Why, as a potential investor in the next Starbucks, should you applaud when you see copycat competitors springing up left, right, and center?
Because it’s the ultimate proof that your start-up company’s underlying concept works.
CLUE #3
Success Is Validated by Competition
There are many measures of success: making profits, not losses; rising sales; growing repeat business—to name just a few.
But the ultimate proof that a company could be the next Starbucks is when the copycat is copied!
Any company that does not inspire copycat competition is destined to serve a narrow market niche.
An example we’re all familiar with: the iPhone. It once had the smartphone market pretty much to itself. Today, dozens of alternative models are vying for your smartphone dollar. Indeed, Apple has lost the top spot by market share to Samsung and Android—though it’s still the most profitable company in the business.
Howard Schultz’s Starbucks was not the first café chain in the United States. Peet’s opened its doors in San Francisco in 1966. But like Canberra’s Augustin Petersilka, who only wanted his café his way, the owners of Peet’s were quite satisfied to stick to the Bay Area. That all changed once Starbucks paved the way.
Today, in addition to Peet’s and Seattle’s Best (now owned by Starbucks), the United States boasts, to name just a few of many, Caribou, Coffee Bean & Tea Leaf, Biggby Coffee, and Caffè Trieste—some following Starbucks’ example by franchising worldwide.
The Starbucks Effect
All told, the United States as of 2012 had over 21,400 “coffee cafés,”1 over 60 percent of them Starbucks stores. And that’s not counting the McCafés, Krispy Kremes, and other places now serving espresso as a sideline. Compared to, at most, a few hundred when Schultz had his Milan epiphany in 1983—an amazing transformation.
In his book about coffee, The Coffeeist Manifesto, author Steven Ward talks about his favorite coffee shop, Lakota, in “maybe my favorite town in the world,” Columbia, Missouri, “where I did most of my thinking and writing for grad school.
“When a Starbucks opened up down the street, and closer to the University of Missouri campus, a lot of us were worried that Lakota would be out of business soon.
“If anything, as time went by, it got harder to find a seat.”2
In other words, Starbucks expanded the market.
The same thing happened when Starbucks came to Los Angeles in 1991. It offered to buy the local Coffee Bean & Tea Leaf chain.
When founder Herb Hyman refused to sell, “they just flat out said, ‘If you don’t sell out to us, we’re going to surround your stores,’” Hyman recalled. “And lo and behold, that’s what happened—and it was the best thing that ever happened to us.”
Hyman called his friend Jim Stewart, who founded Seattle’s Best, to find out what had happened when Starbucks came to town.
On a high-rent Hong Kong street (double New York City rents), three coffee chains in a row: Habitu (#3 in Hong Kong), Pacific Coffee (#2), and Starbucks (#1). All busy at 11:00 a.m. on a weekday.
“You’re going to love it,” Stewart reported. “They’ll do all of your marketing for you, and your sales will soar.”
Hyman’s new neighbor boosted his sales so much that he decided to turn the tactic around and start targeting Starbucks. “We bought a Chinese restaurant right next to one of their stores and converted it, and by God, it was doing $1 million a year right away.”3
But to look at the United States alone is to dramatically underestimate Starbucks’ impact. Entrepreneurs in other countries, spying Starbucks’ success, started their own chains before the American “gorilla” came to town.
So in Australia you’ll find Starbucks clones such as Gloria Jeans, Hudsons, and Coffee Club; in Hong Kong, Pacific Coffee, Uncle Ben’s, and Habitu; in the Philippines, Bo’s and Figaro; in Vietnam, Highlands Coffee; in Thailand, Coffee World … to name just a few. Starbucks clones, each and every one.
Then there’s Krispy Kreme and Dunkin’ Donuts (US), Tim Hortons (Canada), McDonald’s with its McCafés, and hundreds of other restaurant, café, and hotel chains that have added espresso-based drinks to their menus.
And that doesn’t count tens of thousands of independent, single-store coffee cafés that didn’t exist before Starbucks’ success—or the countless numbers of other restaurants that now, thanks to Starbucks, offer espresso.
Why do they exist?
For three reasons:
1. Starbucks proved there’s a worldwide market for espresso-café culture, that people prefer espresso to drip coffee that’s been sitting on a hot plate since God knows when. And are prepared to pay more for it.
2. Starbucks (unlike Google) cannot be everywhere at once.
3. Starbucks could not (and still cannot) provide for every taste or pocket.
Having educated drip- and instant-coffee drinkers to prefer espressos, some wanted better espressos than Starbucks’. Others wanted cheaper ones. Today, thanks to its success, Starbucks is being squeezed from two directions at once in its home market. And outside the United States, only in a few countries—Hong Kong and the Philippines, for example—is Starbucks the leading brand.
