into the Family Business
In 1993, Beth took a leave of absence from J&J to return home and help sort through the heartache and turmoil that followed her mother‟s death from cancer at the age of 56. Sandy Wood had inherited his wife‟s business, but made it clear that if his kids were not interested in keeping the small chain going, then he would either try to sell the sites or liquidate the assets.
Operating on the assumption that she would be returning to her corporate job once they had closed the doors on her mother‟s enterprise, Beth carefully examined the financials and visited each of the seven locations to estimate what they might be worth. In the course of that investigation, Beth realized that her mother had developed a solid business model within a largely untapped niche—suburban shopping malls—and she was drawn to the possibilities. Her husband Bill recalled that when Beth asked him to join her in the venture, it didn‟t take much convincing:
I was running a division of Bell Atlantic in Pennsylvania at the time. Beth
and I had worked together much earlier in our lives; I had really enjoyed that. I have always figured that if two married people were meant to work together, it was Beth and I. We get along very well, and we both know our own place in the sandbox.
One of the issues that we discussed was that one of our egos would have to get checked at the door. I was a leader where I was working before, but I understood that this was Beth’s family’s business, and that she was now going to be the face of The Coffee Collection, now named Nancy’s Coffee. With equal amounts of sadness, trepidation and excitement, Beth informed J&J that she would not be returning. Her father was pleased, and said that he would divest his interest in the business by annually gifting equal shares to his three children. As the new CEO of Nancy‟s Coffee, Beth set a course for growth.
The Specialty Coffee Industry
The Green Dragon, a Boston coffeehouse founded in 1697, became the clandestine headquarters of the American Revolution. It was there, in 1773, that the Boston Tea Party was planned as a protest against the tea taxes being levied by King George on his colonies. By the time the British and the colonists had settled accounts, coffee had become the hot beverage of choice in America.
Throughout the 19th century in the U.S., neighborhood coffeehouses proliferated, and home-roasting coffee became a common practice. The industrial revolution, however, fostered a demand for quicker, cheaper, and easier caffeine solutions. With the advent of vacuum packaging and modern transportation, it became possible for a roaster on one side of the country to sell to a retailer on the other side. As with many other food products, quality was compromised to accommodate mass production and efficient distribution. By the 1940s, the coffeehouses had disappeared, and Americans had been sold on the idea that fresh coffee went „woosh‟ when the can was opened. In 1950, William Rosenberg founded Dunkin‟ Donuts in Quincy, Massachusetts. While his donut shop took pride in serving what they called the “World‟s Best Coffee”, it would be twenty more years before U.S. consumers could purchase a truly high-end cup.
In the early 1970s, a small cadre of coffee aficionados began to offer a unique brew made from hand-picked beans; fresh-roasted in small batches. Peets, founded on the West Coast by legendary coffee idealist Alfred Peet, quickly set the standard for superb coffee. In Seattle, Gordon Bowker, Jerry Baldwin, and Ziv Siegl, named their coffee shop business Starbucks, after the coffee-loving first mate in Moby Dick. On the East Coast, George Howell was building his chain of Coffee Connection shops in the Boston area. New Yorker Irwin White began making a name for himself supplying fresh-roasted grounds to some of the finest restaurants in Manhattan. San Franciscan coffee broker Erna Knutsen coined the term Specialty Coffee, and in 1985, helped to found the SCAA (Specialty Coffee Association of America).
SCAA membership grew steadily as these coffee pioneers—Nancy Wood included— developed dynamic, profitable business models by proactively educating American consumers about fine coffee. By the time Beth took the helm of her mother‟s business in 1993—the same year that Starbucks had gone public—upscale consumers had developed a real taste for an excellent brew.
Growth without Sharks
Beth and her management team undertook an aggressive search for retail space. To facilitate that process, they worked almost exclusively with the regional mall management companies that had been doing business with their mother for years. Beth explained that this path was chosen in part as a way of dodging a direct confrontation with the powerhouse sweeping in from the west:
Starbucks had clearly stated that as they came east they were going to do cities like Philadelphia, Boston, DC and Manhattan in a big way. We really didn’t know how to play in that kind of shark tank, so we figured that we’d let Starbucks have that, and play the suburban card. And at the time, that was low-hanging fruit.
