Diedrich, Starbucks Facing Off Nationally and in OC
Irvine-based Diedrich Coffee Inc. is the hometown hero hoping to make a national name for itself.
But Seattle’s Starbucks Corp., the 800-pound coffee gorilla, is not sitting still, opening new stores even on Diedrich’s Orange County turf.
No worries.
“We co-exist very well,” said Ann Wride, director of strategic development for Diedrich. Starbucks is famous for its dark roast and Diedrich is famous for its light roast. It’s similar to Coke and Pepsi, she said. The market is big enough for both to sell side by side.
Meanwhile Starbucks, which evolved into somewhat of a cultural icon in the ’90s, is confident of its superiority, including in the OC market. Kimberly Gerber, regional marketing manager for Los Angeles and OC Starbucks stores said, “The inference that we might be following Diedrich around is really not an appropriate thought. Our expansion is driven by consumer demand.”
Additionally, she pointed out, Starbucks has been in OC since 1992 and has more stores than Diedrich. Indeed it does. Starbucks has 60 stores in OC and Diedrich has 25 stores.
As far as Diedrich stores affecting nearby Starbucks’ sales, Gerber said “while it’s ridiculous to say that there is no competition, there certainly isn’t a struggle.”
Wride said that when Starbucks moves blocks away from a Diedrich, “we see a blip, but after a couple of weeks, it goes right back.”
“It’s really a business of loyalty,” she said, noting that most customers visit three to five times per week.
Putting the competition in perspective, Diedrich, after going public in 1996, had its first profitable quarter at the end of 1999, on $19.1 million in revenue. Diedrich has 360 outlets in 38 states (including 280 mall-based Gloria Jean’s retail stores) and is expanding in Florida, Southern California, North Carolina, Phoenix, Portland, Ore., Connecticut and Nevada. It expects to open about 1,200 to 1,500 new locations over the next five to seven years.
Starbucks, with $527 million in revenue last quarter, already has 2,200 locations and has now turned its focus toward international expansion. Recently, Howard Schultz, Starbucks chairman and CEO, announced he was giving up his CEO duties to be the vision guy for its global development. Starbucks currently operates 350 shops outside the U.S.
Starbucks was trading last Wednesday at 37 5/8; Diedrich at 2 3/4. Schultz’s 1999 base salary was $804,000; Diedrich chairman John Martin earned $100,000 for his efforts.
So Diedrich, No. 2 in the coffee marketplace, is a long way from the No. 1 spot. But there’s plenty of room for growth, Wride said. The coffee market is growing by 10% annually. Even better, people are assuming their coffee addictions earlier. Those in the 18- to 24-year-old age bracket are drinking 4.6 cups of coffee a day, she said.
Coffee beverage sales account for about 70% of Diedrich’s revenue. Drip coffee, or coffee of the day, is its biggest selling item. Starbucks earns most of its revenue from beverage sales as well, Gerber said, although Starbucks is more oriented toward in-store retail sales of items like mugs and espresso machines. It also licenses its products to companies such as Pepsi and Albertson’s.
Diedrich plans to do more retail sales,it has a new chocolate line and sells items such as mugs,but it’s sticking with coffee, Wride said.
Although Starbucks is the largest player, the mom-and-pop coffeehouses still own the market, Wride said. However, within a few years, she said, she expects a wave of mergers and acquisitions to consolidate the sector into three or so major players.
Meanwhile, Starbucks is headed outward as Diedrich intends to flourish in the States.
The two coffeehouse chains take different approaches to expansion. Starbucks prefers to own most of its stores. Diedrich has been aggressive about lining up large-area franchisees.
There is also a difference in cultures.
For example, within blocks of each other in Newport Beach, customers are lined up out the door at Diedrich’s coffeehouse and Starbucks during the early morning coffee rush. But in the evening, there is more of a social atmosphere at Diedrich. Diedrich’s coffeehouses are generally a bit larger and more conducive to “hanging out.” The wooden tables, soft-fabric chairs and laptop plugins give Diedrich a more homey feel, Wride said. Starbucks stores are more modern in design and lend themselves to grab-and-go customers.
Coffee fiend Gary Goldhammer occasionally uses the Diedrich store in his Tustin neighborhood as an office and a social meeting place.
“If you go to hang out and read, you go to Diedrich,” he said. “It’s a community get-together kind of a place.”
And though he says he’s a loyal Diedrich customer, there’s a Starbucks close to his office, so he frequents that, too. n
