Second wind for Second Cup?

After a decade of also-ran status, the gourmet coffee-chain needs a pick-me-up.

 

After a decade of also-ran status, the gourmet coffee chain needs a pick-me-up. (Bernard Weil/GetStock)

Everybody wants to sell you coffee these days. It’s tough for brewers to stand out amid the clutter, even for a company like Second Cup, which has a long history in Canada. The chain may have been the premier name in gourmet coffee more than a decade ago, but intense competition has reduced them to looking like an also-ran.

But Stacey Mowbray, the company’s CEO in Mississauga, Ont., is vowing to change that. “We are very much back in growth mode,” she says. The company plans to add up to 30 locations this year, and is looking to open 130 more over the next few years in order to reverse a long decline. In 2000, Second Cup boasted 390 locations across the country, but that number has been winnowed to 340. Starbucks, meanwhile, ballooned from 238 to more than 1,000 stores over the same period.

Though the Seattle-based coffee giant is Second Cup’s main competitor, it is far from the only one. Tim Hortons is expanding into espresso-based and flavoured coffees, and McDonald’s is aggressively pushing its McCafe concept, which offers the same sort of customer experience as Starbucks and Second Cup. Even lower-end chains such as Coffee Time are moving upscale.

The assault on all fronts helps to explain the weakness in Second Cup’s same-store sales, which inched up only 0.2% in 2008, and fell 3.2% in 2009. The recession certainly hurt the chain, but when it announced its 2010 results recently, same-store sales were flat, indicating customers have yet to return. The investment community is lukewarm, too. The lone analyst following the company, Turan Quettawala at Scotia Capital, has had an Underperform rating on the shares since late 2007.

“I don’t think there’s anything going on at Second Cup that’s exciting or interesting,” says Doug Fisher, a restaurant-industry and franchise consultant with FHG International in Toronto. “But I don’t think there’s anything that makes it bad, either,” he adds. Therein lies the dilemma: mediocrity is not a good long-term strategy.

Mowbray, who joined Second Cup in 2008, is working on improvements beyond increasing store count. A big effort is underway to obtain environmental and fair-trade certifications from various organizations, which she says are important to almost half of premium coffee drinkers. Mowbray hopes Second Cup’s entire coffee portfolio will ultimately be certified, up from 80% today. She also appointed an in-house coffee expert last year to seek out new brews and to allow the company to stay on top of industry trends.

Second Cup introduced a temporary loyalty program last year, as well. “We were trying to get people to break their current habits,” Mowbray says. “If we can get somebody to come over, they will become loyal.” Second Cup used to have one of the best loyalty programs in the sector, according to Fisher, but it was scrapped a few years ago, raising some eyebrows in the industry. “They hurt themselves when they got rid of it,” he says.

But to really grow, Second Cup will have to improve when it comes to offering new and different products in its stores, something at which Starbucks excels. Mowbray is well aware of how important it is to keep things fresh. “Retail is all about innovation,” she says, “and we’ll continue to evolve.”

 

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