Clearly stated or not, one of Beth‟s first meetings after coming on board concerned a regional mall lease that Starbucks had been considering for awhile. During that meeting Beth suddenly realized how happy she was to be free of the inefficient, multi-layered bureaucracies that characterized much of corporate America:
There were two leases on the table; a Starbucks lease, and one for Nancy’s Coffee. The woman said that the Starbucks lawyers had had the lease for six months—but she was willing to wait. I said, ‘Look, do you want Starbucks, or do you want a leased space?’ When she said, ‘A leased space’, I said, ‘Give me the pen.’ That lease is up next year, and I still haven’t gotten around to reading it.
Beth noted that Starbucks wasn‟t the only coffee vendor shying away from space in enclosed malls:
Establishing your brand in mall locations is not, quite frankly, a strategy for the faint of heart. Managing a mall shop is a difficult business, and it costs a lot of money. That worked for us in a way, since newcomers would get scared off by the idea of paying something like $100,000 a year in rent, when they could be paying $2,000 a month for a Main Street space in ‘Anytown, USA’.
The team had learned through their mother‟s experience, however, that these pricey mall locations offered an advantage that few suburban in-town settings could match; a captive base.
Throughout the 1990s, Nancy‟s Coffee and its suburban-model competitors like Peets and Caribou had the luxury of being able to choose locations where no other specialty coffee shops were operating. Beth explained that this monopolistic positioning was especially advantageous in a setting with high overhead and two distinct customer groups: Our bread-and-butter customer is the mall employee—the three to five hundred people who come to the mall every day to work. If you can get them to try, you can get them to repeat.
Then, obviously, we have our transient customers; the shoppers. We have squarely positioned ourselves to cater to stroller moms; mothers with time on their hands, and kids to entertain. They come to the mall for something to do; they may not always buy, but they always have to eat. So we have lots of cookies, apple juice, and bagels on hand for the little ones, which helps us get the mom for her cappuccino.
In a move to foster a loyal base of customers, in January 2002, Nancy‟s contracted with Paytronix—a nascent venture that had developed a swipe-card with both payment and loyalty program capabilities. Beth noted that the One Card system (See Exhibit 1) went well beyond the paper cards used by a variety of food-retailers to encourage repeat business:
This is like an electronic punch card that also functions as a debit card— either by putting in a cash balance or by pre-paying for product. For example, we have this one guy—an eyeglass store manager at a mall in New Hampshire—who shells out $150 on the first of each month to buy the 85 cappuccinos he knows he’s going to drink over the next thirty days. We get his money up front, and he gets our $3 drink for less than $2.
If you can get mall employees to buy a One Card membership for a dollar a year, they’re going to come to you every day, since for every nine drinks they get one free—they can even get a jumbo mocha in exchange for nine basic coffees. That’s a drink that we sell for four dollars; free to them, and my cost is about seventy-five cents.
The One Card is really a nice competitive advantage. We just had a Starbucks open in Buffalo, one floor below us. Our staff was nervous, but I didn’t understand why. I told them that with the One Card, you already have all of your mall employees in your pocket. It worked; that Starbucks kiosk is struggling.
By late 2003, Nancy‟s Coffee shops could be found in over thirty locations from Boston, west to Niagara Falls, and from Nashua, New Hampshire, south to New Jersey (See Exhibit 2). Three of the stores had been acquired from the owner of a four-chain enterprise who had come to the stark realization that running coffee shops was not going to be the road to riches that he had once imagined it would be. Beth recalled that they were able to make significant improvements in the stores that they took under management:
When we acquired Café Coffee, their gross margins were running in the low thirties. They had been managing the business from Wellesley, Massachusetts, and no one was going out to visit the stores. From a financial standpoint, we hammered down on the employee hours and on the food costs. That helped to drive their gross margins closer to 50 percent. Operationally, we kept some of their people, but not all. We put some of our own people in who had much different operational standards than the Café Coffee people. At one store, we saw an increase in customer count, and in six months that store went from being in the red to being in the black.
Just as Starbucks and Dunkin‟ Donuts never said „never‟ with regard to Mall locations, Beth followed through on an opportunity to develop a street-front location. She was excited about the challenge and the possibilities:
There are so many locations that are still looking for high-end coffee bars. The question is; are we as a high-end coffee bar looking for that location? We just opened a store on the street in Manchester, Vermont. My rent there is $1,800 a month. I think it will work, but it will take some time to attract a customer base. If we can find some more good towns like that, I suspect that we will probably do more like that versus more Mall expansions.