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BUSINESS PLANS

The Copycat: The Next Starbucks
 

Not only is imitation the sincerest form of flattery, but it may also be the easiest way to make a buck.
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Moonstruck Chocolatier operates out of a matchbox of a store in downtown Portland, Oreg., its 140 square feet of space wedged between a Payless shoe store and the entrance to the Oregon National Bank Building. It would be easy to miss Moonstruck, save for its striking blue awning.

Inside, you can buy individual truffles, freshly handmade at the company's plant in Portland. You can buy all manner of coffee drinks. You can also buy all manner of chocolate drinks, hot and cold. Moonstruck mixes fresh, high-quality chocolate into exotic confections, combining it with ingredients like coffee, root beer, Earl Grey tea, vanilla, and fresh peppermint. Although the store sells coffee, pastries, and ice cream, chocolate in varying forms accounted for 65% of its $170,000 in sales in 1999.

Down the block stands a store with a more familiar name: Starbucks. With its buffed stainless-steel sign, it conveys the institutional heft the world has come to expect from an enterprise as familiar and ubiquitous as Starbucks.

It's hard to imagine a greater asymmetry between two brands. The Moonstruck logo is scarcely known beyond downtown Portland. Starbucks has more than 3,000 stores in the United States and 19 other countries, and its logo is universally recognizable.

Still, Moonstruck has ambitions as lofty as its name. The business plan calls for the company to have 45 stores in Chicago, New York City, and Portland by the end of 2003, generating about $26 million in revenues.

Such a dizzying ascent may seem preposterous, considering where the company is today, but Moonstruck intends to hit those numbers and become a brand as well known as Starbucks. It plans to do that by copying the Starbucks model, substituting chocolate for coffee. And the parallels between what Moonstruck is setting out to do and what Starbucks has done are not inconsiderable.

Still, Moonstruck faces long odds. To consider just one barrier: Will Americans really drink chocolate with the same abandon that they drink coffee, an already popular beverage sold widely in coffee shops and cafés well before Starbucks came on the scene?

Moonstruck was conceived in 1992 by Bill Simmons, who is 62, and his wife, Deb, now 50 (with help from John Schouten, a marketing professor at the University of Portland). Bill began his career in the baking industry and migrated from there into high tech. Deb had been a schoolteacher for 22 years. They were looking to start a homegrown business that would combine their expertise in food retailing and education -- a business not unlike Starbucks.

Starbucks went public that same year, 1992, with 165 stores and $103 million in sales, having grown from a single Seattle storefront opened 21 years earlier. Starbucks started out as a purveyor of fine coffees and teas, which it sold in bulk. Its high-quality coffee came from arabica beans, which in 1971 accounted for a small fraction of the coffee consumed in America. The balance came from robusta beans, an inferior variety that produced the dark and acrid brew Americans had come to reflexively choke down as part of their Calvinistic heritage.

What really lit a fuse under Starbucks was not just its commitment to better beans but its move into retail -- selling coffee by the cup. The stores were decorated with bins of coffee beans, photos of coffee trees, and shelves of gleaming coffee paraphernalia. Employees were trained to educate customers about what they were drinking and why it tasted good. For many, the experience was so engaging that Starbucks became a natural gathering place, and that made the brand familiar.

Bill and Deb Simmons couldn't help noticing the success of Starbucks. Perhaps it was worth copying. "The more we poked at the Starbucks model, the better it looked," says Bill, who wondered what other commodity could command a cult following. The couple zeroed in on the cacao bean, which had a romance and lore all its own. People used to think of chocolate as something to drink, not eat. In Europe as recently as the late 19th century they congregated at chocolate bars in exactly the same way that people now meet at coffeehouses. "Poets and philosophers used to meet and talk over chocolate," says Deb.

The Starbucks analogy came into focus for the couple once they discovered that 95% of U.S. chocolate is derived from the forestero bean, the cacao counterpart of the inferior robusta coffee bean. Older, "gran cru" trees yield finer criollo and trinitario cacao beans, which are more flavorful than the lesser beans.

Chocolate from the finer beans is purer, requiring less sugar and fewer additives. More flavors come through to the palate, not unlike what a fine wine delivers. A typical American chocolate may have as little as 17% cacao content, compared with a minimum European standard of 56% for "fine" chocolate.

Moonstruck would bring the higher European standard to the American palate and revive the chocolate bar as a meeting place in a busy, anonymous world. In the process Moonstruck would romance the cacao bean and educate the customer, just as Starbucks had done with coffee. "We are not a chocolate store where you walk in and leave with a box of candy," says Deb. "We are about a chocolate experience. We want people to know what they're eating."

Moonstruck kicked off its business in 1993 primarily as a maker of truffles for the wholesale market. (It sold to other retailers, including Neiman Marcus, Marshall Field, and even Starbucks for a while.) The retail store opened in 1996 and its revenues grew rapidly.

