Coffee

Philz coffee & Blue Bottle

2016.10

The third wave coffee start-ups: Philz Coffee & Blue Bottle (2016)
Coffee
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I. Intro

During the 1990’s and 2000’s, the coffee market was dominated by Starbucks, which aimed to become “The Third Place” in people’s daily lives. Similar brands followed suit (e.g. Coffee Bean & Tea Leaf), and these companies provided what became known as second wave coffee.

  • First wave coffee. Before the 90’s, one could purchase coffee at small kiosks in office buildings or in bakeries as accompaniments to pastries and other baked goods. The price of coffee during this era ranged around $1-2, and coffee was marketed as an affordable and accessible beverage.
  • Second wave coffee. Thanks to Howard Schultz, who conceptualized the idea of “The Third Place” (aside from home and work), the 90’s saw the popularization of the idea of serving premium coffee in a clean and refreshing environment where people would feel welcome to stay for extended periods of time.
  • Starbucks. Starbucks, the most prominent second wave coffee brand, was founded in 1971 by three entrepreneurs. However, after the founders acquired Peet’s Coffee, they decided to sell Starbucks to Schultz, a Starbucks employee, in 1987 in order to concentrate on the growth of Peet’s, which was based in San Francisco. Howard Schultz redesigned and expanded Starbucks throughout the country, and eventually succeeded in its initial public offering (IPO) in 1992.
  • Growth of second wave coffee. Observing Starbuck’s success, Coffee Bean & Tea Leaf, Peet’s Coffee, and other second wave coffee brands emerged in the market. These stores charged $4-5 per cup of their premium-grade coffee (for both the coffee and the use of their café space).

Recently, however, there has been a decrease in demand for coffee from such companies as Starbucks, at least in the Western US. Seeking to taste “genuine” coffee, customers have been flocking to cafés that are a part of the third wave coffee culture.

  • Since 2010, the number of “artisanal” coffee shops offering not only pleasant spaces but also such drinks as a “pour-over” made from “the highest-quality beans” has grown monumentally.
  • These coffee shops differentiate themselves from competitors with their: 1) roasting methods, 2) techniques used to make the drinks, and 3) innovative menu items.
  • Many customers are willing to wait long lines in order to get a mere taste of these drinks.
  • Observing this pattern of consumption, the press has come to label these coffee shops and their beverages as “third wave coffee.”

Two major players in third wave coffee in the Western US are Blue Bottle Coffee and Philz Coffee.

  • Blue Bottle is known for their dedication to brewing and preparing delicious espresso drinks, and also the quiet and calm atmosphere of their stores.
  • Philz Coffee is known for their unique and eccentric beverages, like the Mint Mojito Iced Coffee, the Tesora, and the Philtered Soul, and also flaunts a vibrant and lively store atmosphere.

II. Philz coffee

Philz Coffee was founded in the outskirts of San Francisco in 2002 by Phil Jaber, a third generation coffee tycoon.

  • Jaber was influenced by his father and grandfather, both of whom ran coffee businesses.
  • Preferring the flavor of multiple beans rather than one, Jaber experimented by blending up to seven different types of coffee beans, eventually producing 30+ unique blends for his shop.
  • In 2003, Jaber quit the grocery store he had been managing and started Philz Coffee.

Philz Coffee, the culmination of Jaber’s hard work and passion, differentiates itself from other coffee shops in four key ways.

  • The menu. Philz Coffee does not sell beverages typical to most coffee shops, like lattes or brewed coffees. Instead, Philz offers a selection of unique beverages found only in their stores (e.g. Mint Mojito Iced Coffee, Tesora, Philtered Soul, etc.)
  • Ordering. Beverages are made-to-order by the baristas, with whom customers can communicate in order to customize the sweetness, amount of creamer, and more. Afterwards, customers tell the cashier what they ordered. This is in contrast to the ordering process at Starbucks, where customers pay before their drinks have been made.
  • Crafting the beverage. Philz places an emphasis on brewing their coffee “one cup at a time.” Typical coffee orders take 3-5 minutes to make because they are all drip coffees. Philz takes the time to cool their coffee when crafting iced beverages, so as not to kill the flavor of the beans.
  • Atmosphere. Philz has a West Coast hip-hop vibe and the shop is painted with bold and vibrant colors.

Philz Coffee currently has 36 stores throughout the country, and this expansion has been an indication of their quality.

  • Opening new stores. Since it opened its flagship in 2003, Philz Coffee has expanded to own 36 stores.
  • Expansion. Most of its coffee shops are located in the Western US, but Philz has since opened two stores in Washington D.C. and more stores in other, non-Western cities in the US as well.
  • Brand positioning. Philz has risen to become one of the most beloved coffee shops in the West Coast – enough to make Mark Zuckerberg ask Philz to set up shop in Facebook’s headquarters.
  • Funding & investments. Since its opening, Philz has successfully secured a total of $30M in funding, allowing them to open stores in the East Coast and 150 factories which manufacture its coffee.
  • Financial results. In 2015, Philz Coffee made $50M in revenue, averaging $1.7M per store.

