First Coffee for 3 February, 2006

David Sims : First Coffee
David Sims
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First Coffee for 3 February, 2006

By David Sims

The news as of the first coffee this morning, and the music is one of the better covers of an obscure Bob Dylan song, Jennifer Warnes’s “Sign On The Window:”

As I was writing to a friend earlier this morning, it’s part of my business philosophy that almost any business concept or truth can be best illustrated in a coffee shop.

So let’s look at what, RightNow Technologies, NetSuite and other pure on-demand CRM vendors are facing with SAP and Microsoft announcing they’re going to swagger onto the on-demand turf, kick some butt and take some names.

The situation reminds me of something I’d read in The Wall Street Journal a few years ago, at the height of the anti-Starbucks fervor. Hey, I take the retail coffee shop industry pretty seriously. As I said, it’s my personal metaphor for American business in general. You tend to keep tabs on something like that.

I can take or leave Starbucks personally, I’m not one of these yo-yos who think it’s the Antichrist, a Wal-Mart with better cappuccino, but their coffee’s not as good as it could be either. Their muffins and whatnot are overpriced and bland, but overall I don’t mind meeting there – the one here in Istanbul’s actually better than most of the American ones.

But the Journal talked to proprietors of a Kansas City coffeehouse called Broadway Café. When Starbucks announced in 1998 they were opening an outlet next door, the Broadway’s customers and owners went hyper, ran around like Chicken Little screeching that the sky would fall in on Broadway, “collected a thousand signatures on a petition asking city leaders to thwart the plan.”

Starbucks opened anyway, and four years later when the Journal paid them a visit the Broadway Café was not only still open, but “sales at the 10-year-old coffeehouse have grown stronger since Starbucks arrived. With reluctance, Jon Cates, a co-owner of the Broadway, concedes that that might not be a coincidence. ‘Starbucks helped our business, but I don’t want to give them any credit,’ he says.”

Next door now, folks, and business increases. What was that about a rising tide lifting all boats?

That’s one problem with neighborhood coffee shops, they are generally run by the least business-friendly people in business, the kind of 1960s refugee greenies who think Wal-Mart is the devil incarnate and that customers should actually care about things like “fair trade,” “rain forests” or “organic” when it comes to coffee.

“Nice, Dave, but the point is…” The point is that the conventional wisdom (which as historian Paul Johnson noted is almost always wrong) says “Starbucks is clobbering the independent – invading its turf, stealing its customers, bankrupting its owners,” as the Journal puts it.

And as they found, conventional wisdom is… yep, dead wrong again:

In fact, most independent are doing fine – and not just in spite of Starbucks, but perhaps because of it. Here in Kansas City [in 2002], nearly all of the coffeehouses operating before Starbucks arrived in 1998 remain in business. Since then, other independents have opened, pushing their numbers well beyond the 25 stores Starbucks has on the market. Like Broadway Café, many of the independents operate within a store’s throw of a Starbuck’s outlet.

Nationwide, independents accounted for more than half of the industry’s growth between 1996 and 2001, when the number of U.S. coffeehouses doubled to 13,300, including Starbucks, according to Mintel Customer Intelligence, a Chicago market-research firm. Moreover, the large majority of independent coffeehouses started within the past decade have survived, industry experts say. By comparison, close to half of the country’s sit-down, slow-food restaurants are less than two years old, according to D&B, another research-market firm.

It’s like if Starbucks came into East Slingshot, where nobody had really thought much about coffee other than the potburn you buy to wash down the doughnuts from Dolly’s Diner, or the Maxwell House to get revving in the morning.

Andre’s Coffee Shop, opened by that weird guy who moved here from San Francisco last year and selling stuff like “Kenyan AA,” “Guatemalan Dark Roast” or “Hazelnut” – what the hell’s a “hazelnut?” – does subsistence trade, mostly on the strength of his wife Carla’s to-die-for carrot muffins. Folks just don’t see why they need to pay $3 for a cuppa joe when Dolly’s Diner charges buck-fifty, I mean coffee’s coffee, right? The only option you need is “Decaf or hi-test?”

And when Starbucks rolls into town and opens in the old stationery supply store’s corner space on the mall downtown, well, goodbye Andre, everyone thinks. Shame about the carrot muffins, but at least Carla contributed the recipe to the Methodist Church’s cookbook.

So because of Starbucks’s trustworthy, well-known brand name East Slingshot goes to sample the lattes, cappuccinos, espressos (no Turkish coffee, unfortunately, that’s still the great untapped market in America). And over time the town develops a taste for fine roasts, hazelnut lattes and double espressos. Folks could tell the difference between French Roast and Sumatran in a blindfolded taste test six times out of ten, and come to realize that in the morning you go for the darker roast, whereas in the evening a nice, crisp Colombian will do.

Then they twig that hey, this is the stuff Andre’s been selling. So they start dropping in a bit more often and hey, guess what, this guy knows what he’s doing. More and more people, their taste awareness having been raised by Starbucks, realize that yeah, Starbucks is better than Maxwell House, thanks for getting us off Dolly’s ditchwash, but Andre’s got the truly righteous bean. Starbucks gets their share of the market but Andre’s business goes up, thank you, Starbucks.

That’s how I see Microsoft and SAP’s long-term effect on the on-demand market. It raises the general awareness and acceptance of on-demand, stamps the imprimatur on it (because we all know that if something’s really worth doing Microsoft’s doing it, right? Right?) but it won’t put anybody out of business who knows what he’s doing in the first place, it’ll just create a bigger market for on-demand in general.

Back to the Journal’s analysis of the Starbucks phenomenon: “A third of Americans who drink coffee away from home order gourmet coffee from a specialty shop… Many people believe that Starbucks increases the overall market, attracting new customers to the product who then patronize the independent provider next door. ‘When a Starbucks opens, it educates the market, expanding it for everyone,’ says Bruce Milletto, president of Bellissimo Coffee InfoGroup Inc., a Eugene, Ore., company that provides consulting services to independent coffeehouses.”

Educating the market in the benefits of on-demand will certainly be a favor Microsoft and SAP will do, one the dedicated providers can reap the benefits of. Because folks who have a good experience with on-demand don’t say “Hey we’re really into this on-demand model, let’s buy this company’s installed stuff.” They say “Hey we’re really into this on-demand model, can we find someone who does it better?”

And hey, it might improve the salesforces and RightNows as well. Again from the Journal:

For one thing, sheer terror goads many independent owners to improve their shops when Starbucks enters the neighborhood. Kansas City’s Broadway Café banned smoking and began roasting its own beans when Starbucks opened next door. Similarly, the arrival of additional Starbucks in Long Beach, Calif., prompted the five-store It’s a Grind chain to spend thousands on cosmetic improvements as well as staff training, customer service and quality control. Sales have been rising by 8 percent to 15 percent since Starbucks moved close to the It’s a Grind stores in 2000.”

A little competition never hurt anything, not a girlfriend’s attitude or a high-tech company. It’s when you get into monopoly situations – marriage, Microsoft – that the, ah, innovation and attention to detail begin to suffer.

So Microsoft and SAP’ll get their share of customers, but as far as on-demand goes, the rising tide should lift all bytes.

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