In May 1997, Chris Mottern became CEO of Peet's Coffee & Tea Inc., a proud specialty-coffee retailer humbled by the conspicuous success of Starbucks. Not that Peet's was a flop. Hardly. As a regional competitor it was doing fine. It had 30 stores in California, all but one of them in the San Francisco Bay area. But Mottern, a veteran beverage-industry executive who had previously guided the upscaled repositioning of Heublein wines, had a mandate to do better. Much better. Peet's was taking in $41 million in revenues, far behind the $975 million of Starbucks. Mottern faced an overarching question: How could Peet's capture a larger share of the specialty-coffee market?

Pondering what catch-up strategy to adopt, Mottern concluded, "The store wars are over, and the winner has been declared." In other words, the opportunity to compete with the Starbucks juggernaut in a store-building binge had passed Peet's by. Starbucks was just too far ahead.

Then Mottern had a flash of insight. Why couldn't he leverage his powerful competitor's extraordinary momentum to his own company's advantage? After all, Starbucks was clearly the driving force behind the spectacular growth in the specialty-coffee market. (From 1989 to 2001, the industry's retail sales rose a stunning 613%, from $1.5 billion to $10.7 billion, according to the Specialty Coffee Association of America.) With its beguiling Italian-style cafÉs, Starbucks was turning droves of people into premium-coffee drinkers. Increasingly, the converts were demanding high-quality coffee wherever they were -- in restaurants, in offices, or in grocery stores.

Within those emerging markets Mottern could see an opening for Peet's. Like a race-car driver following in a leader's draft for aerodynamic advantage, Peet's could compete by "slipstreaming" in the Starbucks wake. So Mottern recast the company's strategy so that slipstreaming was at its core. "Starbucks presents us with a terrific opportunity," he says.

Five years later Peet's, based in Emeryville, Calif., is moving briskly toward its goal of becoming a national brand. It has opened 30 new stores since 1997, establishing beachheads in Chicago, Boston, and Portland, Oreg., and expanding its presence in southern California. In the process its sales have more than doubled, to $94 million. In January 2001 it scored an initial public offering, which raised $26 million, despite the chill that had seized Wall Street since early 2000. The Nasdaq-listed Peet's stock has traded this year 50% or so above its $8 offering price. The company is solidly profitable and virtually debt-free.

Under Mottern's leadership Peet's is shifting its focus away from in-store sales, which now account for just under 80% of its total sales. The company has signed on 130 gourmet stores and high-end groceries, the sector in which Mottern sees the greatest potential for wholesale growth. Mottern is also going after top restaurants (Wolfgang Puck is a customer) and companies that are willing to offer Peet's as a perk to their office workers. That business will come on top of sales in the 60 stores (total: $75 million), by direct mail ($7.3 million), and on-line ($4.4 million).

There's yet another dimension to Mottern's slipstreaming strategy. A basic marketing tenet holds that you can't beat an entrenched competitor unless you differentiate your brand. Peet's, accordingly, is being positioned as the brand of the ultraserious coffee drinker. "We don't sell books or music," says Mottern, contrasting Peet's with Starbucks. "We don't do salads or sandwiches. We're very coffee focused."

The earnestness of the Peet's mission harks back to its origins. Created in 1966 by a Dutch immigrant, Alfred Peet, the original store in Berkeley, Calif., functioned as a sort of hip West Coast mecca for coffee aficionados five years before the first Starbucks store opened in Seattle. The Peet's credo has always been to market fine coffee in whole-bean form for home consumption. Even now, whole-bean sales account for about 60% of total revenues, compared with only 7% at Starbucks.

The legacy endures in the simple, almost austere design of Peet's stores today. Center stage is generally a counter devoted entirely to whole-bean transactions, which stands apart from another counter for beverage and pastry sales. Stark wooden chairs and tables reinforce the no-nonsense mood. On display and for sale is paraphernalia targeting hard-core coffee devotees -- everything from an espresso thermometer ($6.95) to an Italian espresso machine ($1,200).

Peet's also insists that it's more serious than its competitors are about product freshness -- hence the company's pledge that its beans are shipped within 24 hours of roasting, stay on grocers' shelves no more than 10 days, and are "roast dated." Compared with the Starbucks brand, Peet's coffee is "smoother" and "fresher," contends Mottern.

Mottern's enthusiasm for having Starbucks as a competitor does have its limits, particularly when he talks about the challenge of hunting for rental space to house new Peet's stores. More often than not, Starbucks (which added 647 stores to its worldwide total last year, swelling the number to 4,900) beats Peet's to the prime real estate. "There are not many places that we can go where they're not," Mottern says.

He concedes much the same point in speaking about the new channels of distribution that Peet's is developing. Starbucks is everywhere in that sense, too. As long as specialty-coffee sales are booming, there's plenty of room in grocery stores for everyone's brand. But what happens if the market wanes? Until now, Mottern says, grocers haven't charged Peet's the slotting fees that vendors must usually pay to obtain shelf space for their products. In a shrinking market all bets are off. And the question looms: Who would be better capitalized to wage a slotting-fee battle, Peet's or Starbucks?

Put more broadly: Can Peet's really compete nationally against the overweening power of the Starbucks brand? "It's hard to distinguish yourself because Starbucks has defined the market so completely," says Nancy Koehn, a marketing professor at Harvard Business School. "It will take lots of creativity to do it." Despite the dominance of Starbucks in the specialty-coffee market, Koehn suspects that there's room for "two or three other players."

And Mottern plans to be one of them. He's betting that ultimate survival for competitors like Peet's may depend heavily on the prospect of sales in local outlets throughout the United States, places like Larry's Markets, located in Seattle. When Larry's Markets began carrying Peet's coffee, on September 15, 2001, it was a symbolic moment. Mottern in effect had slipstreamed his company's product directly into its rival's hometown bastion.

Joseph Rosenbloom is a senior editor at Inc.

The Whole New Business Catalog

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