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.

Photo by Keith MayCraggy coffee beans, chipped and charred and blistered, are strewn like spent bullets across the top of a small wooden table at Polly's Gourmet Coffee. Mike Sheldrake is inspecting, arranging and considering them with the comfortable panache of a venerable gunslinger, simultaneously appalled and pleased and fascinated. Sheldrake is 51 years old, and he has been roasting premium coffee beans since 1976 in a little Long Beach shop adorned inside with rustic wood and frosted outside with terra-cotta stucco. He knows coffee beans. Loves 'em, actually. Believes in them, ultimately. That's why he can't stop dwelling on the collection of defectives he's got going on the tabletop. Again and again, Sheldrake smugly removes another little cripple from a bowl of beans labeled THEIRS and places it on the table. "Frankly," he says with a sincere, if perverse, smile, "I'm glad Starbucks has come to Second Street."

Well, those are brave words, anyway, even if they do sound like the last ones from a man facing a firing squad. Starbucks has put two stores within seven small blocks of each other in Belmont Shore's cozy Second Street shopping district. It's not exaggerating to say they constitute the cross hairs of a high-powered scope that has targeted Polly's Gourmet Coffee for a fatal 2,100-gun salute. That's about how many stores were in Starbucks' international arsenal when the second Belmont Shore outlet store opened one and a half years ago. By now—well, as of June 1, anyway—the count is up to 2,217. It's the kind of well-chronicled corporate firepower that has been mowing down mom-and-pop coffeehouses for most of the 1990s.

"When Starbucks opens one of its corporate stores next to an independent, its very presence knocks 10 percent to 15 percent off the independent's business," explains Sheldrake, speaking from experience. "What kind of small business can afford that kind of loss? After a few months, it's usually enough to knock the independent out. And Starbucks is big enough to survive until that happens."

But as Sheldrake sits in his shop, telling his story while picking out one disfigured coffee bean after another from the bowl labeled THEIRS, he has become convinced that Starbucks is one of the best things that ever happened to Polly's Gourmet Coffee. He pauses, breaks into a wide smile and sighs with satisfaction. "My business," he says, "is up 40 percent."

Until Starbucks whipped up a mania for high-end caffeine, Polly's Gourmet Coffee was mostly a curiosity, a vanity, an occasional indulgence for most of Sheldrake's customers. And that was a surprisingly short time ago: Starbucks' first Los Angeles store opened in 1991, the chain arrived in Orange County in 1992, and there are 209 stores in the LA/OC area now. "It was Starbucks," Sheldrake acknowledges, "that brought specialty-roasted coffee to the masses."

Until Starbucks' mass appeal grew so monstrous that it threatened to wipe out Polly's Gourmet Coffee, Sheldrake never took a hard look at what he was doing as a small businessman. He was pessimistic about what independents could do to survive the corporate chaining and franchising of America. He has gotten an unflinching eyeful now, and in the past 18 months, Sheldrake's business philosophy and practices have taken a 180-degree turn. So has his attitude—from a helpless sense of impending extinction to something approaching a lust for competition.

That's where that bowl of raunchy coffee beans comes in—the one Sheldrake has been sorting through, the one labeled THEIRS. Sheldrake has become an expert on what his opposition is using for ammunition. "These are Starbucks coffee beans," he says, raising his eyebrows. "And may I add that these are typical Starbucks coffee beans; I bought them right off the supermarket shelf and poured them all in this bowl. I didn't have to doctor them. Go to any Starbucks. Pick up a bag at any store. Open it up and look inside." What you'll find, Sheldrake claims, are beans that are "chipped, burned, defective and stale."

"At Starbucks, we go through extreme lengths to buy the finest arabica coffee beans from around the world,"countered Scott Martin, Starbucks' coffee-quality manager, in a written statement to the Weekly. "Our quality and freshness standards from purchasing to roasting to selling coffee are among the most stringent in the industry. Our coffees are packaged in Starbucks Flavorlock packaging to ensure product freshness. Once opened, the coffee beans are donated to a local charity after seven days."

