A funnel cake macchiato anyone? The coffee wars are heating up

Across the US, in cities large and midsize, cafes and drive-ins that specialize in tea and coffee drinks make up one of the fastest-growing segments of the restaurant industry in terms of number of stores.

Six years ago, Odessa, an oil town in West Texas probably best known for the high school football team that inspired “Friday Night Lights,” had all of 17 coffee or tea restaurants.

Today, it boasts around 55.

Starbucks has eight outlets in the community, with another expected by the end of the year. A regional brand out of Arkansas, 7 Brew, has put up three drive-thru coffee stands, where it serves drinks like Funnel Cake Macchiatos, Pixie Stick energy drinks and wild berry smoothies. From Oregon, coffee companies Dutch Bros and The Human Bean have also established toeholds in the community, on top of numerous mom-and-pop coffee cafes that have opened in recent years.

“In Texas, almost every community the same size as Odessa is seeing the same thing, an explosion in what we call the three C’s: Car washes. Chicken places. And coffee shops,” Javier Joven, Odessa’s mayor, said recently, a few hours after he had ordered his Starbucks usual: a venti caramel macchiato, upside down, extra hot, with soy milk.

This is not a phenomenon unique to Odessa. Across the country, in cities large and midsize, cafes and drive-ins that specialize in tea and coffee drinks make up one of the fastest-growing segments of the restaurant industry in terms of number of stores.

And it’s not just the biggest coffee chains — Starbucks and Dunkin’ — that are trying to get consumers their coffee fixes; numerous regional players are racing to expand their footprints in parts of the country like the Midwest and South, which they argue are under-caffeinated. Seven years ago, 7 Brew Coffee opened a kiosk in Rogers, Arkansas; today, it has more than 190 stands stretching from Casper, Wyoming, to upstate New York. Likewise, Scooter’s Coffee, a chain out of Nebraska, has grown from 170 shops in 2018 to an expected 770 by the end of this year, according to Datassential, a market research firm based in Chicago.

Christine Barone, CEO of Dutch Bros, a publicly traded restaurant based in western Oregon, said, “In 2019, we had 370 shops, and we have 912 right now.”

She added, “We hope to have 4,000-plus shops over the next 10 to 15 years.”

But good luck finding an ordinary cup of joe at most of these new restaurants. There is something of an arms race going on in the coffee world, with a growing number of establishments seemingly desperate to outdo one another in coming up with sweetened, imaginatively flavored concoctions that in some cases bear only a passing acquaintance with what the average customer might consider “coffee.” Instead, most of their sales growth is coming from iced beverages, whether they be syrupy, foamy, cookie-flavored lattes or macchiatos; fruit smoothies; high-octane energy drinks; or souped-up seltzers and sodas.

This changing landscape is one of the challenges facing Brian Niccol, the new CEO of Starbucks, who last month was wooed away from Chipotle with a jaw-dropping compensation package that could exceed $100 million. He replaced Laxman Narasimhan, who was abruptly ousted after a 16-month stint.

Starbucks, to be blunt, is trying to get its mojo back. Throughout the Covid-19 pandemic, the company had been a big winner, expanding its loyalty programs and drive-thru capabilities while serving up 12-ingredient iced beverages for Gen Zers who happily posted them on their social media platforms. But two quarters of consecutive declines and a stock price that dropped nearly 30 per cent in six months were clear warning signals to the board of Starbucks, and a key reason the company decided to go with a new occupant in the executive suite.

On top of concerns that slowing traffic and revenues suggest some coffee drinkers may be cutting back on their caffeine fixes, Starbucks and the other traditional coffee chains are facing big competition not only from one another but from fast-food restaurants, in terms of securing top real estate locations in cities all over the country. In a post-Covid world, every coffeehouse, burger joint and taco restaurant is looking for the same thing: drive-thrus.

And then there is this question: How much coffee does a city or neighborhood even need?

In Odessa, Joven, who shells out $7 four times a week for his customized venti drink, said he was unperturbed about the number of coffee shops popping up around town.

“Everybody has their preference of where they want to go for their coffee,” he said. “If there is oversaturation, some places getting more business and others less, they just won’t survive.”

‘Starbucks Is Our Competition’

When Brandon Knudsen and his wife, Camrin, opened their first coffee shop in Longmont, Colorado, in 2004, they didn’t have much of a plan, and their aspirations were pretty low.

“We basically hoped we’d make enough money to pay the mortgage on the place, but around 10 p.m. the night before we opened what was then called Gizzi’s, we realized we hadn’t put together a menu board yet,” Brandon Knudsen said. “So one of our friends brought over a chalkboard, and we were trying to decide what to put on there and how much to charge. ‘How about we put on a latte and maybe charge $3 for it?’”

