Corporate Strategy at Caribou

[On Screen] Corporate Strategy at Caribou Coffee

[Scott Winters with Biz TV] Recently I was stranded in the Airport and needed a cup of coffee. Well I looked around for a and couldn’t find any but in its place was something called Caribou Coffee. I figured, “Okay, a latte is a latte.” but I ended up with the best coffee this side of Milan so I did a little checking later on. Turns out Caribou consistently beats Starbucks in the Minneapolis area. Not only that, they’re rapidly becoming the java of choice in Atlanta, D.C., and Chicago. I wondered how Caribou’s Don Dempsey could dare to go toe to toe with Starbucks. Well, the secret turned out to be strategy.

[Don Dempsey, CEO Caribou Coffee] And it was very interesting when I came in here because nothing ever mentioned in this company about profit. Never. It sounds very callous to say, “all I care about is profits” but all I do care about is profits because profits drive everything. There’s only two ways to get profits. One is to increase sales. One is to cut costs. Okay? Let’s take the cut costs thing. This is a good thing. You want to run lean. Okay? You want to run efficient. Okay?. But you’re only going to do that once. You can’t cut costs beyond where you can get growth. Okay? Or you’ll be cutting off your nose to spite your face.

So it brings you back to sales. Okay. So you gotta get sales. Well how do you get sales. Well, in our business, at least in the retail shop business, as long as we confine ourselves to a retail shop, there’s only two ways to get sales. One is you build more stores. Two is you increase the sales in an existing stores. Can’t think of a third one. Only two ways. Okay.

Now, let’s take one of those branches. Let’s take how do you increase sales in existing stores? First you have great, confident people in it. Now we’re getting down to the warm fuzzy stuff. Okay? You have great, confident people in there. You train them well. You pay them to retain them. All those things people put in vision statements. Okay? But if you don’t have those things…if you’re smart and you’re in a single minded pursuit of profits, you very quickly come to the realization that you can’t get there without getting here first.

[Scott Winters] The first part of Caribou’s strategy involved the creation of a quality product. Well, coffee aficionados know, the best cup of coffee starts with the best beans. So we caught up with one of Caribou’s roasters to learn more about the process.

[Stuart Craver, Coffee Specialist] This is where we roast the coffee at Caribou. It’s our first plant and this is our G120 roaster. What’s happening right now is the roaster is analyzing the beans to determine what stage of development they’re at. It’s very important that the roaster concentrates fully on his craft. Making the best decision on how to get him to the next roast. At Caribou we work purely on a “just in time” philosophy. We do this in order to have the freshest coffee in the market.

[Scott Winters] You see, the roasters concentrate on craft, analyze need, make strategic decisions and work small to ensure the best possible quality product. Let’s stay with Caribou for a while and see what other secrets we can learn. [Don Dempsey] I think one of the challenges for me and for the company, is to stay focused on what we do. I don’t pay a lot of attention to competition because there’s nothing I can do. There’s nothing I can do. I watch the competitor’s very carefully to see if they’re doing something better than we are or if they’re doing something that we’re not doing that looks like a good idea, I’ll steal an idea from them very quickly. I think Starbucks is no different it’s just that they’re bigger, they’re better organized, they have more capitol, they have more financial resources, you know. They train their people better. You know. Blah, blah, blah. So it’s like everything else. It’s the coffee shop on the corner versus the other coffee shop on the corner and we have to be sure we’re better.

[Latte maker] Really I think the drink that requires the most skill is a latte. It’s very hard to find a good latte out there today. You have to have the right amount of froth, tamp, and swirl. I think that‘s the most important technique that’s missing out there. You want to hit the back of the cup. You have a nice half-moon latte.

[Scott Winters] There was a time you could be number one just by having a quality product but there’s a lot of competition today and businesses have to go the extra mile to impress customers. We stopped by Caribou’s White Bear Lake store and spent the morning with Michelle Langkau, district manager.

[Michelle Langkau, District Manager] One of the things we could do to help people see the promotional material, what if we took and had one of these things built… like right here -one of these holders and then anytime anybody walks up, they’d actually see whatever was being promoted at that particular time.

