1. Based on you analysis of the case, why do you think Beth entered the family business. Elaborate.

2. Discuss the business venture from a lifestyle point of view. Would you be willing enter a venture such as this one? Why or why not?

3. Based on your analysis of the case, what course of action would you recommend to Nancy going forward?

Nancy's Coffee As the busy president of the $7 million Nancy's Coffee Cafe chain, Beth Wood-Leidt wasn't able to visit each of their thirty suburban coffee shops as much as she would have liked. Whenever she did journey out as she was doing today, it was with a passion for building brand and enhancing profitability. Beth approached one of her more challenging locationsin a mall in central New York- and surveyed the space with a practiced eye. ... that front table needs a wipe the display shelves are dusty the OneCard holder is hidden behind the tip jar isn't it too early in the day to be out of plain bagels?... She warmly greeted the staff she knew, introduced herself to new faces, and ordered a cappuccino from a slightly nervous young hire at the counter. As the teenager set about to whip up the best coffee drink of her brief career, Beth took the manager aside to offer a quick rundown on areas for improvement. Beth was just finishing up with her quality assessment when her cell phone buzzed with a call from a former corporate colleague in whom she had often confided about the challenges of running a retail business. Beth took a sip of her frothy brew, winked her approval to the relieved girl who had brewed it, and headed out into the mall to chat. When her friend noted that Beth sounded tired, the 40-year-old CEO closed her eyes and nodded into the phone: Gosh. I am tired! Remember about a year ago I started saying that I wanted to figure out where this business was going? Well, I'm still asking the same questions like, how can we attract the capital we would need to grow faster; what is the best exit strategy to shoot for; and what is the best way to enhance the value of what we are building Sure, we'll add another two more stores this year, but that's just not doing it for me. It's early winter, 2003and that means I've been running this thing now for over ten years. And, as you know, the story hasn't really changed; we're still too small to be acquired, not valuable enough to be worth selling outright, and yet the business is large enough to need someone thinking about it almost all the time; yes, that would be me. We've hit a long plateau here; it's past time to make some critical decisions From Nuts to Beans In 1973, Nancy Wood-then a 36-year-old mother of three and married to Sandy Wood-founded a mall-kiosk business to sell dried fruit and nuts. When demand for that fare appeared to be softening, she began the search for a more viable product line. After connecting with master coffee roaster Irwin White at a fancy-food trade show in 1978, she decided to turn her lifelong passion for great coffee into a new business. Nancy's eldest daughter, Beth, recalled that the concept was a bit ahead of its time: My mother took her kiosks and slowly began to convert them over to coffee bars she had named the Coffee Collection. She started introducing Kenyan and Columbian coffees, but people responded "no way; there is Folgers, and there's Maxwell House, and Dunkin' Donuts." It was a very strange thing to many people who were being asked to pay a whole Case: Nancy's Coffee 57 dollar for a single cup of coffee or told they could grind their own fresh-roasted beans at home. They looked at my Mom like she was nuts. In those days it was very much about educating the consumer By the late 1980s, Nancy's son Carter and her daughter Roxanne had joined the venture full-time. While Beth had been contributing to the effort by periodically reviewing the aggregate financials for her mother, she had never taken much interest in the enterprise. So it was, with her mother's blessing and encouragement, that Beth earned her BS at Babson College in Wellesley, Massachuseus, and soon began a rewarding management career in consumer product marketing. Newly married, Beth happily immersed herself in the busy corporate world of high-profile projects and after-hours brainstorming sessions-first with PepsiCo, and later, with Johnson & Johnson: I loved the work. I had a good salary, a 401(k), stock options, bonus check, company car, great suits: I was lowing life Then suddenly, everything changed! Nancy died of cancer at the age of 56. Beth Enters the Family Business In 1993, Beth took a leave of absence from J&J to return home and help sort through the heartache and turmoil that followed her mother's death. Sandy Wood had inherited his wife's business, but made it clear that if his kids were not interested in keeping the small chain going, then he would either try to sell the sites or liquidate the assets. Operating on the assumption that Beth would be returning to her corporate job once they had dosed the doors on her mother's enterprise, Beth