From 'Cari-who?' to Caribou

With the wind at its back, No. 2 coffee company prepares for growth

MINNEAPOLIS -- When Michael Tattersfield took the helm of Caribou Coffee in late 2008, the No. 2 coffeehouse company was struggling. Its stock was nearing $1, and it hadn't been profitable since it went public in 2005.

"We had a simple goal of making $1 in 2009, and we made $5 million," he told Fare Digest in an exclusive interview. In 2010 they doubled that number, and in the first quarter of 2011 the 541-unit chain reported a 4.3% same-store-sales increase. (Q2 results will be out next week.)

"We're always humble about this. Success doesn't guarantee success, and I'll always remind us of our history. It's not like folks didn't try to do well."

Tattersfield spoke with Fare about the company's growth plans, foodservice strategy and the overarching mantra of "affordable luxury."

[For more from the interview, watch for the October issue of Fare magazine.]

[image-nocss]Fare Digest: Last year you launched a rebranding of Caribou Coffee; this year you've rolled out oatmeal, specialty drinks and other foodservice items. What are your growth plans for the year to come and beyond?
Michael Tattersfield: The company has been evolving from a coffeehouse business to a branded coffee company, and that forced us to look at the business in different channels. Those channels are where coffee consumption is occurring, and it's important for us to think that way, because loyalty is built along each one of those channels and people become very loyal to a brand. If you don't do that and you're not in those channels, there's a very good probability that you'll have a customer loyal to another coffee brand, and they will skip you.

Each channel has different strategies. We'll start building new stores, but priority No. 1 was to start to build the average unit volumes. We wanted to drive our average unit volumes aspirationally, which we call our million-dollar benchmark. Why? Because 10% of our system does that, and we know when we pick the right real estate and we have the right teams running our brand, we can do that.

Our core coffee competitive set tends to be five to 10 times our size in the markets that we're in. We don't want to do that because you can't source the type of quality coffee we can today under that model. But clearly we can scale probably to three to five times our current size in the store count in the geography that we're in. And we can expand to new geography, but the priority will be to develop the markets we're in. We're underpenetrated, that's one of our biggest challenges. Why do some stores not perform as well as other stores? Well, when you're well-penetrated, it's convenience and the level of conveniencewhich some brands have taken to a whole other level.

FD: What about CPG?
MT: We won't ignore that [at least 80% of] coffee consumption happens from the home or at home. So if you don't build your commercial business ... that has an impact on how you build the brand. We're in about 8,000 doors today, roughly around 40% of all the doors of grocery that exist. We don't need to be in 100%, but we think it's somewhere around 70% or 80%. So we could double the door count. And those doors will also tell us if there's a high demand for our product, we should be thinking about this as a retail coffeehouse market as well.

Then you think about how you link that to our third channel, which is our store-within-a-store concepts. If you focus on the health-care industry [or] the grocery business, what it does is drive the packaged coffee on the shelf a lot more. So the brand awareness in markets where we might not be really starts building.

In markets where we are, we have a huge percentage of the market share of premium coffee. In this market for example (Minneapolis/St. Paul), we have over 40% of the premium coffee share on the grocery side, and we've only been doing this for four or five years. So we can see how the channels really work with each other, and we see a great opportunity to expand into the other channels of foodservice and other elements. But, and I'm always humble about this, you gotta move beyond "Cari-who?" You gotta earn the right to be Caribou. It's takes the brand development and story to do it.

FD: What challenges stand in your way?
MT: You've got an ultra-competitive environment now that's dramatically changing the landscape. You've even seen premium brands getting into very aggressive discounting, which you never saw before in the category. Does it change your strategy? No, it just fine-tunes, it helps to clarify what your environment is. The unique thing that's going on is that commodities are exploding. If you're a coffee company, you have to manage that. You've got to find that right equilibrium of pricing, traffic or velocity and how to [deliver] affordable luxury while you're dealing with some hyper pressures.

FD: So what are your next steps?
MT: To open up 10 stores and continue on our food evolution, which has led us to target around a 3% to 5% same-store sales growth for the year, and that's lapping the almost 4.5% same-store sales growth from last year. Forward flavors from not just the fruit drinks but coffee. You'll see our lunch program getting ready to launch if the timing lines up and the systems are ready to take it. ... We're privileged enough to be able to say we'll do it or not do it.Then continue to execute with our CPG business, to grow beyond the 8,000 doors, maybe a couple hundred more. Looking at the licensed franchise side, it's opening up a little more than 30 stores this year.

It's a good development year from a store count. You're now in the space of adding 40 locations of the Caribou brand, continuing to evolve the food platform and offering an affordable luxury.

[Hungry for more? For more from the interview including Caribou's foodservice plan, watch for the October issue of Fare magazine. Comments or questions? Talk to us on Twitter @faremagazine.]

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