[worker] I think that would be great.

[Michelle Langkau] Right now it’s kind of buried. My name is Michelle Langkau and I’m a district manager for Caribou Coffee. I oversee eleven stores.

As shift supervisor, you want to…you want to kind of assess the staff. Are people smiling? Are they saying please and thank you? Are they greeting people? So as you’re doing your walk through as a shift supervisor, you want to make sure they’re doing those things also because they are the extension of you when you’re not here. So, you want to make sure that’s happening on all day parts.

[Customer] I used to go to Starbucks and now I go to Caribou. Why?

[Michelle Langkau] Yeah

[Customer] Because I like the coffee better. I like the people better. It’s a friendlier place.

[Michelle Langkau] So what do you order?

[Customer] Vanilla latte. 500 I walk in, they have it made for me before I even pay for it. Seriously! [Michelle Langkau] People may not really know when they go into a store if everything is perfect . They may just walk out and say that was a great experience but when things are wrong or when things are dirty, they’re able to walk away and say, “ew, that didn’t really look very good” kind of a thing.

[Don Dempsey] In all the markets that we deal in, for dual users of Caribou and Starbucks, we beat Starbucks on quality. We beat Starbucks on service and we beat Starbucks on ambience. So the good news is we’re operating well at the store level relative to our major competitor.

Our strategy for marketing really is focused almost single mindedly on generating trial. Once you get people in the store, once you get them to try the brand, then the store takes over.

[Scott Winters] Obviously when you’re the small business going up against an industry giant, you have to be clever about how you go about getting people into your store.

[Don Dempsey] How you spend a dime and get a dollar’s worth of publicity? We would take these to a given city – let’s just say Chicago – leave them in elevators. Just scatter them around and then on the back of it, it just says “The great Caribou coupon roundup. Present this coupon at any Chicago Caribou location and receive enough coffee for your whole herd (up to 10 cups). So they find the Caribou in the elevator and they bring it into a Caribou store, they can get 10 free cups of coffee. But the purpose obviously, of it is to generate buzz around the funny thing of having these just scattered around.

[Scott Winters] I would do that for 10 free . Okay, obviously Caribou scores major points for using its limited marketing budget to its greatest possible fact but the real strategy has to come back to that old retail adage “location, location, location”. But, what hurdles did Don see in stepping into new markets?

[Don Dempsey] There’s two bogies going into market. One it costs money and the reason I say it costs money is if we open a store in , okay, or even a store, you know, even an hour and a half from Minnesota, we’re drawing from our existing base. In other words, whereas the district manager may have to drive an hour but he’ll get to that store, okay? We can train in stores in Minnesota. Okay? If we open a store in Minneapolis, we can train the people for that new store and existing stores in Minnesota. If we open our first store in Washington DC, where are they going to train? So, we’re flying people into Washington DC, we’re flying people out of Washington DC. We’re flying people into Washington DC and having them stay there for extended periods of times in hotels to train people. Then when we get open, instead of a district manager having ten stores, a district manager has one store so that’s very inefficient until there’s ten stores built in Washington. So, there’s a lot of inefficiencies in going to a new market. Your shipping is less in truckloads of quality coffee, so your shipping costs are higher. So it’s very inefficient to go to a new market. So there’s a cost associated with that. There’s an entry cost associated with that.

So you want to capitalize on the economics. So one things is, what’s the size of the market? Is the size of the market worth the investment up front or the potential payoff. Then, what’s the quality of the market. Is it a coffee drinking market? Does it have a high brand development index in terms of gourmet coffee? Do a lot of people drink coffee? You know, are the demographics right for people that drink coffee.

The thing that tipped the scales for me in favor of Washington was, once you establish a beachhead in Washington, you can create up and down the coast with…more economically. If I go to Denver, which is another good coffee market, where do I go from Denver? Now I’m reinvesting again. I’m flying people in someplace else. I can drive people, you know, from Washington to Baltimore, Philadelphia, you know, and, and therefore the economics of east coast expansion, in that capacity, are much better than going from Minneapolis to Denver, you know.

