Starbucks Moving Into Supermarkets

Starbucks Coffee Co. soon will be placing its distinctive bags of beans on Chicago supermarket shelves, and the competition is taking a big gulp.

The Chicago market will be the testing platform for Starbucks’ first major head-to-head competition with some of the biggest names in the supermarket coffee business - Procter & Gamble Co., Kraft Foods Inc. and Nestle U.S.A.

Six new blends of Starbucks whole bean and ground coffee are due to appear at Jewel Food Stores, Dominick’s Supermarkets and Omni stores Aug. 1. At Treasure Island, management still is deciding whether to carry the new line.

Though mainstream brands, such as P&G’s Folger’s, Maxwell House from Kraft, and Hills Bros., which is marketed by Nestle, dominate the $3 billion, wholesale supermarket coffee business, some of the food company giants have moved into the gourmet bean category over the past few years. And they all have well-funded marketing arsenals ready to combat the new invader.

As a result, moderately priced regional brands such as Batavia, Ill.-based Papanicholas and Chicago’s Superior Coffee - without the deep pockets of the national market leaders - may find themselves fighting to keep the shelf space they’ve worked hard to secure over the years.

“Starbucks now is not dealing with the little guys, but with the powerhouses in coffee and in the supermarket business generally,” said Jean-Michel Valette, an industry analyst at Hambrecht & Quist in San Francisco. “If it were anybody but Starbucks, I’d say the deck was stacked in favor of the people already there.”

When a newcomer challenges their turf, market leaders like P&G and Kraft often respond with price discounts and coupons that may stimulate sales but cut their profits as well as those of competitors who feel forced to match the lower price tags.

“This is an important battle,” said Paul Goudreault, vice president of sales and marketing at Papanicholas. “They have very deep pockets. Our mission is to sell high-quality products at a good value. But we don’t have huge buckets of marketing money to fight with.”

Starbucks has such a strong brand name that it will need to spend little on marketing to find space on grocers’ shelves.

Starbucks, founded as a coffee retailer and roaster in Seattle in 1971, made Chicago the first location outside its hometown. Today there are more than 90 stores in this region.

Last year in Portland, Starbucks conducted its first supermarket test. Company officials weren’t available to comment on the results or their newest venture. However, analysts said the Portland experiment answered some key questions.

“One of the issues they had was, ‘Will it cannibalize business at their own stores?’ They found it did not have any effect,” Valette said.

Another obvious question is whether widespread availability of the brand - which has been built largely without advertising - will undermine its cachet.

“The benefits of being widely distributed far outweigh the disadvantages,” said Eric Sorenson, managing director of the Center for Retail Management at Northwestern University in Evanston, Ill.

Without selling any coffee in supermarkets - where more than 70 percent of all coffee in the United States is purchased - Starbucks has sustained steady growth.

In fiscal 1996, ended last September, the company posted sales of $696.5 million, up 294 percent from fiscal 1993. Over the same period, its profits have more than quintupled, to $42.1 million.

Mainstream coffee marketers have had time to get ready for a Starbucks invasion. And some have launched their own gourmet lines, including Procter & Gamble with Millstone and Nestle with Sark’s. Because of their sales volumes, they have the clout to bargain for prominent displays in supermarkets.

But analysts say Starbucks still has the edge.

“The traditional manufacturers have fallen asleep at the wheel,” Sorenson said. “They’ve had an opportunity to do what Starbucks has done, but they let a lot of time go by without innovating.”