A second shot for Second Cup

Over the past decade, the number of Second Cup cafés has slipped to about 340 from 398 while the Starbucks count swelled to 1,070 from just 238… it concentrated on closing money-losing stores, shutting 30 last year alone.

The Globe and Mail
December 27, 2010

A second shot for Second Cup
Facing increased competition in the premium café sector, Canadian chain looks re-establish itself on java lovers' radar
Marina Strauss

Second_Cup.jpg

'It's imperative to us that we get growth,' says Second Cup CEO Stacey Mowbray. J. P. Moczulski or the Globe and Mail

Stacey Mowbray is upping the ante in the coffee wars, one vanilla bean latte at a time.

The chief executive officer at Second Cup (SCU.UN-T) has a five-year blueprint for growth that pits her chain against industry leader Starbucks in the $1-billion-a-year premium café field. She’s set her sights on adding 130 coffee shops to the current 340, which is a departure for Second Cup whose store count has shrunk 13.5 per cent from a peak in 2000 – even as Starbucks overtook it and surged ahead 351 per cent in its shop numbers over that period.

At the same time, she’s bolstering the size of many of her existing cafés by up to 30 per cent, adding more leather armchairs, a double-sided fireplace and drive-through counter – all designed to pull in more customers.

Her chain needs a jolt. After having virtually created the high-end coffee chain sector in Canada in the 1990s, Second Cup, of Mississauga, Ont., is rapidly losing ground to U.S.-based Starbucks. Now Ms. Mowbray, who took the reins at Second Cup in 2008, is racing to return the chain to its former glory.

“It’s imperative to us that we get growth,” she says.

The stakes are higher than ever. Seattle’s Best Coffee, another chain owned by Starbucks, is quickly pushing further into Canada, offering its premium coffee to a growing array of chains such as Subway, Burger King and now Wal-Mart Canada. Fast food titan McDonald’s is nabbing customers with its upgraded coffee offerings, while mainstream Tim Hortons is a magnet for coffee drinkers.

The increased competition is putting the heat on Second Cup. “It’s tough for them to be the preferred destination,” says Linda Strachan, restaurant industry analyst at market researcher NPD Group in Toronto. “You can get a good cup of coffee in a lot of places – more so all the time.”

The numbers tell the tale of strikingly diverging trends at the two top premium chains. Over the past decade, the number of Second Cup cafés has slipped to about 340 from 398 while the Starbucks count swelled to 1,070 from just 238.

Overall sales at Second Cup last year stood at $190.4-million, a far cry from the estimated $594.7-million at Starbucks in Canada. Meanwhile, total sales in the almost $1-billion premium café segment have stayed relatively static over the past few years, Ms. Strachan says.

Michael Bregman, who put Second Cup on the café map in its heyday of the 1990s as its CEO, can barely believe the “time warp” at the company. “They just fell asleep … They’re waking up now.”

Today, Ms. Mowbray, a veteran of food services giant Cara Operations, which once owned Second Cup, is determined to shake it up. She’s focusing more than ever on the quality of the coffee, getting third-party environmental and social certification of the beans and even appointing an in-house “coffee expert.” Her research found that her customers covet the designations.

She’s doubled her advertising budget to tout the products, shifting spending from store posters to ads, and shaving other printing and marketing costs.

The sleepy pace at Second Cup can partly be explained by its conversion into an income fund in 2004. Income funds focus on generating cash distribution for unitholders, rather than expanding their businesses. But on Jan. 1, Second Cup is converting back to a corporation, underlining its renewed focus on perking up sales.

Even so, as a royalty income fund until 2009, the company could have benefited from royalties from store openings but failed to move in that direction, Ms. Mowbray says. Rather, it concentrated on closing money-losing stores, shutting 30 last year alone. Also in the past, executives concentrated on wooing consumers with a message about the café ambiance, rather than its java.

Now Ms. Mowbray is intent on taking Second Cup back to its coffee roots. Her research found that customers still trust the coffee in her cafés, and find them unpretentious. “They don’t come to us for status or image.”

So she’s trying to reinforce the “unsung stories about the product.” She’s touting the chain’s 24 different varieties of coffee, its Swiss non-chemical water decaffeinating process and 112 taste tests before its java ever gets served. “We’re starting to now tell our secrets.”

Her next step is getting additional Rainforest Alliance or Fair Trade certification for Second Cup’s coffees, which she has already obtained for 24 per cent of them and aims for 80 per cent by next spring.

Her efforts, along with a stronger economy, are starting to perk up the business. In the first nine months of 2010, sales at cafés open a year or more rose 0.7 per cent, compared with a drop of 3.2 per cent over all of last year. She’s done it by reversing the annual slide in the number of customer purchases in each of the past few years, she says.

Still, Mr. Bregman thinks Second Cup could distinguish itself more from its competition. For instance, Second Cup introduced instant oatmeal about one year after Starbucks rolled out the offering in 2008. Second Cup could learn from its archrival’s practice of constantly launching new products, he says.

The Second Cup café design could be more alluring, Mr. Bregman adds. “Now when I walk into a brand new or renovated Second Cup store, I want to take a nap, I’m so bored.” In his day, he tried to make his shops look quirky by customizing neighbourhood locations, partly with an artist’s original creations.

Ms. Mowbray says her more-standardized stores are more efficient and starting to gain traction. She’s aiming to put drive-throughs in as many as one-third of them, compared with a handful today. And she’s looking for more non-traditional sites such as universities and hospitals, and opportunities to have her coffee served in select restaurants and hotels. “People are moving up to higher quality coffees.”

http://www.theglobeandmail.com/globe-investor/a-second-shot-for-second-cup/article1849849/


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