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Canadian specialty retailing: coup for The Second Cup.

Canadian specialty retailing: coup for the Second Cup

With 160 plus retail shops from Vancouver Island in the west to Newfoundland in the east, Toronto-based The Second Cup leads the Canadian coffee market in specialty retailing. In fact, The Second Cup's chairman and ceo Michael Bregman contends that, perhaps to the chagrin of his American counterparts, "The specialty coffee retailing business is much further developed in Canada that it is in the U.S."

Bregman could be right. Canada has a population about 10% that of the U.S., yet The Second Cup is the largest specialty coffee retailer in North America. The company has twice as many outlets as its nearest competitor in either country, with shops concentrated in Southern Ontario, particularly Toronto. And though unwilling to disclose an exact figure, a few simple calculations place The Second Cup's annual retail sales at just under $50 million Canadian Dollars.

Their nearest Canadian competitors include A.L. Van Houte, a long-established coffee company that dominates the Quebec market, with 77 of 82 stores in that province and annual retail sales currently reaching just over $21 million Canadian Dollars. 77 of the A.L. Van Houte stores are franchises. Toronto-based Timothy's Coffees of the World has a total of 45 outlets (10 are franchises) generating approximately $12 million in annual retail sales. Gourmet Cup based in Abbotsford, British Columbia also has 45 stores at present. On the American side, it's Gloria Jeans, Barnie's and Starbucks.

Founded 13 years ago by Tom Culligan and Frank O'Dea, The Second Cup was bought out in 1988 by mmmuffins, inc. a privately held company owned by the Bregman family and Alten McEwen. (In addition to The Second Cup, mmmuffins, inc. owns two other food retail subsidiaries, mmmarvellous mmmuffins and Michel's Baguette French Bakery Cafe.) When Culligan sold the business, it could boast of 130 stores. Over 30 shops have been added since the sale. And over 95% of them are franchises, a percentage that is higher than any of its competitors (though A.L. Van Houte is running a close second at 94%). According to Bregman, the franchise arrangement has been emphasized at The Second Cup because the establishments "work best when owners are present at each location."

The Store

Each shop retails about 40 different 100% Arabica whole bean coffee varieties, including flavored coffees, a full range of roasts, and 10 to 14 different brewed coffee varieties. The cost of a cup of coffee ranges from about 60[cents] up to 80[cents] depending on the serving size and store location. According to The Second Cup, a typical store averages $300,000-$400,000 Canadian Dollars in annual sales. The gross operating profit is about half that figure. Operating expenses amount to roughly $85,000 based on the average The Second Cup mall location. The franchise fee itself is an additional $20,000.

More in Liquid Sales

The parent company selects store locations, negotiates all leases, builds all stores, provides marketing plans, promotion, product development and public relations. They also assist in merchandising, accounting, and other store operations. And once a successful franchise, multiple store ownership is encouraged.

The Second Cup stores typically combine liquid or cup sales with whole bean retailing, averaging 40% in liquid sales and 20-25% in sales of whole bean coffee. This combination sets it and other Canadian specialty retailers apart from the typical American specialty retailer. As president of Timothy's Coffees of the World, Becky McKinnon explains, "The Canadian specialty retail business has combined cup sales with whole bean sales in a way that American specialty retailers have not. In the U.S. you don't often see a cafe serving lots of brewed specialty coffee while selling lots of whole bean coffee in the U.S. The primary emphasis is usually on one or the other. Yet in Canada you often see cafes that are almost restaurants selling significant amounts of whole bean coffees."

But like the U.S. market, specialty-coffee retail sales continue to grow in Canada. Spokespersons from both The Second Cup and Timothy's Coffees of the World estimate retail sales are currently 15% ahead of last year at a time when overall retail sales in Canada are down by about 5%.

The Customer

Who does The Second Cup serve? Though reluctant to provide a general profile of their customers, Bregman says that two thirds of the people they serve in mall locations are women of above average education. He likens The Second Cup to, "a white collar equivalent of a donut shop." "But," Bregman cautions, "there's a lot of myth and mystique surrounding specialty coffee. Many of the impressions people have about the market are not necessarily true. We conduct a lot of consumer research to find out just what consumers do want, in terms of roast and other variables."

The Supply

"We don't own one truck," says Bregman. "We contract for our supply and distribution." What's more, most of their supply comes through Nestle, which roasts coffees for The Second Cup on a custom basis. "We conducted an exhaustive review when we went looking for a supplier. We were looking for quality, flexibility and distribution. And Nestle does a very nice job for us." Bregman does add, however, that they are becoming increasingly involved in "sourcing" from individual estates in producing countries. Their corporate team along with several franchisees will be traveling to Guatemala and Costa Rica in late July.

Cappucino Carts

With such a strong position in the business, is The Second Cup considering expanding into other arenas, such as roasting its own supply? "Not at this time," Bregman responds, content with their current pace of horizontal expansion. "We are retail specialists, and we need to be careful not to allow ourselves to be distracted from that." Bregman expects The Second Cup to continue more or less on its current retail track for the foreseeable future. Within retailing, however, new undertakings include the introduction of cappuccino coffees carts, one in Toronto and one in Winnipeg. (Both cities are in the Ontario province). So far, these test carts have been generating sales equivalent to some of the retail stores.

Geographically speaking, The Second Cup has its eye on the American retail market, though the company would like to enter through an association with an existing presence in the American specialty industry. One of its competitors, Timothy's Coffees of the World, already has U.S. outlets in Syracuse, NY and Washington, D.C.

To be sure, the competition is heating up in the specialty retail market, both in Canada and the U.S. Chances are, we will also see a blurring of borders as The Second Cup enters the U.S. market and American specialty retailers go north (Starbucks in Vancouver is a good example). But the success of The Second Cup has no real rival in either country. Their franchise approach, which has, in part, allowed them to grow faster than anyone else, may portend the direction (and magnitude) of multiple store specialty retailing in this country. Or is it the Nestle connection that has given them the edge? It could also turn out to be the nature of the Canadian market: that The Second Cup has been winning over many of the tea drinkers in that country. Whether it be The Second Cup, Gloria Jeans, Barnie's Starbucks in the American market, this may be just the beginning of a "chain reaction" of sorts. And in that sense, the Canadians may have had a glimpse of the future before the rest of us.
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Title Annotation:specialty coffee retailer
Author:Castle, Tim
Publication:Tea & Coffee Trade Journal
Article Type:Cover Story
Date:Aug 1, 1990
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