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Coffee clash

The battle for store fronts between caffeinated giants can leave local independents out in the cold

By Michael Summers

michael_summers@fortwaynereader.com

Fort Wayne Reader

2008-05-06

What does Fort Wayne need? A thriving downtown? A baseball stadium? Lower taxes, clean water, and job opportunities?

Sure. But Fort Wayne also needs doughnuts. Lots of doughnuts. And we’re going to get them.

In March, Dunkin Donuts announced plans to open 13 new stores in the area over the next few years as part of an aggressive expansion campaign. HH Restaurant Group, LLC, a Fort Wayne-based company that is also a Dairy Queen franchisee, signed the deal and will operate the stores.

Dunkin Donuts has been around for nearly 60 years, and according to the company’s marketing materials, can boast over 7,200 restaurants in 31 countries worldwide. Fort Wayne only has one, though, which is sort of surprising. Concocted mostly of sugar, flour, and fat, with even more of the gooey stuff layered on top or injected inside, doughnuts are like the femme fatale of some 50s b-movie, as delicious as they are dangerous. They’re the kings of the junk food jungle, one of the very worst foods you can eat from a nutritional standpoint, with an average of 3.2 grams of transfats. Considering that, it’s a wonder Fort Wayne doesn’t already have a Dunkin’ Donuts on every corner.

But in all seriousness, Dunkin’ Donuts has gone to some lengths in the last few years to rebrand itself and freshen up its image. The company announced last fall that it was “eliminating trans fats” in its menu (those insidious trans fats won’t be all gone; federal regulations say a food can be labeled trans fat free if levels of trans fats fall below .5 grams), but the current campaign and expansion of Dunkin Donuts has less to do with changing its menu than its public perception. The company’s logo, color schemes and store set-up is the same as its always been, or at least the same as its been for a long, long while, which makes perfect sense: Brand Keys, a consulting firm that researches brand loyalty among consumers, found Dunkin Donuts was the top brand in the coffee and doughnuts category. Besides, the failures of other fast food chains when they tried to drastically change their image were probably enough of a warning to the company.

The transition Dunkin Donuts is trying to make involves them stepping into a market that wasn’t very prevalent in small city America just 10 or so years ago, but which the company seems uniquely positioned to move into. Without changing their style or much of their menu, they’re rebranding themselves as “the largest coffee and baked goods chain in the world.”

Sort of like… well, Starbucks. In fact, a recent Dunkin Donuts TV commercial had puzzled customers in line at an un-named but vaguely familiar coffee shop, uncertain what language the menu was in. Another had a customer ordering a “large” coffee and being told to use an Italian word.

In other words, Dunkin Donuts is positioning itself as the less pretentious alternative to Starbucks. But no matter what language the menu is in or if the color scheme is in pastels or earth tones, the result is the same story of what happens when large, well-financed national chains set their sites on a certain location. Independent local business have to compete with entities that don’t really play by the same rules. And to further complicate matters, developers love the big chains.

John Richards, owner of Higher Grounds, a local coffee stores with several branches throughout the city, says that when he went to scout locations for another shop a year or so ago, he found himself competing with the giants in ways he hadn’t thought about. “I always thought I just had to compete with them for customers,” he says. “What I’ve found that’s been kind of interesting is that the developers who are developing these shopping centers, they want these national chain tenants so bad that you’ll have two developers right across the street from each other that will sit on letters of intent from Starbucks for a long time.”

A “letter of intent” is just what it sounds like. It’s simply a semi-formal way for an entity to say “I am seriously interested in this location.” It’s not legally binding, no obligation is required, and no fee is involved. Richards compares “letters of intent” to house-hunting; it’s just like saying “I’d like to see that house.”

Except a highly visible national chain can probably get away with saying “I’d like to see the house” however many times they want, wherever they want, and developers will listen to them each and every time. Richards saw what he thought was a prime location for Higher Grounds in a new shopping center being built up north. He already had a relationship with the developer, but when he asked about the location, the developer told him he already had a letter of intent from Starbucks. “I thought, ‘well, that stinks,’” Richards says. “But that developer only had the first 200-foot of frontage. Then it falls into the hands of another developer. But (the other developer) also has a letter of intent from Starbucks.”

Richards was amazed at how seriously the developers took this non-formal, non-binding expression of interest from a national chain, though he says he probably shouldn’t be. “Developers build these centers, and they do it to attract people to a certain area,” he says. “Someone moving to Fort Wayne from… well, where ever, when they see they’re going to be within a four-mile radius from a shopping center with a Kroger’s, a Walgreen’s, a Blockbuster, and a Starbucks, then that’s obviously a benefit.”

Still, Richards says he finds it ironic that he’s being forced to compete for location space with other coffee shops, national or otherwise. Higher Grounds has been around for a little over 10 years, with several stores throughout Fort Wayne. “My very first venture into this business 12 years ago, we wanted to open up in Northcrest shopping center in that little satellite building where Windows, Doors, and More is, because they have a little drive-through window,” says Richards. “We had plans drawn up, but they would just flat-out not lease to me because 12 years ago, retail coffee was something Fort Wayne had never heard of.”

“It does frustrate me now, where we’ve gone through this evolution and then regression,” he adds. “We were this unknown entity to local developers, then we became sought after. There was this period where we would get calls from developers: ‘we’re building this new center. We want you to be there.’ Now, we’re competing because everyone wants to get Starbucks.”

In response to dipping stock prices, Starbucks recently announced that it would slow down its rapid expansion in the US (but just in the US), discontinue its breakfast sandwiches, and focus more on what made it such an icon in the first place — coffee, baked goods, and making the “hip” coffee house experience less threatening. This tightening of the reins shouldn’t be confused with losing money; the coffee giant is still a giant, and it’s still dabbling in music and a couple other sidelines. Also, Howard Shultz, the chairman, CEO, and founder of Starbucks, recently said he could see Starbucks reaching 40,000 stores worldwide (not even McDonald’s has 40,000 stores worldwide), so “scaling back” in this case should be taken with a drop of cream. But Starbucks is supposedly taking a look at some of its underperforming locations with an eye towards shutting down the ones that aren’t doing well.

Yet even if the coffee giant is slowing down, that won’t help the independent coffee retailer if there’s another giant in the wings with its own expansion campaign. Of course, in many ways this is the old story of locally-owned businesses running up against the national chains, but the coffee retail business seemed a field where an independent business owner could make a go of it. “It’s like my business is very typical in some ways,” Richards says. “But in other ways, I can’t think of any other business that has to face something as specific as Starbucks. I’m not Tru Value vs. Home Depot, because I have more to offer and it’s less expensive. You don’t see little, independently owned sub or sandwich shops popping up. So I don’t know anyone who is currently experiencing that same phenomenon.”