Tuesday, May 28, 2002

Werner Gerst, president of GMS Hawaii, sits at the newest location of his company's Seattle's Best Coffee franchise, in the Waikiki Beach Marriott Resort. Gerst opened the sixth island coffee shop this month.


Seattle's Best Coffee takes the
bean battle to Starbucks

By Erika Engle

The small picture is that Seattle's Best Coffee May 8 opened its largest Hawaii cafe at the Waikiki Beach Marriott Resort at 2552 Kalakaua Ave. The 660-square-foot cafe is No. 6 in the islands for SBC franchisee GMS Hawaii Corp.

That compares to the 28 Hawaii stores carrying the banner of industry big dog, Starbucks.

On a corporate scale the battle involves not just coffee but fried chicken and cinnamon rolls, and comparison becomes a matter of apples and oranges.

Seattle's Best Coffee is one of several brands owned by Atlanta-based, publicly traded AFC Enterprises Inc. According to filings with the U.S. Securities and Exchange Commission, as of April 21 of this year AFC claimed 3,896 restaurants, bakeries and cafes in 47 states, the District of Columbia and 30 countries under brands including SBC, Torrefazione Italia Coffee, Popeyes Chicken and Biscuits, Church's Chicken and Cinnabon.

The number of AFC's coffee-branded locations is dwarfed by the 5,368 claimed in SEC filings by Seattle-based, publicly traded Starbucks Corp. as of March 2002; the latter plans to open 1,200 more locations by the end of its fiscal year.

GMS Hawaii plans 10 more SBC locations statewide by 2006.

Size may not matter to the visitors and local residents who stop into the new Seattle's Best Coffee location in Waikiki from 5:30 a.m to 10:30 p.m.

"They're bigger but we're better," said Werner Gerst, president of GMS Hawaii.

"I say that tongue-in-cheek, I'm not about to bash the competition," he said. "We do offer a superior product. I like to think we provide customer service second to none."

Toward that end a key company trainer from Seattle will be in town this week to work with Gerst's 10 new employees. Overall his six locations employ 35 full- and part-timers, he said.

Also by way of not bashing the competition, Steve Schickler, president of Seattle Coffee Co. which oversees the SBC and Torrefazione coffee brands, adds "We're not a European sort of formal coffee house. We try to be more American and laid back."

SBC derives 70 percent of its income through wholesaling efforts to retailers and restaurants, which drive traffic into its cafes, Schickler said. Starbucks' business model is driven by its cafes.

Schickler predicts that SBC wholesaling in Hawaii will grow. "Through Werner and other people we think we're going to have a much larger coffee business in the other channels (wholesale food service, grocery stores and direct marketing) as well."

Hawaii's first SBC cafe opened in 1999 at the Outrigger Waikiki on the Beach. Gerst then opened two on base at Pearl Harbor, one at the Naval Exchange and another at Pearlridge "Downtown."

The Exchange location will relocate into a new, publicly accessible space as part of the NEX redevelopment project.

Most Hawaii SBC sites so far are not cafe-sized.

The Pearlridge location is a kiosk, but "the mall management has provided seating so you do create the ambiance of a cafe," Gerst said.

"We are striving to do exclusively cafes. However, there are elements that will influence that, one of which is availability and viability of the real estate, the location itself, the area's demographic and the investment required," he said.

He had wondered why there are no drive-through locations where customers can purchase a high-end cuppa joe. Then he found out.

Two locations he scouted were ideal, he said, but very expensive.

"If you have to pay half a million dollars before you start building, there aren't enough days left over to sell coffee," he said.

Hence, co-locating with an existing operation is an option he would pursue, Gerst said.

The parent company has recently launched a program to cross-sell SBC with Cinnabon.

"Personally it makes a lot of sense. Those two products should sell like hand-in-glove," said Gerst.

It's not as simple an undertaking as it might seem, as the franchisee who owns the four Cinnabon stores in Hawaii lives in Japan. Until recently they were owned by the parent company.

"We look at synergies," said Schickler. "We are testing Cinnabon at several cafes in Seattle. ... We are still exploring to see how far we go."

For now, SBC offers pastries which are either purchased from local bakeries or baked on the premises, where panini sandwiches are also offered.

Starbucks' next competition may come from an SBC sister brand. At the just-concluded National Restaurant Association show in Chicago, AFC announced it has launched a franchising program for Torrefazione Italia Coffee, which has no current presence in Hawaii.

"It's just like stepping into an Italian cafe, it's incredibly authentic," Schickler said.

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