Still, the store accounted for less than 20% of the company's $1 million in chocolate sales in 1999. Moonstruck, after all, was a company with a split personality. Bill Simmons, through his other business experiences, had been able to recruit a well-qualified board. But the relative abundance of board talent created a divide over which way to take the company. "We had a couple board members with bad experiences with retail. They were afraid of the investment in bricks and mortar," says Bill. Conversely, the board members counseling against a wholesale strategy worried that the brand would never flourish in wholesale.


The man who made Starbucks hum was Howard Schultz. Moonstruck found its own Schultz in Tony Roth.


The man who made Starbucks hum was Howard Schultz, who in 1982 was selling coffee machines for a Swedish appliance maker, Hammarplast. When he discovered that a tiny store in Seattle, called Starbucks, was placing orders larger than Macy's, Schultz paid a visit. What he saw so intrigued him that he begged the Starbucks founders for a job and finally landed one after a year and a half. Then he begged them to sell coffee not just in bulk but by the cup. He met with resistance at nearly every step but kept hammering away until his initiatives succeeded. Today Schultz, the driving force behind the meteoric growth of Starbucks, is the company's chairman.

Moonstruck found its own Howard Schultz in Tony Roth. Like Schultz, who was raised in a working-class section of Brooklyn, Roth came from modest circumstances. He grew up on a farm in Illinois, one of five brothers. After attending the University of Illinois, he went into the investment business and then the food industry, marketing new products in natural and gourmet foods.

Roth, as thorough as he is tireless, stumbled across a statistic in his research on the food industry: in 1999 gourmet-chocolate sales in the United States saw double-digit growth for the first time in 70 years.

That fact led him to Hawaiian Vintage Chocolate, a small grower of high-quality cacao beans and maker of raw chocolate in Hawaii. For Hawaiian Vintage to grow, it needed an outlet on the mainland. Roth found Moonstruck and tried to persuade the two companies to work together. But Hawaiian Vintage's owners, like the original owners of Starbucks, wanted to stay independent and near the production end of the food chain.

But Roth didn't give up there. The more he looked at Moonstruck, the more the numbers amazed him. "There are not that many deals with this much lift potential," he says.

Roth acquired a license for the exclusive right to open Moonstruck stores in the Midwest. He then agreed to merge his company, Eclipse Management Group LLC, with the Simmonses' Moonstruck Confections. Eclipse would own 25% of the merged company, Moonstruck Chocolatier. The Simmonses then sold the East Coast license to another major investor, Leon Wagner. Over the next two years, Moonstruck Chocolatier plans to sell up to 45% of the company in return for $2 million in cash. That, says Roth, should provide enough capital to get the company to an initial public offering.

Roth came in as a strong advocate for an aggressive retail strategy and tipped the balance in its favor. "Moonstruck could continue being a seasonal specialty business," he says. But he believed that Moonstruck had far more to offer the market than a box of fancy chocolates to be bought on the occasional holiday or a showcase item to elevate the image of an upscale department store. "We needed to take their superior product and superior menu direct to the market," Roth says.

"We needed a management catalyst," says Bill Simmons. "Tony has the conviction to go forward. He could visualize the concept in play." What Bill saw in Roth was a man whose discipline matched his energy. "He's never afraid to run the numbers on an idea he likes," Bill says. He recalls Roth's falling asleep over his laptop while drafting detailed memos late at night.

Roth opened three new stores in Illinois (two in Champaign and one in suburban Chicago) between June and November of last year. That finally focused the company on retail -- just as Howard Schultz's plan had done with Starbucks many years earlier. Roth spent just $70,000 in tenant improvements to get the two Champaign stores running. The first store, which Roth opened June 22, grossed $21,000 and earned a tiny profit in just its fourth month of operation.

The third Moonstruck store in Illinois opened in November near Chicago. On a Sunday afternoon more than a week before the formal opening, with the staff still putting the finishing touches on the decor, the store did $650 in sales. Five days later, with the formal opening still three days away, it rang up $2,000 in sales.

Roth's stores look nothing like the one in Portland. They're seven or eight times larger and should top out at about $700,000 each in annual sales, with about 60% of their business in high-margin (60% to 70%) chocolate truffles and drinks. (The balance will come from other beverages, pastries, and ice cream.) Roth's aim is to revive the long lost chocolate bar. Referring to the Portland store, Roth says: "Imagine it with seating for 12 to 15 people. Imagine having jazz on Friday nights."

Educating the customer will take the form of regular truffle tastings and positioning the truffle case as a strong focal point in each store. "That gives us the chance to talk to the customer about the high cacao content in our truffles and the fact that they are handmade with all natural ingredients," says Roth.

With the opening of the bigger stores, some large investors have come calling. What's the appeal? "I think it's a combination of Starbucks and Godiva," explains Marc Robins, who has invested in Moonstruck and lent it managerial guidance through his Portland company, Crown Point Group. What intrigues Robins about Moonstruck is that "the selling clock" is always ticking. "They sell coffees until 11 in the morning, chocolate confections from 11 to 3, and people stop in and buy a box of chocolates when they go home at night," he says. "Starbucks doesn't have that."

