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Independent coffee shops feeling perkier than Starbucks

July 28, 2008

When java junkies step into Richard Lobdell's Mo'Joe Coffeehouse on Michigan Street downtown, they quickly realize it's no Starbucks.

The airy 2,500-square-foot space doesn't boast a slick menu display or a predictable array of beverage options. Instead, patrons find hand-drawn chalkboards listing the day's drinks, exposed duct work on the ceiling, and coffee-inspired walls painted in varying shades of copper, bronze and orange.

A sign on the cash register even warns customers to avoid any references to the ubiquitous chain with the green mermaid: "Customers using Starbucks' lingo will be served with an extreme lack of enthusiasm," it reads. "Be prepared."

Sure, the sign is a joke, but Lobdell's operating philosophy isn't. At a time when Starbucks is closing hundreds of stores nationwide, he and other local independent coffeehouse owners say they're doing just fine, largely because they're infusing their stores with personality and offering consumers an experience chain stores can't replicate.

"Regardless of Starbucks' troubles, the opportunity for the independent coffeehouses generally remains strong," said David Morris, a Chicago-based food and beverage analyst with market-research firm Mintel International. "There are a lot of consumers who have enjoyed going to independents and have continued to keep that a strong and vibrant part of the market."

Sales at the 2-year-old Mo'Joe, for instance, increased 31 percent from last year to $200,000 and Lobdell is looking to expand. He opened a coffee and sandwich kiosk at the nearby Gibson building in March, and he's considering adding a drive-through window to his Michigan Street store to attract morning commuters.

Lobdell also would like to open another full-service location nearby.

"Keeping up with it is a whole lot of work, and it's time-consuming," he said. "But it is a profitable business."

Other shops are growing, too.

Darin and Lisa Mitchell, owners of the Higher Grounds coffeehouse at 116th Street and Olio Road in Fishers, expect to open three additional locations by summer's end.

The success comes after their 1,600-square-foot Fishers store became mired in a "David versus Goliath" struggle more than a year ago, when Starbucks requested a zoning variance to open a drive-through location across the street.

Customers and area residents signed petitions against the chain, and the Mitchells spoke up at public meetings. Eventually, Starbucks reversed course.

That decision came as a big relief, Darin Mitchell said, since Higher Grounds does not have a drive-through window and would have struggled to compete against a store with one.

"We thought we were done," he said. "It was just a difficult and stressful time, and we weathered through it."

In fact, since the company's Fishers location opened two years ago, Mitchell said, it has seen steady, progressive growth. The store's success also has fueled the company's recent expansion efforts.

On July 18, the couple opened a 100-square-foot coffee bar on the second floor of the Hamilton 16 Imax movie theater in Noblesville's Hamilton Town Center. In early August, they plan to debut a 300-square-foot coffee shop inside Ball State University's Indianapolis Center downtown. And a full-service location will open in the new Geist Christian Church by the end of August.

Mitchell said Higher Grounds succeeds by offering a type of service chain stores can't match. One of his baristas, for example, memorizes the headlights of regular customers' cars, so she can start making their drinks before they even step in the door.

Over time, that kind of personal attention builds loyalty, he said, so consumers consider the coffeehouse their own.

"We just really want to be a place that molds into the community," he said. "I want people when they go on vacation to say, 'Man, this is nothing like our coffee shop.'"

Even with their good intentions, though, independent cafes pale in comparison to market leader Starbucks. Mintel's research shows that Starbucks controls about 45 percent of the coffeehouse market, while independents account for only about 34 percent.

Small cafes also face some of the same challenges confronting the big chains, such as rising food prices and declining consumer confidence.

Morris said higher milk and commodity costs hit locally owned shops particularly hard, because those businesses have lower profit margins and can't easily absorb the increases.

Mo'Joe's Lobdell understands. He said he now goes to a handful of local retailers to keep his costs low. When the price of milk spiked, he stopped buying it through his supplier and started driving to Aldi, where it sells for 50 cents less per gallon. For other items, he stocks up at wholesalers such as Sam's Club and Costco.

Other coffeehouses are turning to consumers to help pay for higher costs.

At the Abbey Coffeehouse on Pennsylvania Street downtown, co-owners Moises Molina and Mark Stiker recently started asking customers to give an extra 10 cents to 25 cents for a "green" biodegradable to-go cup. So far, nobody's complained.

Still, despite the tough economy, Molina said he doesn't take pleasure in Starbucks' closings.

"You open up a business because everyone has a dream," he said. "Nobody wants to see somebody's dream go down the drain."

But Starbucks' strategy of opening thousands of stores with similar product offerings eventually backfired, said Judy Ramberg, a vice president and consumer strategist at Iconoculture, a Minneapolis-based trend research company.

"Their ubiquity killed them," she said. "It stopped being personal and it stopped being unique."

To rebound, Ramberg said, Starbucks needs to let its baristas "go wild" so they can create more customized drink options to give stores a local flavor.

Independent coffeehouses already offer those kinds of experiences and can shine in a tough economy by offering low-cost art, music and entertainment options to show "we're all in this together," she said.

"It's their time to be part of the fabric of the community," she said. "People are open and looking for those deeper connection points."

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