BUSINESS 2.0:

Grinding Out Success Next to Starbucks

Coffee competitors' strategies for thriving in the shadow of the world's largest chain are as varied as the beans in their brews.

By Georgia Flight, Business 2.0 Magazine

(Business 2.0 Magazine) -- When Dr. Evil plotted to take over the world in 1999's Austin Powers sequel, his headquarters was the Seattle Space Needle emblazoned with a Starbucks logo. As a symbol of global domination, the image is just as fitting today: With more than 11,000 locations and annual revenue of about $6.4 billion, Starbucks shows no sign of loosening its grip on the market.

"No one's going to seriously challenge it anytime soon," says Scott Van Winkle, a food industry analyst at investment banking firm Adams Harkness.

Yet in any industry with a clear leader - be it Wal-Mart (Charts) in retail or Google (Charts) in search - smaller companies find ways to thrive in the giant's shadow. To lure latte drinkers from Starbucks (Charts), coffee competitors have successfully differentiated themselves using everything from atmosphere to product mix to regional specialization.

After all, even a sip of the market can be satisfying: Coffee is the second-largest U.S. import, and the specialty coffee market is estimated to be worth $11 billion a year. Here's how five blends of brewing and branding have broken through Starbucks's barriers to entry and carved out profitable niches.

STRATEGY 1: Be Green

Green Mountain Coffee Roasters

HQ: Waterbury, VT

Year founded: 1981

Outlets: N/A

2005 revenue: $162 million

Green Mountain (Charts) began as a small Vermont cafe and has stayed true to its organic roots while growing into a booming wholesaler with more than 8,000 accounts, including the Newman's Own brand of organic coffees. Green Mountain's sales of its organic lines were up 51 percent in 2005. The company has also focused on its office business, which now accounts for about a third of its sales.

STRATEGY 2: Keep Innovating

Coffee Bean & Tea Leaf

HQ: Los Angeles

Year founded: 1963

Outlets: 400

2005 Revenue: $150 million

Coffee Bean is known for its extensive selection of coffees and teas, as well as its reputation for innovation: The company invented the ice-blended coffee drink and popularized the chai latte. Coffee Bean has also made a push overseas, finding niches in Starbucks-free markets such as Israel. With nearly all of its drinks certified as kosher, the company has opened several locations in that country.

STRATEGY 3: Head East

Costa Coffee

HQ: London

Year founded: 1971

Outlets: 617

2005 revenue: $270 million

Despite Starbucks's invasion of its home turf in London, Costa is outsmarting its rival in India. The company cracked the subcontinent by teaming up with a local businessman and adapting its menu to Indian tastes. Costa plans to add up to 300 Indian outlets by 2010. It has been in the Middle East since the late 1990s and is due to open the first of more than 300 stores in China next year.

STRATEGY 4: Go Upscale

Peet's

HQ: Emeryville, CA

Year founded: 1966

Outlets: 120

2005 revenue: $175 million

Peet's strength is the taste of its coffee, which appeals to java connoisseurs. The company roasts its beans in small batches, replaces brewed coffee every 30 minutes, and never resteams milk. "Peetniks" often drink Peet's at home too, and about half the company's sales come from whole beans, which carry higher margins. Peet's beans are also sold in more than 4,000 grocery stores.

STRATEGY 5: Sell a Lifestyle

Caribou Coffee (Charts)

HQ: Minneapolis

Year founded: 1992

Outlets: 416

2005 revenue: $198 million

Caribou's cafes feature mountain-lodge-style decor with exposed beam ceilings, leather chairs, and roaring fireplaces. Add in framed photos of the adventure-loving founders and you get a vibe that's neatly summed up in the company's motto, "Life is short. Stay awake for it." Frontier and Maxjet airlines serve Caribou coffee, and the company recently inked a deal with Life Time Fitness.

Georgia Flight is a writer in San FranciscoTop of page

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Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.