Street Smarts: Taking On Starbucks

How independents can hold their ground.

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If you've been following the saga of the aborted sale of my businesses, you know that I called the deal off at 3 p.m. on April 5, when I met with my senior managers and informed them it was dead. What I haven't told you is that the managers held another meeting right after mine. The subject: how to keep me out of their hair. The company's president, Louis Weiner, said that he knew how much they'd all enjoyed my absence for seven months, and that if they wanted me to stay away, they would have to continue operating the company as they had during that record-setting period. They vowed to do just that.

As a result, I now have even more time to spend outside the business. Among other things, I've been doing what I love, helping small entrepreneurs who come to me for advice. One is a former New York City firefighter named Brian Kelly. He first approached me when he was thinking about getting into the secure document destruction business (see "A Few Good Competitors," August 2002). Aside from the shredding company, Brian also has a coffee shop business, City Beans, with two stores in northern New Jersey, both located in office buildings. He opened the first in Newark in 1996, and it immediately attracted a following, turning cash-flow positive and profitable within the first month. He later added soup and sandwiches to his menu and did even better. About a year ago, however, Brian received the kind of news that can strike terror in the heart of any independent coffee shop operator: Starbucks was coming.

He learned the coffee giant was sniffing around when the manager of his shop called to say that two guys from Starbucks (NASDAQ:SBUX) had shown up with a tape measure and walked through City Beans taking measurements. At the time, Brian's lease was expiring, but he thought he had already come to terms on a new one. When the landlord told him that Starbucks was putting in a bid, Brian had the good sense to refuse to renegotiate. Apparently, however, Starbucks insisted on terms the landlord found less attractive, because Brian wound up getting the lease anyway, causing him to breathe a sigh of relief.

Then he heard that Starbucks was moving into a large, empty retail space on the other side of the office building. At first, he felt a stab of panic and a flash of anger at the landlord, but he soon found out that Starbucks was coming at the invitation not of the building management but of a Hilton (NYSE:HLT) hotel located in the building. The shop would be in the hotel lobby.

Brian had only recently begun to make money on his second coffee shop, in Jersey City, which was in a new office building. Barely 20 percent of the office space had been occupied when he'd opened the store, and it had struggled for a year or more. Along the way, Brian had taken on a considerable amount of debt. He could wind up in trouble if the Newark store went under, which to him suddenly seemed a real possibility. He'd heard all the horror stories about companies like his being crushed when forced to go head-to-head with a national chain. Starbucks in particular had a reputation for aggressive marketing. "I'm not sure what I should do--if anything," he said. "Maybe I should just sit back and wait."

Sitting back and waiting is what a lot of small companies do when a giant moves in. They hope for the best and then react when the giant starts squeezing their margins and taking away market share. By then, it's too late. The outcome can be different, however, if owners capitalize on the advantages small companies have when competing with a giant. For one thing, they can establish close, personal, one-on-one bonds with customers that large companies can't match. Small companies can also outmaneuver giants. That's especially important if they're competing against a retail chain with a cookie-cutter approach to managing its stores. The managers have a formula they have to follow, and they're not allowed to deviate from it. So you can do things that they won't be able to respond to for months, if ever. You can also prepare for their arrival by taking steps to emphasize what makes your store different--and special. That's what I suggested Brian do. "You need to be preemptive," I said. "When is this store supposed to open?" He said he'd heard it would be up and running in December, which gave him four months to make and execute a plan. "Let's talk about your strengths," I said. "What can you do that Starbucks can't do--aside from offering a reasonably priced cup of coffee?"

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