Some Starbucks beans that didn't go the charity route are on permanent exhibit in Sheldrake's shop, right next to a bowl of plump and shiny beans that were roasted right there at Polly's Gourmet Coffee. In fact, the display is positioned in front of Polly's huge imported roaster, which exudes an aroma so captivating that local real-estate agents say it has helped them sell homes. When Sheldrake speaks to small-business seminars or college classes or community groups—and as word of his success has spread, so have the speaking invitations—he always brings a bowl of Starbucks beans to compare with Polly's. In March, Sheldrake even displayed a bowl of Starbucks beans in the Polly's Gourmet Coffee booth at the Coffee Fest trade show at the Long Beach Convention Center.

"I just sat there showing their beans and our beans," he recalls, chuckling. "When some people from Starbucks came by and saw what I was doing, they didn't like it at all. One said, 'You can't do that. You can't show our logo.' I said, 'I bought this bag of beans at Vons. I can do anything I want with it.' Another told me, 'This is a setup.' I said, 'We don't have to doctor the beans.' Like I tell everybody, see for yourself."

After all that Starbucks has done for Polly's Gourmet Coffee, this is how Sheldrake wants to repay them?

"Yep," he says, chuckling mischievously. "I want to send 'em back to Seattle."

A stroll past the two Starbucks stores on Second Street doesn't suggest that either outlet will be boarding up the windows any time soon. They have customers from open to close. So does the new Johnny Rockets hamburger shop, located in the building that used to house Howie's Market. Same with the Rite-Aid Drug Store, which recently supplanted the Egyptian Pharmacy, the oldest business in Belmont Shore when it died. Ditto for the Baja Fresh, which moved in when Cherubs Children's Apparel could no longer afford the kind of rent that results when chains like Jamba Juice, Sunglass Hut and Frame-N-Lens determinedly squeeze into a shopping district that's only 15 blocks long. It's a process that started back in 1992, when the Gap/ Banana Republic tandem took over a store occupied for many years by Tuttle's Camera. And it all makes good business sense.

Since Belmont Shore was dredged along the edge of massive wetlands more than 100 years ago, it has remained one of Long Beach's most endearing areas to live—and not coincidentally the city's most enduringly successful retail district. Its demographics are a combination of Iowa, Bohemia and Baywatch. About 15,000 people with an average household income of $60,000 are crammed into houses and apartments that serve as a living collage of 20th-century Southern California home-sweet-homebuilding. The tiny lots, lack of garages and narrow one-way streets not only put everyone within walking distance of Second Street but also create a chronic parking problem that encourages people to make that walk rather than lose their parking space during the drive somewhere else. It's about as close as merchants can come to having a captive clientele.

For years, Second Street was a combination beach hangout, nightspot and full-service shopping district. In addition to fine restaurants, fast-food joints, funky bars and offbeat shops, it was a place where you could buy everything from a tailored suit to a sack of groceries. This authenticity made it the best kind of tourist attraction—in this case, an unadulterated slice of the California lifestyle—a seamless extension of the surrounding neighborhood. Now it's looking more and more like just another shopping center, except with bad parking.

"Bottom line, it's competition," says Frank Colonna, a real-estate agent and a major property owner on Second Street, who used to lead the Belmont Shore Business Association and now represents the area on the Long Beach City Council. "I believe in a capitalistic society and the value of competition. I'll always be a supporter of small business, but there's also a place for the larger corporates on main streets like ours. With their national experience of understanding the marketplace, they sort of bring us to a new level of rethinking our market strategies."