The McCafé
A hamburger chain serving cappuccinos? Not an intuitively obvious success story.
Yet McDonald’s is rolling out its McCafé concept worldwide.
A brand extension, McCafé was started in 1993 in Melbourne, Australia, where it turned out to be a natural fit for Australia’s espresso culture—and is now that country’s largest espresso chain.
The McCafé comes in three varieties: as stand-alone stores, as a separate counter in a McDonald’s where the coffees are made by hand, or as a press-button machine next to the racks of Big Macs and apple pies in a regular McDonald’s. As a result, the quality and consistency of the coffee can differ quite dramatically from one store (and one country) to another.
Nevertheless, if you’re one of the millions of people who—thanks to Starbucks—prefer espresso to brewed coffee, you can now satisfy your craving with your morning McMuffin in over fifteen hundred locations (so far) worldwide.
The success of McDonald’s also spawned a host of fast-food chains. Direct competitors such as Burger King and Hardee’s. And even more indirect competitors competing for the fast-food dollar: Taco Bell, Pizza Hut, Domino’s, Kentucky Fried Chicken—just to mention a few of the major American chains.
Whole Foods’ success went hand in hand with the expansion of Trader Joe’s (founded 1967), the Fresh Market (1982), and Sprouts (2001), to name its three major domestic competitors. And while Walmart has overtaken Target and Kmart, there’s no dearth of competition in Walmart’s market space.
Outside the originator’s home territory, the competition is even fiercer. Starbucks, McDonald’s, Whole Foods, and Walmart all have first-mover advantage, but primarily in their home turf, the United States.
Entrepreneurs in other countries, spying the success of Starbucks or McDonald’s in the United States, set up their own clones before the much-bigger American company can come to town.
So the largest hamburger chain in the Philippines is not McDonald’s (460 stores) but the local Jollibee (916 locations). What’s more, by honing its product to local tastes, Jollibee forced McDonald’s to change the taste of its products to compete for Filipino customers.
In Finland, McDonald’s plays second fiddle to the local chain, Hesburger (founded in 1980), which has 281 stores compared to 72 for McDonald’s.
A Jollibee store in Manila: a McDonald’s copycat in more ways than one.
Interestingly, both these companies are McDonald’s copycats in more ways than one. Hesburger has expanded beyond its home base into neighboring Estonia, Latvia, Germany, Russia, and Ukraine.
And McDonald’s foray into the Philippine market forced Jollibee to upgrade its operations. In 1981, learning that McDonald’s was coming to town, a Jollibee management team went to the United States for an intensive study of McDonald’s operations. They found that McDonald’s “excelled over us in all aspects—except product taste [for the Philippine market],” said Jollibee’s founder, Tony Tan.4
By upgrading their promotion, store design, service, and other facets of their operations, they more than held their own against the American giant.
Like McDonald’s, Starbucks often enters markets where another originator or copycat already has the …
First-Mover Advantage …
… in the UK: Costa Coffee: In 1971, two Italian brothers, Sergio and Bruno Costa, opened a coffee roaster, Costa Coffee, to service the country’s then mostly Italian espresso bars. It opened its first retail store in 1978—five years before Howard Schultz had his epiphany.
Twenty years later, when Starbucks came to the UK, it had some 700 branded espresso cafés (the market leader being Costa Coffee), plus 4,100 independents.
India’s Coffee (and Copycat) King
“More than my intelligence, I can pick up ideas and copy them better and faster than others,”
—V. G. Siddhartha
—also known as India’s Coffee King—told Forbes India.
Like Sam Walton, everywhere he goes he sees what others are doing and tests the ideas he picks up in his various businesses.
By the end of 2012, that number had more than doubled. Costa Coffee remains the market leader, with 40.4 percent of the 5,246 branded outlets (Starbucks is number two at 30.7 percent), plus 5,633 independent cafés and 4,831 other places serving espressos.5 As The Guardian reported: “Today [2012], the coffee shop market in the UK is worth 10 times what it was in 1997, with 15,273 outlets currently estimated to be doing business.”6
That number doesn’t include the nine hundred Costa Express outlets, which are self-service coffee-vending machines.
While Starbucks can’t claim to have introduced the espresso revolution to the UK, it was indubitably a significant force in the dramatic expansion of the UK’s café culture.
Costa Coffee has also expanded into twenty-eight other countries, mainly in Eastern Europe and the Middle East. With a total of 2,203 stores,7 Costa Coffee is the world’s number two café chain after Starbucks.
… in India: Café Coffee Day: “A chance meeting with the owners of Germany’s largest café chain, Tchibo, in 1994,” reports Forbes India,8 inspired V. G. Siddhartha, CEO and majority shareholder of India’s largest grower of arabica coffee beans, Amalgamated Bean Coffee Trading Co., “to set up Café Coffee Day in India.”
