The Starbucks Solution

Mike Sheldrake figured he was dead when Starbucks opened two stores near his indie coffeehouse. Now his business is up 40 percent.

Inventories were reviewed and refined, and displays of giftware (coffeemakers, cups and the like) were streamlined, augmented with explanations of each item's function and clearly marked with their price. "The idea is to make it convenient for customers to shop, to make things as self-explanatory as possible," says Phibbs. Giftware sales increased 45 percent.

Polly's staff was overhauled, too, because many employees didn't like new working conditions that canceled their discounts and freebies and demanded their completion of a 35-hour training program followed by a 100-question test. "I wasn't holding my employees accountable," says Sheldrake. "They'd give away free coffee in exchange for more money in the tip jar, and I'd let them. But seven days after I cut out the discounts, my profits were up 11 percent. I said, 'Hmmm, we might have something here.'"

It's difficult and expensive to assemble and keep a good staff, says Sheldrake. "I have 13 employees, and last year, I issued 36 W-2 forms," he says. "But it's worth it. Their performance is light-years ahead of what it used to be. Other businessmen ask me, 'What if I train my employees and they leave?' I ask them, 'What if you don't train them and they stay?'"

Polly's Gourmet Coffee's image has undergone the biggest changes, but again, they are mostly subtle. White foam cups have been replaced with designer cups, created and signed by local artists and emphasizing the Polly's brand. Additionally, Polly's is aggressively promoting its special abilities. It will roast made-to-order blends created by customers. It will contract with restaurants to provide gourmet coffee. It offers mail-order shipments. Polly's wants to come across as confident and assertive, even sassy—especially in relation to its biggest competitor. Polly's isn't a victim anymore.

"The idea is to re-define Starbucks on our terms," says Phibbs. "They're not going to define us; we're going to define them."

"Down the Street from Ordinary" is Polly's new slogan, a reference to those two links in Starbucks' endless chain. Sheldrake has issued a series of bumper stickers that emphasize Polly's local quality. One says: "Locals Don't Let Locals Drink Ordinary Coffee." Another says "Enjoy Coffee Roasted 1,000 Miles From Seattle." Sheldrake has taken out sarcastic advertisements in a small local paper comparing Starbucks to obnoxious second fiddles of sitcom TV, ranging from Barney Fife to Endora.

"I haven't gotten a call from their lawyers yet," says Sheldrake.

Phibbs chuckles and says, "That's my goal."

For all the impudent fun they're having at Starbucks' expense, Sheldrake and Phibbs emphasize that their attitude isn't an empty advertising stance.

"The essence of Polly's Gourmet Coffee is the roaster, which sits here as proof of our attention to quality and detail," says Sheldrake. "We roast 10,000 pounds of coffee beans per month in a roaster that does only 100 pounds an hour. That's our 'wow' factor."

"Polly's Gourmet Coffee is a success because Mike knows who he is and who he isn't," says Phibbs. "If he ever farmed out the roasting, he'd be in trouble."

Nobody is saying that Polly's Gourmet Coffee's emphasis on the personal touch —from quality control to the intimacy of the environment—is the only strategy that a small coffee roaster can employ to counterattack the proliferation of Starbucks. Just ask the top guy at Diedrich Coffee, which built a reputation for pouring the world's best cup of coffee in Orange County's most stimulating coffeehouses. Try to ask him, at least—we did. But our calls to John Martin, the chairman of Diedrich Coffee Inc., went unreturned.

"Mr. Martin has other priorities," said Martin's secretary apologetically. "He's busy with acquisitions."

Well, there's the answer anyway: Diedrich Coffee Inc., now based in Irvine and ever-broadening on the NASDAQ stock exchange, is remaking itself in the style made ubiquitously famous and massively profitable by Starbucks.

From a single shop in Costa Mesa in the mid-1970s that German immigrant Carl Diedrich supplied with beans from his own Central American plantation and roasted in an oven of his own invention, Diedrich Coffee has expanded into a far-flung retailing, wholesaling and roasting enterprise that did $24.2 million in business in 1998.

Diedrich Coffee had 40 retail locations in 1998, as well as a couple of franchise locations. The company lost money, but as president and CEO Tim Ryan said in a prepared statement to stockholders, this was because executives were "preparing the company for national expansion."

That expansion is in full swing. In March, Diedrich acquired Coffee People, which increased the company's reach to four brand names (Diedrich, Coffee People, Coffee Plantation and Gloria Jean's) in 363 stores in 38 states and seven countries, not to mention systemwide sales of more than $150 million. It also made Diedrich the No. 2 company in the retail specialty-coffee market, behind you-know-who.

Then, in May, Diedrich signed a development agreement with Paradise and Associates Inc. that calls for the opening of 50 Diedrich coffeehouses in northern Florida. Eventually, Diedrich's national expansion plans call for the addition of more than 1,200 coffeehouses through franchise development agreements with large multi-unit franchise operators.

"Diedrich Coffee has the experience and strategic vision at the top that will help secure the national growth of the brand," blah-blahed David Paradise of Paradise and Associates in a press release on the Diedrich Web site. "Floridians will love Diedrich's comfortable coffeehouse environment and great coffee. It's a super concept and a super product, and I know it will be well-received in the Florida market."

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