Upstarts brewing coffee war in US

Baristas take coffee orders at the Human Bean coffee shop in Odessa, Texas. — ©2024 The New York Times Company

SIX years ago, Odessa, a West Texas town best known for its high school football team that inspired Friday Night Lights, had only 17 coffee or tea spots. Today, it boasts around 55.

With Starbucks leading the charge, the coffee landscape in Odessa has shifted dramatically.

The global coffee giant has eight locations in the city, with another expected by the year’s end.

Other regional players, like Arkansas-based 7 Brew, have set up shop with three drive-thru stands offering drinks such as Funnel Cake Macchiatos, energy drinks, and smoothies.

Not to be outdone, Dutch Bros and The Human Bean from Oregon have also established a presence, along with numerous local mom-and-pop cafes.

Odessa is not alone. Across the US, mid-sized cities are experiencing a coffee boom.

Javier Joven, Odessa’s mayor, summed it up: “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.”

This rapid growth reflects a national trend.

Cafes and drive-ins that specialise in tea and coffee are one of the fastest-growing segments of the restaurant industry.

It’s not just Starbucks and Dunkin’ expanding their footprints; regional players are racing to dominate the under-caffeinated areas of the Midwest and the South.

Rise of the regional players

Seven years ago, 7 Brew Coffee opened a small kiosk in Rogers, Arkansas. Today, the brand has over 190 stands from Wyoming to New York.

The 7 Brew coffee stand in Odessa, Texas. Seven years after opening a drive-through kiosk in Rogers, Arkansas, the company has more than 190 stands across the United States. (Top) A barista steams milk at a Cpl Ray’s Coffee shop in Odessa. Most of the sales growth at coffee establishments like Cpl Ray’s is coming from iced beverages, like syrupy, foamy, cookie-flavoured lattes. — ©2024 The New York Times Company

Similarly, Nebraska-based Scooter’s Coffee has grown from 170 shops in 2018 to an expected 770 by the end of this year.

Dutch Bros, another fast-growing chain, has expanded from 370 locations in 2019 to over 900 today, with plans for 4,000 in the next decade.

But the coffee scene is changing. The days of grabbing a plain black coffee are fading.

Instead, growth is driven by iced beverages – syrupy, cookie-flavoured lattes, fruit smoothies, high-octane energy drinks, and souped-up sodas.

This shift is reshaping the strategies of big and small players alike.

The Human Bean coffee shop in Odessa. As regional coffee players rush into new markets, they are competing with one another for key real estate locations.

The Starbucks factor

Starbucks remains a dominant force in the coffee industry, with over 16,000 US locations that generated US$26bil in revenue in 2023 alone. But even the coffee behemoth has felt the pressure of competition.

After expanding its loyalty programmes and drive-thru services during the pandemic, Starbucks saw two consecutive quarters of decline, resulting in a nearly 30% stock drop in six months.

In response, Starbucks replaced CEO Laxman Narasimhan with Brian Niccol, who was lured from Chipotle with a compensation package that could exceed US$100mil.

Starbucks is now looking to regain its edge, watching closely as other chains push innovative iced beverages.

Competing with the giant

For regional coffee chains like Ziggi’s Coffee, competing with Starbucks is no small feat.

Brandon Knudsen, who co-founded Ziggi’s in 2004, admits that Starbucks is a tough competitor but views it as an inspiration.

“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,” Knudsen said.

Ziggi’s, which now has 97 locations, mostly franchises, has built a reputation on iced drinks like the Limecicle Refresher and Cosmic Blast energy drinks. It also offers a range of food items, from breakfast sandwiches to cake pops, similar to Starbucks’ offerings.

Other regional players like Scooter’s and Dutch Bros are using a similar playbook. Both focus heavily on iced beverages and drive-thru locations, offering loyalty programmes to keep customers coming back.

While Starbucks might not be sweating the competition just yet, it is adapting. After other chains introduced iced energy drinks, Starbucks launched its own versions, including the Melon Burst Iced Energy drink.

A saturated market

Despite Starbucks’ size and dominance, the company doesn’t have a presence everywhere.

Mid-sized cities in the Midwest and South, where coffee chains are relatively scarce, are ripe for expansion.

Scott Harvey, president of Dunn Brothers Coffee, a Minneapolis-based chain, sees these markets as untapped potential.

“We’re focusing on the I-35 corridor from Minnesota to Texas,” Harvey said. “As we march further south, we’re finding lots of markets that are underserved.”

Dunn Brothers currently has 50 stores and plans to expand to 250 in the next five years.

Cities like Green Bay, Wisconsin and Cedar Rapids, Iowa, have seen the number of coffee shops skyrocket in recent years, with many regional players rushing to capture the market.

But as these coffee chains expand, they face stiff competition not just from Starbucks but from each other and other food chains for prime real estate.

The hottest spots are the “end caps” – the far corners of shopping centres that allow for a cafe and drive-thru to be built.

“All of us are out there looking for the same sites,” Harvey said, “and that’s causing real estate pricing to go up.”

What’s brewing next?

The regional coffee boom shows no signs of slowing down.

Even though it may take decades for any of these smaller chains to compete with Starbucks’ scale, they are quickly making inroads in underserved areas.

As long as the demand for iced, frothy, and sugary beverages keeps climbing, the competition will continue brewing. — ©2024 The New York Times Company