Vying with Starbucks: A Love-Hate Thing

In July 2004, Kinley Pon was throwing his annual block party at his El Paso (Tex.) coffee shop, Kinley's House, on the same day that a Starbucks (SBUX) across the street was having its grand opening. Pon, 51, says he had planned the party for months—a day-long event with musicians, belly dancers, and local law enforcement intended both to promote his business and to raise awareness about drunk driving. Pon was surprised when an employee from the new Starbucks store walked across the street and started passing out Starbucks promotional cards to customers—on Pon's own patio. A spokesperson for Starbucks couldn't cite a specific policy regarding the distribution of promotions on a competitor's premises. "They did it for a week," says Pon. "But I allowed it to occur, because my reasoning was that they were going to pass them out anyways."

There's a love-hate relationship between Starbucks and the thousands of independent coffee shop owners in the U.S. For years, the Seattle-based chain has brought coffee drinking into the mainstream and revitalized the business of java, yet its ubiquity has also made survival more difficult for mom-and-pop coffee houses. In 2007, there were roughly 26,300 coffee cafés, kiosks, and carts across the U.S., and about 60% of those were independent, according to Mike Ferguson, the marketing communications director at the Specialty Coffee Association of America. On July 1, Starbucks announced it would be shuttering 600 locations (BusinessWeek.com, 7/1/08). On July 17, it listed the names and locations of the 600 specific stores it was planning to close of its roughly 11,000 U.S. stores. The closures prompted the question: What have independent coffee shops been doing to compete with the $9.4 billion company, the largest coffee retailer in the world?