III. Blue Bottle

Blue Bottle Coffee Company was founded by James Freeman, a former professional clarinet player. The company opened its first store in Oakland, a city near San Francisco.

  • Freeman was a clarinet player who was trying to make it in San Francisco as a professional musician.
  • Freeman was also a coffee geek who would take the time to purchase and roast his coffee beans every morning (unlike Jaber of Philz Coffee, Freeman prefers the taste of single-origin beans).
  • In the early 2000’s, sensing that he lacked the talent to pursue the clarinet professionally, Freeman decided to give the coffee business a go.
  • At first, his business plan consisted of delivering coffee beans roasted 24 hours beforehand or selling his brewed coffee at the Berkeley farmers market. As his coffee became better known, Freeman opened his first coffee shop.

Blue Bottle, a product of James Freeman’s meticulous tastes, differentiates itself from other coffee shops in four key ways.

  • Taste of the coffee. Blue Bottle sells only 5-6 different beverages (e.g. Americano, Latte, Cappuccino, Mocha, etc.) but emphasizes the use of the highest quality, single-origin coffee beans, roasted to perfection. These beans are then ground and served as a pour-over or in an espresso drink. Each drink takes 3-4 minutes to make, as the baristas pay close attention to the temperature, volume, and techniques in order to craft the perfect cup.
  • Coffee menu. Blue Bottle will not make you, say, a “grande iced latte” – lattes are served hot and in one size. Blue Bottle’s philosophy for such rules is that chilling a latte or increasing the volume would take away from the pure taste of the coffee.
  • Coffee manufacturing. Custom-made to bring out the best of Blue Bottle’s beans, the company manufactures its own line of roasting machines and espresso machines.
  • Store atmosphere. In contrast to the free-spirited, hip vibe of Philz Coffee, Blue Bottle’s stores, inspired by Japanese tea houses, are characterized by their warm and soothing atmosphere. Blue Bottle shops do not have WiFi or outlets either.

Despite its wild success, Blue Bottle has opened only 22 stores because of its belief in maintaining the quality of its coffee.

  • Opening new stores. Blue Bottle’s first coffee shop opened in Oakland in 2000. Since then, a total of 22 stores have opened up.
  • Expansion. Most of Blue Bottle’s stores are located in California (Oakland, San Francisco, Palo Alto, LA). In 2010, the first East Coast flagship opened inside Manhattan's Rockefeller Center, and in 2015, the first international shop opened in Tokyo.
  • Brand positioning. Blue Bottle has earned the nickname, “The Apple of Coffee Shops” because of the quality of its beverages and the clean and sleek design of its coffee shops. As a result, this beloved brand has received investments from such figures as Kevin Systrom, co-founder of Instagram, and Evan Williams, co-founder of Twitter.
  • Funding & investments. Blue Bottle has received a total of $120M over three rounds of funding and has acquired 2 coffee-related companies in order to secure online/offline distribution channels.
  • Financial results. Since 2005, Blue Bottle’s revenue has grown by 50% each year. The coffee sold in its stores accounts for only 20% of the company’s revenue. The rest comes from restaurants (e.g. Smitten Ice-Cream’s coffee flavor is made from Blue Bottle beans), supermarkets, and other shops.

IV. Blue Bottle and Philz Coffee

Philz Coffee and Blue Bottle, though very different, are two major players in third wave coffee for several reasons.

  • Top quality coffee. The quality of coffee from such stores as Starbucks is incomparable to those of Blue Bottle or Philz.
  • Slow but steady growth. Though both companies have been around for more than ten years, neither has opened more than 20-30 stores. Rather than expanding rapidly, Blue Bottle and Philz have focused primarily on maintaining the quality of their beverages.
  • Brand loyalty. Both companies have gained recognition via social media and have successfully secured an international fanbase. Together, the companies are valued at $400M and have secured $26-44M in funding.
  • San Francisco. Both companies started in the Bay Area but are loved by people around the world for their unique cultures.

Though third wave coffee has been popular in the west, its reception in busy East Coast cities such as New York has been tepid at best.

  • Blue Bottle has only been mildly successful in NYC.
  • For business professionals in finance and other fast-paced work environments, giving up 30 minutes of their day for coffee seems like a ridiculous idea. New Yorkers would rather buy mediocre coffee that is available for pick up within minutes.

Relatedly, many people have wondered how third wave coffee would fare in Seoul, which is both a fast-paced city and also one that is filled with coffee aficionados.

  • To take a current example, Paul Bassett, one of the most premium coffee brands in Seoul, is categorized as an upgraded version of second wave coffee rather than a third wave coffee provider.
  • There are different opinions about how Blue Bottle would do if it were to open a store in Seoul. (e.g. Blue Bottle’s slow-living culture does not suit the needs of Seoulites vs. As an internationally renowned coffee brand, Blue Bottle will achieve as much success as Shake Shack has over the past few months.)

What are the similarities and differences of these two coffee start-ups? Which coffee shop do you prefer? Which company is more attractive in terms of their business potentials? Do you think both companies are equally capable of global expansion? What about in Seoul?

Please discuss Philz and Blue Bottle with your Ringle Tutor and take the time to work on your spoken English.

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