Observations on Coffee Shops, from a Coffee Shop

I have an addiction to Coffee Shops. Coffee shops and cafes, not coffee itself. At a good coffee shop I arrive at a magical intersection of productivity and creativity. It is the “third place”, as coined by Starbucks CEO Howard Shultz, that I spend the most amount of time at after my home and my office. I wake up and head to the coffee shop; I meet and have meetings with friends and colleagues at the coffee shop; I blog, I read and I browse at the coffee shop. In fact, I’m writing this post at my new local coffee shop/bar hybrid, Freehold.

Freehold Brooklyn, my new favorite hang out spot

I love the environment of a coffee shop so much that I have often dreamed of owning my own, but a quick look into the economics of the industry have convinced me that the business is not nearly as comfortable for the owners as the coffee shop environment is for their patrons.

Nevertheless, I have made a number of observations about the industry that I feel are worthy of sharing.

Coffee is a leading indicator of Consumer Trends

Coffee has always been a highly visible industry for studying changes in consumer preferences. In the 80's and 90's, the shift from coffee as a commodity drink brewed at home or in the office, to an on-the-go pickup purchase from Starbucks or Dunkin Donuts preempted the ongoing shift in consumer focus from price-consciousness to convenience and quality of experience. In the late 90's and early 00's, consumers began to step up and take notice of where their food, drink and clothes were coming from. The coffee industry led the way in embracing Fair Trade ethical sourcing standards, beating the subsequent explosion of organic supermarkets and socially conscious apparel manufacturers.

Third Wave Coffee differentiates itself from Starbucks et al. through its creativity. As a labor of love, Drip Coffee and Pour Overs let the coffee speak for itself rather than masking the bitterness with milk. Photo source: Blue Bottle Coffee

Today, the consumer trend being led by coffee producers is not the quality of the experience or the ethicality of a product’s supply chain, but rather the rise of products that are purchased as a reflection of a consumer’s individual personality. As perfectly articulated in this Mashable article, today’s Young Urban Creatives “define ourselves by our purchases…[but] how much they cost is immaterial if the materials bought validate our intellect”. The rise of Third Wave coffee producers such as Stumptown Coffee, Intelligentsia and Blue Bottle has been well documented; producing small batch, lightly roasted coffees with a wide variety of flavor profiles that are the antithesis of the consistent, dark roasted coffee consumers can expect from Starbucks.

This surge in creativity and variety in coffee can find a parallel in the craft beer movement, which has successfully taken on the multinational brewers by offering locally produced, creative varieties of beer. People want to be able to purchase products that reflect their individuality and their taste; third wave coffee and craft beer are on the bleeding edge of providing these expressive products to their customers.

Increased experimentation in the typical Coffee Shop model

For coffee shops themselves, I believe we are witnessing the early stages in experimentation of the traditional coffee + pastry business model. Capitalizing on the coffee-shop-as-an-office trend, certain locations are distinguishing themselves by developing a model based on monetizing a consumer’s time or a coffee shop’s own space, rather than the coffee they brew. Ziferblat caused a stir in London when it launched in 2014 with a pay-by-the-minute business model, and has since opened a second location in Manchester. Workshop Cafe in San Francisco has built a model by allowing customers to reserve a seat or a mini-office for as little as $2/hr, providing outlets, blazingly fast wifi and “concierge” services to those who arrive at the same intersection of productivity and creativity as I do in the cafe environment. Other iterations on the business model see locations staying open into the evening hours, serving beers and wines and hosting evening events, from Poetry readings to political debates. Housing Works in Manhattan is a particularly good example of this model.

I love this experimentation and hope to see these new models thrive; a broader spectrum of offerings allows consumers to find exactly the type of “third place” they are looking for, and the increased diversification in revenue streams may ultimately improve the economics of the coffee shop model.

Opportunities in Supplementary Services to the Coffee Industry

Despite some big bets made by the VC community in coffee shop chains like Blue Bottle, the biggest opportunities in coffee may ultimately lie in ancillary products and services. CUPS is a great example: an app that allows consumers to pre-buy discounted cups of coffee to be redeemed at scores of participating independent coffee shops throughout NYC. Their cash-flow positive model benefits from a powerful network effect, and I can see CUPS or something similar scaling rapidly in the near future. Subscription-based Third Wave coffee distributors Craft Coffee and Joyride are finding success building the logistical infrastructure for bringing good coffee to corporate clients, rather than in the coffee itself.

Coffee shops have played an indispensable role in fostering community for centuries, and in an increasingly nomadic society I believe their influence will grow further still. I’ll be keeping an eye out for growing opportunities in the supplementary services side, as well as any business model tweaks that seem to be able to scale successfully, but in the meantime I’ll just enjoy my Stumptown Cold Brew!