carefully examined the financials and visited each of the seven locations to estimate what they might be worth In the course of that investigation, Beth realized that her mother had developed a solid business model within a largely untapped niche-suburban shopping malls--and she was drawn to the possibilities. Beth's husband, Bill, recalled that when Beth asked him to join her in the venture, it didn't take much convincing: I was running a division of Bell Atlantic in Pennsylvania at the time. Beth and I had worked together much earlier in our lives I had really enjoyed that I have always figured that if two married people were mount to work together, it was Beth and / We get along wery well, and we both know our own place in the sandbox One of the issues that we discussed ones that one of our egos would have to get checked at the door. I was a leader where I uns working before, but I understood that this uns Beth's family's business, and that she was now going to be the face of The Coffoc Collection, now named Nancy's Coffee With equal amounts of sadness, trepidation, and excitement, Beth informed J&J that she would not be returning. Her father was pleased, and said that he would divest his interest in the business by annually gifting equal shares to his three children. It was understood by all that Beth would be the new CEO of Nancy's Coffee The Specialty Coffee Industry The Green Dragon, a Boston coffeehouse founded in 1697, became the clandestine headquarters of the American revolution. It was there, in 1773, that the Boston Tea Party was planned as a protest against the tea taxes being levied by King George on his colonies, By the time the British and the colonists had settled accounts, coffee had become the hot beverage of choice in America Throughout the nineteenth century in the United States, neighborhood coffeehouse's proliferated, and home-roasting coffee became a common practice. The industrial rev. olution, however, fostered a demand for quicker, cheaper, and easier caffeine solutions, With the advent of vacuum packaging and modern transportation, it became possible for a roaster on one side of the country to sell to a retailer on the other side. As with many other food products, quality was compromised to accommodate mass production and efficient distribution. By the 1940s, the coffeehouses had disappeared, and Americans had been sold on the idea that fresh coffee went "woosh" when the can was opened. In 1950, William Rosenberg founded Dunkin' Donuts in Quincy, Massachusetts. While his donut shop took pride in serving what they called the "World's Best Coffee," it would be twenty more years before U.S. consumers could purchase a truly high-end cup. In the early 1970s, a small cadre of coffee aficionados began to offer a unique brew made from hand-picked beans, fresh-roasted in small batches. Peets, founded on the West Coast by legendary coffee idealist Alfred Peet, quickly set the standard for superb coffee. In Seattle, Gordon Bowker, Jerry Baldwin, and Zev Siegl, named their coffee shop business Starbucks, after the coffee-loving first mate in Moby Dick. On the East Coast, George Howell was building his chain of Coffee Connection shops in the Boston arca. New Yorker Irwin White began making a name for himself supplying fresh-roasted grounds to some of the finest restaurants in Manhattan. San Franciscan coffee broker Erna Knutsen coined the term Specialty Coffee, and in 1985 helped to found the SCAA (Specialty Coffee Association of America). SCAA membership grew steadily as these coffee pioneers--Nancy Wood included developed dynamic, profitable business models by proactively educating American con- sumers about fine coffee. By the time Beth took the helm of her mother's business in 1993----the same year that Starbucks had gone public--upscale consumers had developed a real taste for an excellent brew. Growth under the Radar Screen Beth and her management team undertook an aggressive search for retail space. To facilitate that process, they worked almost exclusively with the regional mall management companies that had been doing business with their Inother for years. Beth explained they chose this path partly as a way of dodging a direct confrontation with the powerhouse sweeping in from the west: Starbucks had clearly stated that as they came east they were going to do cities like Philadelphia, Boston, D.C. and Manhattan in a big way. We really didn't know how to play in that kind of shark tank, so we figured that we'd let Starbucks have that, and play the suburban card. And at the time that was low-hanging fruit Even so, Beth was up against Starbucks almost immediately. One of her first meetings after coming on board concerned a regional mall lease that Starbucks had been considering for a while. During that meeting Beth suddenly realized how happy she was to be free of the inefficiency, multilayered bureaucracies that characterized much of corporate America: Case: Nancy's Coffee 581 There were two leases on the table