[Scott Winters] Don’t approach to easing into new markets makes a lot of sense. It worked well in DC so we tried the same approach in Chicago. Everything seemed to work perfectly…until…

[Don Dempsey] We had one store on Monroe Street in Chicago, a second site on LaSalle Street (cannot understand what he is saying here) in Chicago, both doing very well and then we had an opportunity for a third site, second site, at Monroe Street actually, same street, and we looked at the site and it’s in a small building that has a bank next to it, ATM kind of facility, and gazillions of people walking by and we opened it and it underperformed. We came to the conclusion if you’re going to build a store downtown, people are going to stop for the coffee, they’re going to stop the last place before they hit their office. They’re not going to stop half way through and carry it, you know, to the office. They’re going to stop right before they get to their office. So we were kind of in between everything, you know, we weren’t the first place you hit coming off the train, we weren’t the last place you’d hit before the office. We were in between and as a result it affected our business.

Also, we were in a building that was not a high rise building. All of the Starbucks were in high rise buildings so they get a lot of support from the building they’re in. People coming up and down every day to get coffee. The building we were in, was a nothing, was not an office building, was just a small building. So we lacked that support. So those are things we’ve learned in a particular case. This happens to be a negative example but a particular case we learned about. I think we learned something important from that one site that is applicable, generally speaking, to downtown sites. So it was a valuable lesson learned.

[Scott Winters] Caribou Coffee strategy may have had some ups and downs but Don’s pretty clear that there’s light at the end of the tunnel. Of course, Don’s had some fairly serious business experience.

[Don Dempsey] I was in international with McDonald’s for fifteen years and I can still remember when I had to market McDonald’s in Japan because nobody knew what it was. Now they’re lined up… you open your first door in Uzbekistan and they’re lined up for four miles to get in because it’s an event. So the brand now proceeds McDonald’s wherever they go internationally. The brand proceeds Starbucks wherever they go domestically.

In Minnesota, we have virtually 100% brand awareness. We are the brand leader in Minnesota, unfortunately, everywhere else the reverse is true. So, when we go into a new market, we’re Joe’s coffee shop. So we have to build our brand, build our reputation and we do that store by store. It’s getting stronger every day and awareness is increasing as penetration of the restaurants increase as long as we stay focused on the quality operations, the brand reputation in terms of quality coffee, good service, and a pleasant environment it’s growing but it’s a slow build.

[Scott Winters] Caribou Coffee’s take on strategic management followed a multi-stage approach. They evaluated their goals and corporate mission. Analyzed the business situation and made some pretty specific plans. When some of those plans went awry, they learned from their mistakes and continued to develop new ideas. Well, I’m going to keep on the lookout for those giant cardboard caribous. With any luck, one will turn up in our elevator any day now! I’m Scott Winters, this is Biz TV and…I’m out of here.

[On Screen – 2nd half) Strategic Planning at Caribou Coffee

[Scott Winters] Howdy! You know, everybody has to plan for the future. Whether it’s summer vacation or kid’s education, you know, and organizations are no different. We took a trip to Minneapolis to find out how Caribou Coffee has consistently grown over the years. Caribou is the market leader in Minnesota and even though it’s squaring off against some very tough competition, it’s also making excellent inroads in DC and Chicago. So we wanted to ask their CEO, Don Dempsey, just what goes into Caribou’s one to three year plans.

[Don Dempsey] The results are more important because the plan doesn’t mean anything. It’s the results that mean something but the plan is important in getting the results. We’ll plan one year out with hard numbers and three years out from what I call a strategic point of view. All the planning is done in the fall. The entire corporation is involved in it. Everybody has a piece of it. How many people do you need to hire, okay? If you need to hire anybody. What are they going to spend? So the GNA component, in other words, the General Administrator Expense component, what are you going to pay them? How much are they going to travel? How many pencils are they going to use? You know, the cost of running the business component.