And then there is the wall-space issue. In a typical coffeehouse like a Starbucks, the walls are relatively "dead." The merchandise on the walls -- mugs, dishes, and espresso machines -- usually turns over slowly. Moonstruck devotes its wall space to gift boxes of handmade truffles, which sell briskly for $24 to $40.

But will people really drink hot chocolate in droves, and if they do, won't Starbucks jump into the market? Roth's answer to those questions is, Starbucks has already jumped in. It sells a lot of sweetened coffee-based drinks. "They're already in the chocolate business big time," he says.

"If you look at Starbucks, over 50% of their coffee sales are mochas or lattes," notes Frank Magdlen, president and managing director of Crown Point Group. "Very few people are actually buying black coffee there." Magdlen says that Moonstruck will sell many such blended drinks -- but with one key difference from the Starbucks variety: the chocolate in Moonstruck's drinks will be fresh and of higher quality. People, he adds, will be able to taste that. So he doesn't see Starbucks entering Moonstruck's market. In fact, he believes the coffee giant will help legitimize the upstart. "Flattery from the right people will help promote the concept," he says.

Roth also claims that Moonstruck is potentially more profitable than Starbucks. "We have slightly higher margins and a higher average ticket," he notes. He says the real concern is execution. "We have to maintain our focus on people, delivering the right level of service and cultivating a culture that is really ours." Moonstruck's main worry is finding good store managers in a tough job market, he says.

Chip Richardson, a broker in the Portland office of brokerage house Wed, Bush, Morgan Securities Inc., declined to invest in Moonstruck, though he found it "an interesting deal." He explains, "It's not obvious to me that chocolate has the repeat sort of business that coffee has." Richardson adds that Moonstruck's impressive per-square-foot numbers generated by the small Portland store will fall once the company starts operating much larger outlets. And finally, he observes that Moonstruck chocolate is a luxury, and sales could soften "if the economy turns down."

Meanwhile, it's full speed ahead at Moonstruck, where Deb Simmons notes that chocolate sales historically do not suffer in recessions and that "chocolate is one of the last legal, socially acceptable sins." Is unassuming little Moonstruck really ready for prime time? "It's so easy to get swayed and tempted and sidetracked," concedes Deb, guardian of the brand. But then maybe the brass ring comes by only once in life, if that.

About a year ago, Bill Simmons went up to Seattle for a meeting over lunch with Maveron, a venture-capital firm, and talked with a portfolio manager there for three hours. "He seemed genuinely impressed and told us to come back when we have four or five stores up and running," Bill recalls.

Maveron was cofounded two years ago by none other than Howard Schultz. Its mission? To find the next Starbucks.

Edward O. Welles is a senior feature writer at Inc.

Related inc.com resource:
Should You Be a Copycat?


Others in the Starbucks Parade

Many small companies have borrowed stratagems from Starbucks in hopes of replicating the java king's success. Here are four such businesses:

"Starbucks has moved coffee from being a commodity to an experience. We are moving dry cleaning from being a chore for the customer to an experience," explains Kirk Kinsell, the CEO of Hangers Cleaners, based in Raleigh, N.C. (See Upstarts: Dry Cleaning.) To distinguish its 40 stores from other dry cleaners, the company uses nontoxic liquid carbon dioxide as a cleaning agent. Kinsell says his outlets look like "fine apparel stores" and don't smell like petrochemical refineries.

Much as Starbucks has created a base of loyal customers, Jimmy John's submarine-sandwich chain has developed a cult following, by locating most of its 100-plus stores in college towns. "We do strong guerrilla advertising each fall, when all the freshmen enter school," says Linda Kelley, president of the Jimmy John's franchise, based in Elgin, Ill. "Once we get them hooked, we have them for life."

Maui Tacos, based in New York City, has taken everyday Mexican fast food and spiced it up with exotic Hawaiian flavors, imitating what Starbucks has done with upscale coffees and flavors. The result, says Maui Tacos CEO Chuck Leaness, is gourmet fast food offered in a stylish setting.

Paul Clayton, CEO of Jamba Juice Co., based in San Francisco, admires Starbucks for its revolutionary ability "to drive significant sales volume through a small footprint." That translates into a lower investment in real estate and into higher returns -- a principle Jamba Juice is applying to its 330 stores, which sell fresh juice, smoothies, and health snacks.


THE START-UP ISSUE

Part 1: Your Way

The Rationalist: The Death of Gut Instinct
The Copycat: The Next Starbucks
The Spin-Off: Hiding in Plain Sight
The Soloist: Balancing Act
The Idealist: Into the Frying Pan
The Zealot: Mission Critical
The Pro: The Rules
The Accidental Entrepreneur: Field of Dreams

Part 2: Anatomy Update -- Big Plans
Part 3: The Start-Up Diaries -- Year One


Please e-mail your comments to editors@inc.com.

Last updated: Jan 1, 2001




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