a Starbucks lease, and one for Nancy's Coffee. The mall representative said that the Starbucks lawyers had had the lease for six months--but she we willing to wait. I said, "Look, do you want Starbucks, or do you want a leased space?" When she said, "Aleased space." I said, "Give me the pen." That lease is up next year, and I still haven't gotten around to reading it Beth noted that Starbucks wasn't the only coffee vendor shying away from space in enclosed malls: Establishing your hand in mall locations is not quite frankly, a strategy for the faint of heart. Managing a mall shop is a difficult business, and it costs a lot of money. Tym worked for us in a urty, vince neucomers would get scared off by the idea of prying something like $100,000 a war in rent, when they could be praying $2,000 a month for a Main Street space in "Anytoun, USA." The team had learned through their mother's experience, however, that these pricey mall locations offered an advantage that few suburban in-town settings could match: a captive base. The Captive Audience Throughout the 1990s, Nancy's Coffee and its suburban-model competitors like Peets and Caribou had the luxury of being able to choose locations where no other specialty coffee shops were operating. Beth explained that this monopolistic positioning was especially advantageous in a setting with high overhead and two distinct customer groups: Our bread-and-butter customer is the mall employee--the three to five hundred people who come to the mall every day to work. If you can get them to try, you can get them to repeat Then, obviously, we have our transient customers, the shoppers. We have squarely positioned ourselves to cater to stroller moms-- mothers with time on their hands and kids to entertain. They come to the mall for something to do they may nor alunys buy, but they always have to cat. So we have lots of cookies, apple juice, and bagels on hand for the little ones, which helps us get the mom for her cappuccino In January 2002, in a move to foster a loyal base of customers, Nancy's contracted with Paytronix, a nascent venture that had developed a swipe-card with both payment and loyalty program capabilities. Beth noted that the OneCard system (see Exhibit 14.1) went well beyond the paper cards used by a variety of food-retailers to encourage repeat business: This is like an electronic punch card that also functions as a debit card - either by putting in a cash balance or by prepaying for product. For example, we have this one guy--an yeglass store manager at a mall in New Hampshire --- who shells out $150 on the first of each month to buy the 85 cappuccinos he knows he's going to drink over the next thirty durys. We get his money upfront and be gets our 53 drink for less than $2. If you can get mall employees to buy a OneCard membership for a dollar a year, they're going to come to you every day, since for every nine drinks they get one free-they can even get a jumbo mocha in exchange for nine basic coffees . That's a drink that we sell for four dollars: free to them, and my cost is about seventy-five cents The OneCard is really a nice competitive advantage. We just had a Starbucks open in Buffalo, one floor belowns. Our staff was nerons, but I didn't understand why. I told EXHIBIT 14.1 The OneCard OneCard The OneCard Concept The OneCard is a true technological innovation never before utilized in a restaurant/retail environment. You can use the card to gather "loyalty points" toward free purchases, or, by storing money on the card, you can enjoy fast and easy payments -- like having a Mobil SpeedPass for the best coffee products anywhere! The OneCard, which is activated at the time of purchase, can be used for instant discounts on the Web or at our fine cafes, Two Membership Levels Standard Nancy's Bonus Program (In Store): Beverages (Buy 9/1 Free), Lite Fare (Buy 5/1 Free), Bulk Coffee (Buy 9 lbs./ 1 lb. Free) Free beverage of your choice with OneCard Web Registration 0 OneCard Standard Annual Membership: $1.00 Premium Nancy's Bonus Program (In Store): Beverages (Buy 9/1 Free), Lite Fare (Buy 5/1 Free), Bulk Coffee (Buy 9 1bs./ 1 lb. Free) Free beverage of your choice with OneCard Web Registration Free beverage of your choice every month for 1 year ($60.00 value) Nancy's SpeedPay (stored value) Monthly discounts & promotions OneCard Premium Annual Membership: $15.00 them that with the OneCard, you already have all of your mall employees in your pocket It worked that Starbucks kiosk is struggling By late 2003, Nancy's Coffee shops could be found in over thirty locations from Boston west to Niagara Falls, and from Nashua, New Hampshire, south to New Jersey (see Exhibit 14.2). Three of the stores had been acquired from the owner of a four-chain enterprise who had come to the stark realization that running coffee shops was not going to be the road to riches that he had once imagined it would be. Beth recalled that they were able to make significant improvements in the store they took under management