And then for marketing. How much money do you want to spend in marketing? What are you going to do with it? You know. Etc. Etc. From operations, you know, how many stores are we going to build? Where are we going to build them? You know. If we’re manufacturing, you know, do we have sufficient capacity? Do we need new equipment? Do we need major repairs? Do we…you know. From a remodeling perspective or asset management perspective, how many stores need to get remodeled? How much is that going to cost? You know. So all those things, we will develop for the following year which goes into the budget that we’re going to spend and the rest of the year we devote to, hopefully, excellent execution. You know. So…

[Scott Winters] At Caribou, the entire organization is involved with the company’s plan but flexibility is the key. See, in the real world, the details of a plan will always change. There’s a constant process of review and corrections. We asked Don how he deals with the gulf between predictions and reality.

[Don Dempsey] The thing that always makes planning difficult because you’re not dealing with facts, you’re dealing with assumptions. Okay? Now you use facts to make the most educated assumptions you can but at the end of the day, they’re still assumptions. So, I’m famous around here for asking thousands of questions. Why do you think that? Where did you get that number? If I assume we’re going to open 80 stores next year and we build a whole plan around that and we build a cost structure around that, and we only open 40, we’ve got a problem with the plan because I’ve got the cost there because I’ve incurred the costs but there’s no revenue there.

Then you have to maintain flexibility throughout the year so your constantly, every month, looking at it and seeing do we have to make any adjustments, any changes.

[Michelle Langkau] You can kind of see the movement of their sales at a glance, so as their planning their schedules out, their business changes. My name is Michelle Langkau and I’m a district manager for Caribou Coffee. An example of a situation that I ran into where you kind of had to rep-group and step back would be last year, mid-year, the labor (polls?) within my district were way out of control. I mean we were well, a percent and a half beyond where we were supposed to be spending so at that point it’s up to me to re-group, look at the remainder of the year, and put together an action plan on how we’re going to roll up at the end of the year.

[Don Dempsey] When you go in, you’ve got twelve months of assumptions. After January, you have one year of facts and eleven months of assumptions. After February, you’ve got two months of facts and ten months of assumptions. So we’re constantly re-forecasting when we need to. Okay? And, making adjustments to be sure we deliver the bottom line number.

[Michelle Langkau] It’s really a matter of just sitting down and doing the math and planning it out for the remainder of the year and communicating to my stores what they have to do in order to be able to meet that goal.

[Scott Winters] Of course, not all plans and goals are entirely operational. There are other kinds of plans that focus more on an organization’s overall mission. We talked to Caribou Coffee’s roasting master, Chad Trewick, about what’s important to him.

[ Chad Trewick - Roastmaster] All right, we’re going to the green coffee storage area. My job is to buy the best green coffee and to make sure that Caribou upholds the highest quality integrity standards in the coffee industry and we just keep enough in this facility to feed the production equipment that’s upstairs at this…at this warehouse. It’s always a challenge to balance business savvy with a zeal for quality and ultimately, you have to have both. We’re obviously in this business to make some money and you can’t make money if you’re buying, you know, coffee that’s dusted in gold. So that’s not a very pragmatic and practical approach but there is…there is a balance to be struck. You can buy the best quality coffees and represent…represent them beautifully on your …on your…in your lineup but…and still do that pragmatically and with business sense. And it’s always a struggle. You have me, the lunatic fringe, for…for quality, and then you have the conservative corner upstairs for business sense and we’re always doing this sort of back and forth and I think that there is an understanding that we are in this business to differentiate ourselves from our competition and one of the ways we do that is presenting the best quality that we can.

One of the things that is always…always a challenge, we talk about freshness and about shelf- life of coffee and a lot of times people want to extend that as much as you possibly can because from an inventory standpoint and logistics and operation, it makes a lot more sense to have a product that’s stable for, say, six months, as opposed to thirty days. Once it’s roasted, its shelf life is very short but even in its green form, it doesn’t last forever. You don’t want to have it sitting around. I mean, coffee is harvested generally once a year and you want to make sure that once a new crop of coffee’s available, your inventory’s in such a way that you can take delivery of new crop coffee. One of the things that I always try to stress is that we can replace our inventory in our stores weekly so freshness is a huge opportunity and something I’ve had to convince the organization to really hold on to the integrity of that.

