Starbucks has more than 11,000 U.S. outlets. McDonald’s and Dunkin’ Donuts have aggressively adopted a lower-priced coffee strategy. Many higher end brands have taken a severe in hit the recent economic downturn. Starbucks has even been closing stores after a period of aggressive expression. Conventional wisdom says that now is not the time to launch a marketing strategy for high-end coffee. Could conventional wisdom be wrong?
A recent post on this blog dealt with the concept of how to increase your market share in a difficult economy. Another post dealt with how to compete with the big boys. An article in the Wall Street Journal reveals a company implementing much of those concepts in a very challenging business category.
For over 20 years, IllyCaffè SpA, an Italian coffee maker sold its coffee in high-end grocers like Whole Foods, coffee shops, restaurants, and hotels. Their strategy to increase their market share is to team with independent coffee shops. This allows them to get their name out to more potential customers without the overhead of creating their own retail spaces.
Illy supplies the stores with Italian espresso machines, coffee cups, artwork, drink recipes and intensive training. The coffee shop becomes a certified Illy purveyor. In return, the shop must agree to serve only Illy coffee for at least three years. If cafes aren’t performing up to par, Illy provides additional training while reserving the right to terminate their certification.
These arrangements allow independent coffee shops the opportunity to feature an exclusive premium brand, and differentiate themselves from chains and other independents.
The article reports these results:
At Caffè Greco in San Francisco’s North Beach neighborhood, owner Hanna Suleiman says sales have increased by 10% and profits by 3% since the shop signed up with Illy a year ago.
Cafe Nineteen in Atlanta, which closed temporarily last year, reopened in June, having added an outdoor patio with red Illy umbrellas. Owner Sean Lupton-Smith said he began serving Illy coffee “so we could offer a consistent experience to our customers and be strong enough to stand up to the Starbucks around the corner.”
A 12-ounce Illy drip coffee in a white ceramic cup with the red Illy logo sells for $3 instead of $1.60 for his previously no-name cups of joe. Coffee sales have tripled to $750 a day. “We’re open until 2 a.m. and believe it or not, we sell coffee at midnight,” Mr. Lupton-Smith says.
It remains to be seen if this bold strategy will pay off in the long-term. Much of the success will depend on how well it’s executed. Tripling sales and higher profits margins are certainly a good start.
Consumers will pay more for a product or service – even in a deep recession, if they perceive it will meet a need or desire they have. Are you giving them a compelling reason to spend more with you, or are you running with the conventional wisdom crowd?
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