The first outlet opened in Bangalore in August 1996.
With 1,556 outlets,9 and a new one opening just about every day, Café Coffee Day dominates the Indian market. With 75 percent of the branded café outlets, it looks destined to maintain its first mover advantage in a business where location is almost everything.
But there are no guarantees. The competition is fierce, including Barista (majority owned by Italian coffee roaster Lavazza), Costa Coffee, Gloria Jeans, Coffee Bean & Tea Leaf, Au Bon Pain—and Starbucks, which opened up in India in 2012, in partnership with Tata.
While not exactly virgin territory, with just 1.2 cafés per million population, India’s espresso revolution has barely begun.
… in Germany: Tchibo: Tchibo was established by Carl Tchilinghiryan and Max Herz in 1949. Its original business: selling coffee by mail order. Its first coffee shop opened in 1955; today it has 750 in Germany and 300 in seven other countries, plus thousands of other outlets in bakeries, supermarkets, and the like. It claims to be the biggest purveyor of roasted coffee (by value) in several European countries, including Germany, Austria, Poland, the Czech Republic, and Hungary.10
In 1973, in a unique move, it began selling nonfood consumer goods in its cafés, from table sets and breadboards to lingerie and cell phones. Every week, a new nonfood special appears.
… in Vietnam: Highlands Coffee: Vietnamese American David Thai started Highlands Coffee in 1998, inspired by the success of Starbucks … and is now franchising across Asia.
… in Colombia: Juan Valdez Café: Started in December 2002 by Colombia’s National Federation of Coffee Growers, the Juan Valdez Café chain had 170 outlets in Colombia and 68 in 12 other countries at the end of 2003. Starbucks opened its first Colombian store in July 2014, planning to open 49 more. Interestingly, although Colombia is a major coffee exporter, per capita coffee consumption is low compared to the United States and Western Europe, so there’s plenty of room to grow.
… in Hong Kong: Pacific Coffee: Pacific Coffee was started by Thomas Neir, from Starbucks’ hometown of Seattle, in 1993, because he “couldn’t find a decent coffee” anywhere in town. Walk into a Pacific Coffee outlet and you’ll think you’re in Starbucks … themed red instead of green. Hong Kong is one of the few markets where Starbucks has overtaken the first mover.
… and in Greece, coming from behind: Mikel Coffee Company: Starbucks came to Greece in September 2002—but today Greece’s biggest coffee chain is the Mikel Coffee Company, started by Eleftherios Kyriakakis in 2008. A Starbucks copycat, it soon took away Starbucks’ first-mover advantage; today, it has ninety-seven stores compared to Starbucks’ twenty-five and is opening new stores at a faster pace.
Ironically, one reason for its success: in the evenings you can buy alcoholic drinks as well as coffee, an innovation that Starbucks is now rolling out in the United States.
Will Starbucks Succeed in Italy?
Though Starbucks only entered Italy in early 2017, the Starbucks’ concept already has: Starbucks copycats are flourishing.
In a prime location in the Milan piazza where Schultz had his epiphany stands a McDonald’s, complete with a McCafé. One of Italy’s 122 McCafés,11 which makes McDonald’s the biggest café chain in the home of espresso!
Half a block away is a four-story Arnold Coffee, an intentional Starbucks clone down to its original logo, which brought a warning letter from Starbucks’ lawyers.
As befits Starbucks’ Americanized Italian espresso café concept, Arnolds (and McCafés) occupy a completely different market niche from the 140,000-odd Italian espresso bars. They’re a place to hang out, whether with your laptop or your friends. And, incidentally, you can buy a cappuccino, too.
In Milan’s Piazza del Duomo where Howard Schultz had his epiphany, a McDonald’s McCafé!
As a result, “when the other bars are empty,” says one of Arnold’s two partners, “that’s when we’re full.”12
More More-Expensive Gadgets
Starbucks’ espresso revolution has moved into the home, with an increasing range of coffee-making widgets and gadgets available. Aside from filter coffeemakers and the French press, which have been on the market for years, the coffee drinker at home can now choose from—
• Consumer versions of espresso machines, priced from a hundred-odd dollars to many thousands.
• Milk foamers, for when your espresso machine just makes espresso.
• Coffee-pod systems. Based on the Gillette model of locking the customer into your brand of razor blades, Nestlé (Nespresso), Coffee Bean & Tea Leaf, Starbucks, and many others now sell pod systems. They’re simple and quick to use: slap in the “pod”—a small plastic “bucket” filled with the coffee of your choice—press a button, and Bob’s your uncle.
• The AeroPress, a $30, one-person-powered almost-espresso-maker; small enough that you can take it with you wherever you go.
Just pods: a Nescafé Nespresso store in a premium-rent Hong Kong mall.