[Scott Winters] Although it seems that Chad’s primary goal is just quality coffee, he still focuses a lot of his energies on some traditional operational and tactical goals.

[ Chad Trewick] One of the things that I try to do in terms of balancing my supply chain is I’ll look at what is my demand for the next 12 to 18 months? And I’ll really try to figure out, you know, not only what is my demand but when am I going to need to take delivery of certain coffees and then I’ll literally go and spread that demand throughout the supply so that I feel comfortable with and I have relationship with and really make sure that no one is getting much more than the others and really try to balance it out.

And I learned my lesson the hard way. A couple of years ago, I had a supplier have some financial difficulties and really the headache that that created and they…they were probably nearly a third of my total supply and that really hurts. It really sort of shatters your foundation. So one of the things I’ve done is try to explore other suppliers, to create standards with them so that they understand what my expectation is, and really balance out our demand amongst a couple different people and yes you have an advantage in that respect because if someone quotes you a price that’s a little bit out of line, you can say why can I go to so and so on the west coast and get it for 15 cents cheaper? Can you explain to me, you know, why…why the discrepancy is there and sometimes they’ve got to come down and match that price and if they can’t, then they don’t but at least then I’m learning from the other prices that I’m presented with.

[Scott Winters] For Chad, it’s always a balancing act between creating a quality product and the bottom line. In order to be true to his vision, he needs to come up with new ways to work within Caribou’s corporate framework.

[Chad Trewick] And other things that I try to do is strategically improve the quality of coffee without necessarily spending more. We’re going to go look at some green coffee blending. The coffees are generally blended – many of them are blended before they’re roasted – taking coffees from different countries of origin to create new and unique flavors.

Another thing that I try to do is to strategically blend coffees throughout the course of the year so that we don’t end up with having way too much of something or way too little of something else. You don’t lay out all that capitol way out front and then not use the coffee for six months so I’m trying to shorten our inventory so that we use the coffee more quickly after we get it because that’s a quality improvement and it’s a cost savings of capitol.

[Scott Winters] Wow, I never knew coffee had such a short shelf life. Of course, I guess that would explain why the old can of grounds in the back of my cupboard make such a lousy cup of joe. Well, so, I asked Chad that given the demands of just in time inventory, how far in advance could he really plan?

[Chad Trewick] In terms of a hard and fast rule, I like to be contracted 12 to 18 months out for all of our coffees. I guess I’m always thinking further down the road because there’s a crisis in coffee prices right now and one of the things I want to make sure that I’m doing is working on long term relationships with suppliers in producing countries so that they understand that if they go to the painstaking length that they have to to produce these quality coffees, they’re going to have a buyer on this end. So I’m thinking years out. I’ve made, you know, commitments to buy coffee for years out but I want to make sure they understand my expectations that we have a relationship – I’m going to buy this coffee from them year in and year out as long as they continue to provide me with the quality.

[Scott Winters] For a company as small as Caribou, organizational goals and plans are important but what happens when problems arise. We went back to Don and asked him about contingency planning.

[Don Dempsey]I think any…any startup entity is somewhat fragile because it doesn’t take – you can make a lot of mistakes at McDonald’s before it shows up on your P & L’s. Size covers up a lot of mistakes. When you’re young and small, little mistakes can hurt…can kill you. Even in the three years I’ve been here, we’ve become more secure. So we’re less vulnerable because we’re getting bigger and we’re generating more profit. So we’re less vulnerable. We can make a mistake and absorb it. You know. Now there’s certain things we take precautions against. For example, contingency plans – what happens if the building burns down? Where do we get coffee? That’s part of what, I think, a good company does is they try to anticipate disastrous events for the company and prevent them before they happen or have contingency plans and we have done that kind of thing.

[Scott Winters] well, it seems like Caribou Coffee has a great mix of single use and standing plans all of which reflect the company’s mission. Of course, with people like Chad and Michelle, it’s hard to see how Don can lose. I’m Scott Winters. This is Biz TV. We’ll catch you later, okay?