Starbucks who? The other java king named Schultz

When I first entered the coffee industry in 2002, it was one dominated by Starbucks. Not much has changed.

However, when a consumer industry is dominated by one player, I look at that as an opportunity. Consumers will always want choice, whether that is in the U.S, Japan, China or, to be honest, anywhere in the world. Starbucks created an industry that did not exist 25 years ago, but it is impossible for a company to be all things to all people, no matter how dominant.

Kona coffee beans growing in Kona, Hawaii
Getty Images
Kona coffee beans growing in Kona, Hawaii

Over the past five years, Honolulu Coffee has grown from six stores in Hawaii to 32 stores in Tokyo, Osaka, Shanghai, Guam and Hawaii, with another 10 to 15 stores scheduled to open this year.

Our growth is attributable to three factors: 1) well-developed points of differentiation, 2) efficient use of capital and 3) continual focus on quality over competing for the lowest price point.

1. Define your points of differentiation

Honolulu Coffee is the only "farm to cup" coffee company in the world, focused on growing, roasting and serving Kona coffee. Kona coffee is one of the rarest coffees available, representing less than 1 percent of the arabica coffee grown across the globe.

When we developed our strategic plan in 2008, we focused on the following:

  • A unique story competitors could not easily copy: "farm to cup"
  • Highly skilled baristas: 2011 United States Barista champion
  • Great branding and café environment: Creates customer passion

"Farm to cup"
Although coffee companies can buy great coffee from farmers in remote countries, roast coffee well and create a good training program, none of our competitors, large or small, can emulate our "farm to cup" concept.

Today we own and operate 80 acres of high-grown Kona coffee farms on Hawaii island, which allows us to control the taste and supply of our rare coffee. In a world where the consumer wants to know more about their source of food and sustainability, we can proudly talk about the growing environment and how we treat our team of growers in Kona. This all contributes to the experience in our cafés and provides a greater connection to our brand and product for consumers who visit from all over the world.

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This connection with our customer is what also led us to design our Honolulu Coffee Experience Center, a 9,000-square-foot facility in Honolulu expected to open in July 2015. Inside, coffee lovers can discover a world of information about coffee, including why Kona's microclimates are an amazing place to grow coffee, what it takes to process coffee from the tree to a "green" bean ready for roasting, and understand everything that goes into the Honolulu Coffee process.

Highly skilled baristas
To achieve our growth target, we knew that we would need to have the same commitment to excellence in Store 100 as we do in Store 5. A retail company is only as good as its employees, so we set out to create a training program that was consistent with the amazing "third wave" coffee that has flourished on a smaller scale in cities around the U.S.

To create and demonstrate what possibilities were, we recruited celebrity barista Pete Licata to head our training programs. Using 100 percent Kona Coffee, Licata finished 1st at the 2011 U.S. Barista Championship and 2nd at the World Barista Championship in Bogota, Colombia. With this accomplishment, we created an internal culture for our baristas to strive to be the best. This training program is what has allowed the same great coffee to be made at our 26 additional stores, spurring our future growth plans.

Honolulu Coffee Kona
Source: Honolulu Coffee

Customer passion
While many companies use the word "passion" as a core value or something its employees should have, if your customers have it, then you are strongly positioned for success. And in our case, to grow with a spending plan that had limited capital for direct advertising, the goal was to create passionate customers. It is not just customer service, but the environment in which your product is served or sold.

In 2008 we made the decision to update our branding to make it more vibrant and simple, yet maintain our identity with Hawaii and our history. To do this, we engaged Philippe Becker of Sterling Becker, one of the top food-related branding/packaging design firms in the U.S., having worked with Williams-Sonoma, Straus Family Creamery and other specialty food brands.

Over the course of 12 months, we looked at what would resonate with customers—not just if Honolulu Coffee was open in Hawaii, but what it would look like in Tokyo, Shanghai or Los Angeles. We spent approximately $100,000 on this project, and our retail packaged-good sales have increased by more than 500 percent since the rebranding. More importantly, by doing it really well, our return on capital has been almost infinite.

The best way to measure it is when I walk down the street in Los Angeles and see someone wearing our T-shirt or when I ride the metro in Tokyo and see someone carrying our Honolulu Coffee tote bag. That customer passion is the best form of marketing a company can have.

2. Consider the small company-franchise equation

While every business owner wishes their company had the capital, liquidity and valuation of Uber, this is just simply not the reality for 99 percent of entrepreneurs. An amazing product is a good start, and you need to find creative ways to use capital efficiently.

Honolulu Coffee made the decision to use a combination of directly-owned growth and franchising to accomplish this. This balance has allowed our company to stay in total control in certain markets while relinquishing some control in other markets in order to speed the pace of growth, thus bringing in additional capital to continue further growth in markets we directly control. This cycle is a very efficient use of capital.

Employees of Honolulu Coffee
Source: Honolulu Coffee
Employees of Honolulu Coffee

When evaluating different markets for franchising, we elected to focus on Asia for several reasons:

  • Our core customers were in Asia, but directly owning a company in a foreign country is difficult for a small business—different legal system, different labor laws and sheer distance, to name a few of the challenges. Franchising provided a great way to reach these customers.
  • Capital doesn't need to be spent on as many functions. Franchising in the U.S. is very regulatory-intensive compared to Asia, so the amount of capital spent on lawyers, accountants and government disclosure filings is far less compared to the United States.
  • Market separation is easier to accomplish for a small company because it can adapt more quickly to changes than a larger company. Foreign franchising is no different. As a small company, we felt more comfortable "localizing" our concept with different food, ordering procedures and interior design than a 10,000-store operator would. This has worked very well in Japan and Shanghai.

While franchising may not apply in every industry, spending time analyzing the most efficient use of capital is key to growing at less than an Uber valuation.

3. Forget about being the lowest cost vendor

When there is an opportunity to successfully operate in an industry with one dominating player, it is not typically on the volume/price side of the equation. Consider hardware stores that have been successful competing against Lowes and Home Depot—it's on service and quality, not on price. They would get crushed every time they attempted to run lower prices and lower margin than the big-box hardware stores.

The specialty coffee industry is no different. As the smaller player, your costs will always be higher than your competitors. In our case, the "green," or unroasted, coffee; cups; milk and food costs will always be higher than Starbucks, so there is no use fighting this. Honolulu Coffee serves a higher-quality product in a more unique café environment, and as a result, we charge a premium for this. The higher price point and more desirable range of products drive our operating margins to be better than the competition.

Growth is difficult to achieve and even more difficult to maintain, but continually reviewing your original core strategy will keep you on the path that led your company to be successful in the first place.

By Edward Schultz, president of Honolulu Coffee and a member of the CNBC-YPO Chief Executive Network

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