Coffee Chains in Grand Battle to Take No. 2 Spot

Most companies want to be No. 1. Making it to No. 2 would be good enough for Coffee Bean & Tea Leaf, a fast-growing Los Angeles-based coffeehouse chain.

It’s an admission that in the coffee business, there is Starbucks Corp., and then there is everybody else.

Coffee Bean, on schedule to have more than 400 stores by the end of this year, is one of at least half a dozen small players vying for the second spot. They range in size from having 200 to 400 cafes, and none has a clear bead on second place.

Coffee Bean’s rivals include Peet’s Coffee & Tea Inc. of Emeryville, Calif., Caribou Coffee Co. of Minneapolis, Diedrich Coffee Inc. of Irvine and franchiser It’s a Grind Inc. of Long Beach.

“Starbucks will open 1,800 units worldwide this year,” said Nicole Miller, an analyst with ThinkEquity Partners in Minneapolis. “None of these other chains have anywhere near 1,800 units.”

Yet the dominance of Starbucks and its 11,000 stores doesn’t stop others from making money. The entire coffee house and kiosk industry is growing at 20% annually, Miller said. Americans spend about $10 billion annually at coffee outlets, according to the Specialty Coffee Assn. of America.

“There’s a new person drinking a cup of coffee outside their home every day, and there’s also someone going from one cup to two,” Miller said.

That’s what Coffee Bean Chief Executive Sunny Sassoon counts on for growth in the family-owned business, which he says is profitable and will hit $200 million in sales this year. Sassoon wants to grow the business at a 30% annual rate over the next decade.

“The potential is huge,” he said, especially in California.

In Starbucks’ hometown of Seattle, there’s 1 coffeehouse for every 2,500 residents, Sassoon said. In California, the ratio is 1 to every 28,000 residents.

Coffee Bean owns, licenses or franchises 160 locations in the state and plans to jump past the 200 mark this year. Most of the growth will be in Southern California.

The chain recently signed a deal to license as many as 40 mini-cafes in Ralphs Grocery Co. stores over the next three years, including 11 this year. Coffee Bean will supply the coffee, tea and baked goods for the cafes, which will be staffed by Ralphs.

“We plan to open 11 this year,” Ralphs spokesman Terry O’Neil said. “Customers like to be able to get a coffee or tea while they are in our stores.”

It also helps Ralph’s distinguish itself from rival grocer Vons, which has a similar arrangement with Starbucks, O’Neil said.

Coffee Bean is winning customers, even in areas where it is in proximity to Starbucks and other competitors, Sassoon said, because the chain’s coffees and teas taste better and its baked goods are fresh. Starbucks sells a mixture of fresh and defrosted baked products.

Starbucks’ 8,000 U.S. outlets account for nearly 45% of the 18,000 U.S. coffeehouses tallied by the Specialty Coffee Assn. of America. But Starbucks grabs more than 70% of U.S. coffeehouse sales, according to Mintel International Group Ltd., a market research company

“There is room for many players in this market,” Starbucks spokesman Alan Hilowitz said.

Decades ago, Americans gravitated to lightly roasted -- often under-roasted -- coffee sold primarily under the big labels found in supermarkets such as Folgers and Maxwell House, said Martin Diedrich, a coffee expert whose family founded the Diedrich chain but is no longer involved with the publicly traded company.

Starting in the 1970s, chains such as Peet’s and Starbucks popularized dark roast coffee, with a heavy, often burned or toasted flavor that included hints of caramelized sugar. Americans started to associate dark roast with high-quality coffee, Diedrich said.

“But dark roasting also masks a lot of flaws,” said Diedrich, who operates Kean Coffee, a single-store cafe and roasting house in Newport Beach.

Coffee Bean, he said, has a lighter roasting touch, which differentiates it from Starbucks and some of the other chains. The company’s house blend, for example, falls into a light-to-medium-roast category.

“This gives us a milder, more delicate flavor with some citrus notes,” said Lisa Steinkamp, Coffee Bean’s head of marketing.

Diedrich believes that consumers are starting to move away from heavy, dark roasted coffees after finding that medium brews are often more flavorful.

Coffee Bean said its consumer research was finding the same trend.

“I don’t like Starbucks coffee; it is too bitter,” said Ed Giebel as he walked out of a Coffee Bean store in Long Beach last week with a small decaf.

Others still prefer Starbucks.

“I just think their coffee lattes are better,” said Mary Carmichael, who ventured into a Coffee Bean only because there was no Starbucks nearby.

Sassoon knows he will always lose some business to Starbucks, but he says that can be averted as Coffee Bean grows in the region. In Southern California, the chain is bigger than some rivals but still only about 10% the size of Starbucks.

Adding the Ralphs cafes and 37 company-owned Coffee Beans in the Southland this year will help narrow the gap and make his chain more convenient, he said.

“We want to go where people live and work, and we want to cluster our stores,” Sassoon said. “Success in this industry is how well you have a concentration of units in a given area so that it is convenient for customers to find you.”

That’s different from other forms of retailing, Sassoon said.

“You could never open 12 Gap stores on Ventura Boulevard, but if you are in coffee, you can do that,” Sassoon said.

Coffee Bean profitably operates three stores on about a one-mile stretch of Beverly Drive in the Beverly Hills area.

The first store opened 10 years ago, growing into a cafe with $1 million in annual sales. Combined sales continued to climb with each new outlet, and now all three add up to $3.5 million in revenue, Sassoon said.

“And during that time we have had two Starbucks, a Peet’s and three mom-and-pops open,” Sassoon said.

Sassoon is the descendant of Iraqi Jews who fled the Arab country in the late 19th century, eventually settling in East Java, Indonesia, where they entered the spice business.

The family got into the coffee business in 1996, when it signed a franchise agreement to open outlets in Asia with Coffee Bean, then a small chain of Los Angeles coffee stores.

But in 1998, the family’s franchised store business had outgrown the parent company in the United States. Sassoon grew nervous with the lack of control the family had over the brand.

“As we outgrew them we knew we had to do something,” said Sassoon. “So we made them an offer they couldn’t refuse and bought the company.”

The family’s Asian ties are still apparent in its business. Coffee Bean owns 77 cafes in Malaysia and Singapore. It has licensed or franchised an additional 113 stores internationally. There are Coffee Bean restaurants in Australia, China, Israel, Kuwait, Saudi Arabia and the United Arab Emirates. Sassoon’s brother Victor runs the international operations out of Singapore.

Operating in so many diverse nations has trained the company to take an ecumenical approach to its business.

Its Southern California stores, for example, sell only kosher products, both as a stamp of quality and to appeal to the area’s large population of Jews, Sassoon said. But in places such as Malaysia, Saudi Arabia and Kuwait where the customer base is Muslim, Coffee Bean’s offerings are prepared according to Islamic halal rules.

“We are working toward a worldwide brand,” said Melvin Elias, Coffee Bean’s chief operating officer. “We are on the cusp of breaking out in this industry.”