Today, that coffee chain — now called Ziggi’s Coffee — has 97 locations around the country, mostly franchises run by others, with plans to open up to 40 stores a year in the coming years. And its goals have grown as well.

“Starbucks is our competition,” Knudsen said, noting that iced beverages make up the bulk of its sales and that Ziggi’s now offers a variety of food items, from breakfast sandwiches and pastries to cake pops. “People pick up on some of these foods and drinks from Starbucks, and we’re appreciative of what they do. Our job is to make it a little bit better.”

Indeed, if imitation is the sincerest form of flattery, Starbucks is greatly admired.

Like Starbucks, many of the regional coffee players that are racing to expand make the bulk of their money from frothy, sugary, iced beverages. And like Starbucks, they are focusing on developing drive-thru locations, and many have loyalty programs for their customers. Many offer breakfast sandwiches and cake pops that are similar to those at Starbucks. And more than a few sell their versions of Starbucks’ Puppuccinos for furry friends.

“There are a lot of people who complain Starbucks this and Starbucks that, but Starbucks taught the world that casual, convenient coffee cafes can exist here,” said Alex Tchekmeian, the founder of Foxtail Coffee, which, in eight years has grown to 60 locations in Florida and nine in Michigan, Nevada and Georgia.

While others are focusing on drive-thrus, Foxtails embraces Starbucks’ sit-down, roastery cafe concept. “I don’t know where any of the coffee brands would be in America if not for the invention of the model by Starbucks,” Tchekmeian said.

But how the various coffee chains hope to differentiate themselves from Starbucks, and from one another, is through a variety of drinks and beverages (all mostly iced) that hardly look like coffee.

Ziggi’s sells basic hot and iced coffee, but also highlights a number of noncoffee drinks on its menu, including the Limecicle Refresher, the Cosmic Blast energy drink and, for fall, the Harvest Spice Energy Infusion, combining white chocolate and pumpkin in an energy drink. Likewise, Scooter’s is offering for fall an Iced Maple Bourbon Latte and a Green Apple Infusion drink.

Starbucks may not be sweating the competition, but it is clearly watching it. After other chains began selling iced energy drinks, Starbucks launched its own versions this summer, including the Melon Burst Iced Energy drink.

Still, analysts say it will take years — if not decades — for a true competitor to emerge to the coffee juggernaut that is Starbucks.

First, there’s its size. Starbucks has more than 16,000 locations in the United States, and they generated $26 billion, or three-quarters, of the company’s revenue in 2023. That dwarfs not only Dunkin’, which has about 9,600 stores, but makes Starbucks bigger by store count than the 10 largest coffee and tea shops in the United States combined.

On top of that, Starbucks’ scale and size means it has access to less expensive capital, and can more readily absorb higher real estate costs than smaller competitors, analysts say. (Starbucks executives declined to be interviewed for this article, but the company said it planned to open 580 new stores this year.)

“There are significant barriers to becoming a competitor to Starbucks,” said Peter Saleh, an analyst at investment banking firm BTIG who covers Starbucks. “If you wanted to build a competitor to Starbucks starting today, you’d be at it for 20 or 30 years before you even made a dent.”

A nation on caffeine

It may seem as if there is a Starbucks on every corner, but the coffee giant isn’t everywhere. And the places where Starbucks are scarce or absent — think midsize cities in the Midwest and the South — are the markets that various regional players are flooding into.

“We’re focusing on the I-35 corridor from Minnesota to Texas,” said Scott Harvey, president of Dunn Brothers Coffee, a coffee restaurant based in Minneapolis that roasts its coffee on site. It currently has 50 stores, with a goal of having 250 in the next five years.

“As we march further south from Iowa to Texas, we’re finding lots of markets there that are underserved and so we’re focusing on bringing our brand to them,” Harvey said.

In Green Bay, Wisconsin, the number of coffee and tea outlets has jumped to 80 from 33 in six years, according to Datassential. Cedar Rapids, Iowa, has gone to 96 from 58 in that time, and Tyler, Texas, jumped to 52 coffee and tea restaurants from 17 six years ago.

As the regional coffee players rush into new markets, however, they are competing with one another — as well as with other food chains — for key real estate. These days, the hottest commercial real estate in most cities is known as the “end cap,” the far end corners of a shopping center or strip mall that allow for a cafe and drive-thru to be built.

“Prepandemic, drive-thru locations weren’t in high demand,” Harvey said. “Today, real estate is more competitive than it’s ever been. All of us are out there looking for the same site, the end caps or good drive-thru locations, and that’s causing real estate pricing to go up as well.”