Four years ago, anyone looking for a cup of coffee headed to one of the half-dozen lunch counters or delicatessens across the street from Princeton University.
Now, in the space of five blocks, there are no less than seven boutique shops serving coffee at prices that could buy an entire meal at some of the town’s restaurants.
Coffee bars are overrunning affluent towns and upscale urban neighborhoods, pushing the national thirst for premium coffee to the limit. And while some companies such as Starbucks Corp. are thriving, others are ailing.
“There is no way that all the players in the business will survive,” said Robert Goldin, executive vice president of the restaurant research and consulting company Technomic Inc. “Most markets are already so saturated.”
Coffee People Inc., a chain of 47 upscale coffee shops, is one of those learning that painful lesson. The Portland, Ore.-based company recently reported a $6.1 million loss in the second quarter and said it would close or sell seven stores in Denver, Chicago and Southern California. It also hired investment banker Black & Co. to help it scout for acquisitions or find a buyer for the firm.
Another chain, New York-based New World Coffee Inc., isn’t doing much better and hasn’t reported a quarterly profit in 18 months as a public company.
“Competition is fierce and coffee prices are high,” said David Orwasher, a Starbucks real estate development director.
The signs of overcrowding are hard to miss. In Princeton, a city of 25,000 people between New York and Philadelphia, there are now more coffee shops than pizza parlors, Chinese restaurants or burger joints.
Just outside the campus gates is the Small World Caf, which opened in 1993, the town’s first gourmet coffee shop. Around the corner is the Original Princeton Coffee House, the Halo Pub and the Bucks County Coffee Co. A block away is a store operated by industry leader Starbucks, while half a block farther is Totally Wired, where customers sip coffee while using computers to go on-line.
One shop in town, the Coffee Grind, has already succumbed to the competition and closed. This hasn’t stopped other entrepreneurs: The Emerald Coffee Co. just opened across the street from the failed store.
It’s not just coffee bars that are competing with one another. Booksellers such as Barnes & Noble Inc., Borders Group Inc. and others are also getting into the business, serving pricey coffee at in-store cafes.
Surely, premium coffee is hot. The number of outlets selling gourmet brews in the United States has soared to 8,000 from about 200 in 1989. That number is expected to rise to 10,000 by 2000, according to the Specialty Coffee Association of America.
Plenty of those will belong to Starbucks, credited with starting the craze for expensive coffee on the West Coast in the early 1980s. The Seattle-based company, with 1,300 stores, plans to open 325 shops this year, or nearly a store a day, and its stock is up 50 percent in the past four months.
Not everyone thinks Starbucks or its rivals can keep it up. They say consumers will sour on paying as much as $5 for what’s little more than coffee and warmed milk topped with ground cinnamon or nutmeg.
“It continues to amaze me how much consumers are willing to pay,” Goldin said.
Perhaps a bigger concern is finding new sites that don’t take business from older stores.
“The easier store locations have already been taken,” said Starbucks’ Orwasher.
While Starbucks’ success has spawned a crop of imitators, others that sold stock haven’t served investors anything quite as stimulating as their brews.
Shares of New World Coffee have done nothing but fall since the company’s February 1996 offering of 2.5 million shares at $5.50 each raised about $13.8 million. The shares have closed below $2 since mid-May.
Ramin Kamfar, New World Coffee’s president, said the company’s string of losses are the result of startup costs. Kamfar said the chain, with about 40 coffee bars, must open 10 more stores at a cost of about $200,000 each before becoming profitable.
Coffee shops now are forced to rely on specialty drinks, pastries and bagels, ice cream, art exhibits, musical performances and, of course, computer on-line service for a fee.
Even with all the competition, Matt Errico, manager of closely held Small World Coffee in Princeton, said his sales are rising.
Yet, many rivals look like they could use business. On a recent evening, most of the shops in Princeton had a sprinkling of after-dinner patrons. And down the street at the ice-cream parlor, the line was out the door.