Meanwhile, the once-popular coffee percolator—if you’re under fifty, you’ve probably never seen one—has all but disappeared.
You can even roast your own green coffee beans and grind them at home.
All these suggest trouble for the most convenient form of coffee at home: instant. Starbucks’ VIA brand, made from high-quality arabica beans, not the cheaper robusta beans other brands use, demonstrates the market’s growing preference for better coffee. Even so, the instant-coffee category is bound to lose market share over time.
A few other indicators of espresso’s growing popularity:
• In one department store I saw this sign: BUY AN AIR CONDITIONER: GET AN ESPRESSO MAKER FREE!
• Premier customers at “select” HSBC banks can use free press-button espresso machines … while they wait.
• Those same press-button do-it-yourself espresso makers are appearing in more and more places, such as at the breakfast buffet in a hotel I stayed at once in Singapore.
From Labor- to Capital-Intensive
Another indicator of an expanding market is automation. “Handcrafted” coffees are labor-intensive. When the market is small, there’s no profit in making expensive gadgets to automate the process.
Today, automation is taking over in the coffee café business. The most extreme example is the $11,000 Clover, which brews you a perfect cup of freshly ground coffee, from the beans of your choice, at the touch of a button.
Starbucks thought it was such a great product it bought the company in 2008.
Big-Box Stores: Fewer Competitors—but Just as Much Competition
Whole Foods and Walmart face fewer players internationally, as at home, than Starbucks and McDonald’s. The reason is straightforward: far more capital is required to open a Whole Foods supermarket or a Walmart big-box store.
Nevertheless, the competition is just as fierce.
Walmart’s major international competitors include France’s Carrefour, the world’s number two retailer by sales, and Britain’s Tesco, the world’s number two by profits.
All three companies are now head-to-head in China and Japan, while two of them meet in Argentina, Brazil, India, Malaysia, Poland, Slovakia, and Turkey. In addition, Tesco invaded Walmart’s home turf by opening up in the United States. Walmart returned the favor by setting up in Britain.*
Tesco, founded in 1919, opened its first supermarket in 1929 and had a hundred across the UK in 1939. Today—copying the success of other retailers—it has expanded its footprint into other areas from hypermarts to smaller 7-Eleven–style convenience stores, while also diversifying from food into books, clothing, electronics, gasoline, and banking.13
Intriguingly, the origin of Carrefour lies in the United States, not as a direct copycat but via Bernardo Trujillo, a sales representative for the National Cash Register Company (NCR) in the 1950s.
To educate customers of the value of using cash registers, then new and revolutionary high-tech tools, NCR organized Modern Merchandising Methods (MMM) clubs and offered weeklong seminars in Dayton, Ohio, and Paris, France.
Bernardo Trujillo, chief of NCR’s merchandising seminars and fluent in French as well as English, hosted the seminars.† Over time, he became known as the Pope of Merchandising, teaching such now-obvious but then-revolutionary principles as “no parking, no business,” “islands of loss [i.e., loss leaders], oceans of profit,” and “stack them high and sell them cheap.”
MMM became known as Modern Merchandising Method. Move More Merchandise, or Make More Money.
Retail chiefs who attended Trujillo’s seminars and then applied his principles included Emile Bernheim (department stores and the Priba food chain, Belgium), Gustave Ackerman (Pick ’n Pay, South Africa), and Carrefour’s founders, Marcel Fournier, Denis Defforey, and Jacques Defforey.
The first Carrefour store opened on 1 January 1958, in Annecy; in June 1963, the company opened Europe’s first hypermart. Today, Carrefour has over 15,500 stores,14 including 1,395 hypermarts.15
By comparison, Walmart has over 10,800 retail units,16 including 3,188 Supercenters in the United States and 261 in other countries.17 Specializing in big-box stores, the average Walmart store is significantly larger than Carrefour’s.
These companies are hardly alone in the hypermart space. Competitors and copycats include RT-Mart (Taiwan and China, where it’s the market leader, ahead of Walmart18), Auchan (France), Aeon (Japan), Shinsegae (South Korea), Acucar (Brazil), Big Bazaar (India), and SM (Philippines), to name just a few.19
There’s Always Room for More
Years ago, a friend of mine in Chicago told me the following story. One of his employees resigned to work in his uncle’s small business, a three-store “chain” of sidewalk hot-dog stands.
“The last thing Chicago needs,” my friend responded, “is another hot-dog stand.”
Five years later, that company had grown from three stands to sixty!
Even when a market is saturated and there’s no apparent demand for another hot-dog stand, an entrepreneur can still invade that market, replacing existing hot-dog stands with ones that are cheaper or provide better products, better service, a better customer experience, or in some other way take customers away from existing sellers—and possibly expanding the market.
In this way, “there’s always room for more” in every existing market.