Fewer Cups, But A Much Richer Brew

Seattle these days is in the grips of gourmet-coffee madness. Care to catch up on the local cultural gossip? Try the counter at Starbucks, where earnest yuppies plunk down $1.35 for latte macchiato -- espresso with steamed milk and a touch of froth. Want something to sip while enjoying Caribbean street music? There's Henry's Decaf ($1.10) at SBC Coffee. Need a shopping pick-me-up? At Gloria Jean's in the Westlake mall, mocha with whipped cream goes for $1.60.

You would never know it from Seattle's caffeine craze, but most Americans now measure out their lives with fewer coffee spoons. The National Coffee Assn. figures consumption is down, from 3.1 cups a day per adult in 1962 to an estimated 1.75 cups in 1991. In these health-conscious times, only half of U. S. adults indulge, down from three-quarters in the 1960s. Retail coffee sales, at around $6.7 billion, have barely budged in five years.

NICE NICHE. Yet purveyors of gourmet coffee beans are thriving. According to New York research firm Find/SVP, sales of gourmet coffee -- specialty roasts and varieties such as Kenyan or Hawaiian Kona sold by companies not affiliated with the big brands -- have grown an average of 13% annually, to about $780 million this year (chart).

Some of these specialty coffee chains are going national, so much of the country could catch Seattle's mocha mania. Starbucks Coffee Co. has added coffee bars to its bean shops under President Howard Schultz, a former housewares-company executive who bought out the original owners in 1987. Starbucks has entered the Los Angeles market. San Diego and San Francisco will be next.

With 110 stores now and an estimated $80 million in revenues, Starbucks is rivaled only by Gloria Jean's Coffee Bean in Buffalo Grove, Ill. Gloria Jean's has 124 stores in over 100 cities and will open 58 more by 1993, mostly franchises. According to the owners, revenues jumped from $18 million in 1989 to $50 million this year. Other chains are Florida's Barnie's Coffee & Tea Co. and Michigan's Coffee Beanery Ltd.

These chains turn an amenity once confined to bohemian burgs such as Berkeley, Calif., into a business that jives with several trends. There's the national thirst for sobriety. In Los Angeles, coffeehouses have become late-night hangouts for the young set. "Everyone is quitting alcohol and drugs," says Stefan Bell, 22, an actor who frequents the Living Room. "You see people coming in after AA meetings."

And as an affordable luxury, gourmet-coffee sales percolate despite the weak economy. "You can't buy that new car, but you can splurge on a cup of coffee," says Edward C. Kvetko, co-owner of Gloria Jean's. The chain, started by former beautician Gloria Jean Kvetko and her former homebuilder husband, has targeted malls. The menu includes such flavors as hazelnut and French vanilla.

Starbucks disdains such baroque flavors. But it does cultivate an air of romance, a concept not usually associated with that cup of regular unleaded many Americans drink. Starbucks locations come complete with Italian-style coffee bars and biscotti in glass jars. "We're not just selling a cup of coffee, we are providing an experience," Schultz says.

Not everyone raves about that experience. In January, a scathing review in Consumer Reports criticized Starbucks' "bitter charred taste." Unfazed, Starbucks master taster Dave Olsen says: "A phenomenal number of people are deciding in our favor."

So far, Starbucks and Gloria Jean's have not hurt each other. The question is what Procter & Gamble's Folger's, Kraft General Foods' Maxwell House, and Nestle's Hills Brothers and Chase & Sanborn will do. All offer upgraded versions, using tags such as "gourmet supreme," "French roast," and "100% Colombian." Nestle has bought Sark's, a California whole-bean marketer. Kraft sells high-quality beans, labeled Maxwell House Private Collection, in stores and Sweden's Gevalia Kaffe by mail. It's also selling coffee from Jacobs Suchard, a European company it recently bought.

But the purchasing departments of the top coffee sellers still largely favor lower-priced beans, and they have yet to throw much marketing muscle behind gourmet brands. "Up to this point, the small companies have been protected," says Tom Pirko, president of Bevmark, a beverage-industry consultant. But if the big players do wake up and smell the you-know-what, the most robust part of the coffee market will turn as hot as a steaming espresso.

Before it's here, it's on the Bloomberg Terminal.