This change of face isn't exclusive to Belmont Shore, of course. Throughout the country, small business districts that have survived the exodus of customers to shopping malls and big-box discounters are now being invaded by a new hybrid breed of competitor. Chain stores that claimed their fame in the malls of the 1970s and 1980s are forging new links in cities' oldest commercial zones. Superstores that were born fuller-than-grown in cinder-block suburban warehouses are opening compact versions of their mega-selves to attract shoppers who don't have the time or desire to leave their neighborhoods for these huge alternate universes.

Often, however, national corporations get opportunities that small businesses don't. Cities frequently create special deals for chain stores, ranging from free business licenses to rent subsidies to interest-free loans to sales-tax rebates. "It's not fair for small independents to be treated unequally to chains, yet it happens," says Ray Grabinski, a Long Beach councilman who owns a pizza shop. "Cities often seek the status and promotional value of a highly regarded chain store. But besides creating an uneven playing field, giving those deals to chains can create instability because huge corporations may not have the same commitment to the neighborhood. Chains tend to come in when times are good and disappear when things are not."

Colonna emphasizes that no businesses in Belmont Shore were attracted by special subsidies. "There was no reason to," he says. "The area is prosperous. The vacancy rate on Second Street is 2 percent. There has always been a steady backlog of small and large businesses ready to move in."

The chain-store scenario is becoming so familiar that when Starbucks showed up shooting with both barrels, lots of people in Belmont Shore figured Polly's Gourmet Coffee was as good as dead. "That's what I thought," Sheldrake admits. "When the first Starbucks opened down the street, I saw my sales dropping a few percentage points every month. It was a chronic problem. Then when the other Starbucks opened 75 yards away, the problem accelerated. I had exhausted all my ideas. I thought it was useless."

Lately, a glossy polo-green 1998 Cadillac El Dorado has been showing up in the small parking lot at the far western end of Second Street, the one that Polly's Gourmet Coffee shares with Fingerprints Records, Z Pizza, Now Playing video and Kentucky Fried Chicken. The car does not belong to Mike Sheldrake; he still drives a 1969 VW Bus. The Caddy belongs to Bob Phibbs. "My license plates say 'Retail Doctor,'" says Phibbs, in case you didn't notice. His business cards say that, too. "When I first started showing up here, though, the employees called me 'El Diablo.'" Most of those employees aren't around anymore. Phibbs shrugs. "When I got here, things were going so badly they were talking about looking for other jobs, anyway."

Phibbs is sitting next to Sheldrake and the slowly expanding collection of fractured coffee beans, alternately glowing with the quiet pride of an exalted guru and clucking with the affectionate exasperation of a meddling mother. "I had been watching Mike's business for quite a while," he says. "I live nearby. I was just a customer. But I'm also the Retail Doctor, you know? I could see this guy needed help, but it took me six weeks to convince him."

Phibbs is a former district manager with the Howard & Phil's western-wear chain. When he was managing the company's store in South Coast Plaza, he won an award for the biggest sales increase in the shopping center. Since Phibbs set out as an independent sales and marketing consultant, his biggest success has been the rejuvenation of the Bayshores Inn in Newport Beach. "The Bayshores was a 21-room hotel that treated itself like a Best Western," Phibbs sniffs. "Now it realizes it is a premium destination in a prime resort town."

Similarly, Sheldrake gratefully credits Phibbs as the man whose revitalization plan saved Polly's Gourmet Coffee. "I was so caught up in the operation that I couldn't step back to see the big picture," Sheldrake says. "I was so busy looking for solutions that I couldn't see the one staring me right in the face."

Observing Sheldrake and Phibbs sitting next to each other, it's easy to understand why it took a while for their relationship to warm up. Their association still seems unlikely. Phibbs is a slender fellow with an edge to his features and a bit of a sting in his speech. He has a meticulous presence even in casual clothes—on this afternoon, a pressed plaid shirt atop a dark mock-turtleneck pullover with black-rinsed jeans—and he keeps his thinning hair closely snipped. When he's not being a retail doctor, he's being the artistic director of the South Coast Chorale. Sheldrake, on the other hand, resembles a shopkeeper out of a storybook. He has a full head of hair and a thick mustache, though both are turning gray, and he exudes the comfort of someone who relies on his working-man's muscles and his conventional wisdom. He likes to golf and roast coffee.

