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Robert Woolf, A 29-year-old ad writer in Parsippany, N.J., spends $40 a week on Starbucks lattes. Gas prices are climbing, though, and his salary isn't, so he's cutting back. Still, Woolf won't be turning to Maxwell House or Folgers for his fix. "I don't know anyone outside my Dad's Lions Club who drinks that stuff."
Woolf and other steamed-milk-loving consumers have confounded big coffee marketers such as Kraft Foods, Procter & Gamble, and Sara Lee, which have seen their core coffee brands erode in the face of the juggernaut that is Starbucks. In the past two years, Kraft's Maxwell House alone has lost about $75 million in supermarket sales. Niche brands, like Kraft Food Inc.'s Gevalia and Procter & Gamble's Millstone haven't moved the needle enough.
The truth is, the Starbucks effect, which has turned coffee bars into workplaces and study halls and gotten consumers hooked on richer, pricier brews, has thoroughly disrupted the mass market. Now the big food companies are realizing they need a new game plan to tackle the coffee-out phenomenon.
So the big bet now is gadgetry. The food companies are teaming up with appliance makers to take the biggest step forward since Mr. Coffee replaced the percolator. The newest entry about to hit stores, Kraft's Tassimo, aims to create some of the café mojo on kitchen countertops that people seek at the corner shop. The slickly designed push-button single-serve coffeemaker that delivers premium coffee, espresso, latte, chocolate, and even tea, was carefully developed over four years. Priced at $169, it's well above most rivals' systems in the hopes of being taken seriously by coffee aficionados without pricing itself out of the family budget. The quality brew comes in special "disks" that sell for 44 cents to 99 cents, and Tassimo has the only system that makes cappuccino with real steamed milk. Starbucks may have ambience, but half its customers just grab and go. For them, the java matters more than the Wi-Fi link. Says a confident Howard Friedman, a Tassimo U.S. executive: "Tasting will be believing."
None of these companies thinks it can outdo Starbucks, but they are out to learn from its success. Nothing less than a generation of coffee drinkers is at stake. According to a survey by Greenfield Online Inc. for BusinessWeek, 63% of adults age 25 to 44 regularly go to pricey coffee bars. The number of those cafés has jumped from 15,400 in 2002 to 18,600 last year. Starbucks, which has almost 7,000 outlets in the U.S. now plans to eventually have 15,000. And sales of specialty coffees like Green Mountain Coffee Roasters Inc. (GMCR ) and New England Coffee Co. keep climbing, hitting $9.6 billion last year, a growth rate of 7%. Kraft especially sees the fallout. Its own mass brands are sliding, but the Starbucks beans it distributes increased sales by 18% through Sept. 4, to $200 million, according to Information Resources Inc.
It has come to the point that drinking or serving a mass brand of coffee is getting to be like serving Pepsi (PEP ) on linen tablecloths. And the Starbucks phenomenon has extended beyond urban centers as coffee chains are finding an audience for $3 cups of joe on interstate highways, college campuses, and even among blue-collar drinkers. "The taste of the whole American public has been lifted, and Starbucks deserves a lot of the credit," says Mark Pendergrast, author of Uncommon Grounds: The History of Coffee and How It Transformed Our World.
In fact, despite the dim view of Starbucks held by the French and Italians, its influence has propelled American preferences toward those of Europeans -- for deep, rich Arabica-style roasts and espresso drinks. So Kraft faced an especially tough audience when it went to France last year. Researchers hooked machines in French households to monitors to record how often the machine was used, what drinks were brewed, and at what times of day. Kraft will do the same in the U.S., in hopes of maximizing coffee sales and outdoing Sara Lee Corp.'s Senseo system and P&G 's Home Café.
Though Senseo is a hit in the Netherlands, where it's found in half of all households, it has been slower to catch on in the U.S. In the 19 months Senseo has been on shelves stateside, it has sold about 400,000 machines, a sliver of the 19 million coffeemakers sold annually in the U.S. And while Sara Lee and P&G together spent $60 million on ads for their products since 2004, according to TNS Media Intelligence, they have sold only $20 million worth of their branded pods in grocery stores.
Selling more of their coffee refills to the masses, especially 25- to 45-year-olds with a lot of caffeine cravings ahead, is the whole point. In a nod to Gillette's proven razor-and-blade strategy, the idea is to get people hooked on the branded premeasured coffee "pods" and "disks." Home Café and Senseo pods are interchangeable, as well as those from other companies. But Kraft opted for its own proprietary "disks" that will be limited to its own brands like Maxwell House, Gevalia, and Suchard, as well as Twinings tea (Kraft doesn't have its own tea brand). Kraft concedes it limits choice but figures the quality control is worth it.
But can any kitchen coffeemaker displace the java jive atmosphere and brand cachet of Starbucks with its music tie-ins and Wi-Fi Internet connections? Ask Robert Woolf. "If the coffee really is good, I can download a lot more music with what I'll save."
By Adrienne Carter in Tarrytown, N.Y., with David Kiley in New York