"I told Mike, 'I don't want to teach you to make a latte, just how to do your business,'" Phibbs says. "But he kept dodging me. Mike has a real passion for coffee. Things began to get better for Polly's Gourmet Coffee when he was finally able to make the leap that someone else might have a better perspective on the coffee business. I told him, 'You've got a brand name here, and you don't even know it.'"

Sheldrake relented—"I decided to invest in Bob," he says—and almost immediately began to regret it. "Next thing I knew, Bob came up with a 20-page report filled with a checklist of 85 things that Polly's needed to change," Sheldrake recalls.

"Later, the list was expanded to 100," Phibbs interjects.

"It made me mad," Sheldrake continues. "Half the things I didn't agree with, and the other half I already knew needed to be done and was embarrassed because I just hadn't done them."

The process became very personal for Sheldrake. "Basically, Bob would challenge everything I was doing, and I had to defend it," he explains. "Oftentimes my only defense was, 'Because that's the way we always do it.'"

Every time Sheldrake offered that explanation, Phibbs seized upon it in a way that sometimes seemed like an invalidation of everything Sheldrake had been doing for more than two decades. "Like lots of small-business people, Mike cruised through the 1980s doing well and not really knowing why," Phibbs says. "But the problem with that is when things got more competitive in the 1990s and those businesspeople started doing badly, they still didn't know why."

When the review was completed, the revitalization began. Again, Phibbs was pushpin direct. "The list was thorough, but everything fit into one of three categories: the facility, the employees and the advertising," he says. "It definitely wasn't brain surgery."

Polly's Gourmet Coffee's interior got an overhaul. "We had to reinvent the store, but we did it without changing the basic character of the store," says Sheldrake. "It was funny. People who hadn't been in for a year would show up and say, 'Yep, the same old Polly's.' But people who came in every day would say, 'Hey, you've changed something again.'"

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."

Martin Diedrich, the son of company founder Carl, fills a position known as Chief Coffee Officer these days. He was not quoted in any of the stories about the company that bears his name.

Meanwhile, back on Belmont Shore, there's a palpable concern for the future of Second Street's small businesses. It has manifested in many ways, from a citizens-based letters-to-the-editor campaign to the nine-month 1998 city moratorium on the introduction of new restaurants. The just-added newsrack at Polly's Gourmet Coffee is kind of a symbol of what's at stake—the rack came out of Dodds Book Store, which just closed after 34 years in business.

Phibbs is concerned, too, but he's not sentimental. "I'm in favor of people supporting small businesses, but those businesses have to deserve support," he says. "Some people who own their own business think it's an entitlement. They say, 'I want to be my own boss. I want to be able to do what I want.' But the absentee ruler went out with the castle. Somebody else is paying for that business, and that somebody is the customer."

Sheldrake, once so fatalistic about his own prospects, has latched on to Phibbs' philosophy. He's a realist, which he says makes him something of an optimist.

"The future of the small businessman is very much in his own hands," he says, waving his hands to emphasize his revitalized shop and taking a deep whiff of roasting coffee beans. "We have so many weapons to fight against the big guys that they don't have, can't use or just don't know about. We can produce a superior product, we can offer greater variety, we can give better service, and we can create a location that is more interesting. And in the process, we can redevelop a sense of community. That's what we're all looking for, anyway."

Meanwhile, across the street and a few blocks down from Polly's Gourmet Coffee, a corner shop that for years was a dark and brooding little coffeehouse called Midnight Espresso is being renovated for the next arrival in the Belmont Shore business family. The awaiting tenant? The newest link in the 45-store chain of Coffee Bean & Tea Leaf, which opens this week.

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