Blue Bottle Coffee: Managing Expectations for Rapid Growth One Cup at a Time

Blue Bottle Coffee – The Craft Alternative to Starbucks? Only time will tell…

An Unlikely Beginning

While Blue Bottle Coffee made waves this past June by securing $70 million in venture capital funding, the origin of the company was decidedly more humble. In 2002, James Freeman, a struggling freelance clarinet player who had always loved coffee, started roasting his own coffee and soon opened up a pour-over coffee stand at the Oakland Farmer’s Market. Wanting to share with others the type of coffee he wished to drink, Freeman dedicated himself to the principles that still guide Blue Bottle today: to “only sell coffee less than 48 hours out of the roaster to my customers, so they may enjoy coffee at its peak of flavor…[and] only use the finest, most delicious and responsibly sourced beans.”[1] Blue Bottle’s total commitment to the quality of its product and the overall customer experience has been the primary driver for the company’s success as it has expanded beyond the San Francisco Bay Area.

JamesFreeman

Business Model

Blue Bottle currently operates 20 retail cafes – 18 in the U.S. spread across the SF Bay Area, Los Angeles, and New York City and 2 recently opened Tokyo outposts. In addition, it has two other business lines  – Blue Bottle at Home, its direct-to-consumer coffee bean subscription service and a new ready-to-drink offering. Through these three services, Blue Bottle is focused on providing the best possible product quality and experience for its customers. In fact, Blue Bottle made the difficult decisions to discontinue its wholesale business (which represented 20% of its revenues) and halt a proposed merger with the San Francisco bakery Tartine, sacrificing short-term growth in order to fully manage the customer’s end-to-end coffee experience. [2]

To deliver on its customer promise, Freeman has distilled his original commitment  into three key themes Blue Bottle uses to successfully align its operations and business model to create value for its customers: “deliciousness, hospitality, and sustainability.”[3]

Operating Model  – Bringing Deliciousness, Hospitality, and Sustainability to the Customer

Supply Chain Operations:

Blue Bottle’s expansion strategy first requires investing in building a roastery near the cafe locations it opens instead of shipping roasted beans over long distances. This allows the company to lightly roast beans to specification while also maintaining utmost freshness of the product. Meanwhile, jointly coordinating the planning and purchasing of new roastery and cafe locations minimizes Blue Bottle’s environmental footprint. [4]

Moreover, Blue Bottle has developed close relationships with local suppliers and works closely with them to constantly test and improve its products. For the ready-to-drink iced coffee line, Blue Bottle collaborated with its dairy supplier Clover to find the most effective way to pasteurize the raw milk that went into the coffee. Instead of building out its own operations, Blue Bottle worked with Clover to use excess capacity at a nearby brewing plant to combine coffee and raw milk to be pasteurized and delivered to retailers. The strength of Blue Bottle’s partnerships with suppliers has enabled them to effectively scale with minimal capital investments. [5]

Product Quality and Technology:

Blue Bottle employs a rigorous quality control process to not just maintain the quality of its coffee but to constantly improve upon it. Blue Bottle constantly measures the quality of its coffee through a metric called “cupping.” This metric is used throughout the organization to measure how effective the company has been all the way from sourcing, purchasing and roasting its coffee to how well the coffee is prepared by baristas in the store.[3]

Blue Bottle has also invested in bringing some of the most sophisticated coffee-making technology from abroad into its stores. Freeman has worked with Japanese manufacturers to import Japanese siphon coffee makers, machines that require much skill and precision, to create unique drinks and build a product mix that no other coffee retailer in the U.S. offers, such as Kyoto-style iced coffee.

Japanese Coffee Siphons

Human Capital and Company Culture:

Blue Bottle employees receive extensive training and education to not just make excellent coffee but to develop a passion for the product. Baristas typically receive over 30 hours of training even before pulling an espresso shot for a customer. [6]

Beyond training and education, Blue Bottle strives to keep employees happy and engaged by focusing on people operations, often asking for employee feedback on what benefits and perks they most value, in particular health benefits for themselves and their dependents. [3] Blue Bottle locations generally adhere to a no wifi, no computer rule to encourage genuine face-to-face interaction between customers and baristas, especially questions about the coffee making process.

Facilities:

Blue Bottle differentiates itself from other coffee chains through the quality of its retail locations and cafes. Instead of embracing a standardized model, Blue Bottle cafes are often chic and modern but reflect the unique characteristics of the neighborhood they inhabit. This creates an atmosphere where one not only enjoys a great cup of coffee, but feels great at the same time. The open, inviting atmosphere of the store completes the end-to-end experience Freeman aspires to achieve with each new Blue Bottle. [7]

image108

Looking Ahead

Blue Bottle has successfully grown slowly and steadily by carefully aligning its business and operating models. However, the key challenge for Blue Bottle will be to maintain these standards while also satisfying its new investors’ desires for substantial growth.

Sources:

[1] https://bluebottlecoffee.com/our-story

[2] http://www.inc.com/graham-winfrey/why-blue-bottle-coffee-is-closing-its-wholesale-division.html

[3] http://mashable.com/2014/10/06/james-freeman-blue-bottle/#O8feQp2CrOqH. 6 Oct 2014.

[4] http://www.bloomberg.com/bw/articles/2014-05-01/blue-bottle-coffee-and-the-next-wave-of-artisanal-coffee-shops

[5] http://www.theatlantic.com/technology/archive/2014/08/the-future-of-iced-coffee/375114/

[6] http://hunterwalk.com/2014/01/22/bean-there-done-that-how-technology-is-helping-blue-bottle-coffee-serve-up-a-great-cup/

[7] http://www.theawl.com/2014/08/the-big-blue-bottle-machine

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11 thoughts on “Blue Bottle Coffee: Managing Expectations for Rapid Growth One Cup at a Time

  1. Great post, Rafiq. I’m a big fan of Blue Bottle (am actually drinking a Blue Bottle coffee right now). I agree with you that their business model and operating models are mostly aligned, and as a customer, I appreciate their focus on quality and freshness. What I don’t understand is, why did they pull out of the wholesale business while keeping their subscription business? Their justification was that stores not under their control wouldn’t do their coffee justice. I’m not sure how that’s different from selling directly to consumers at their homes. If other coffee shops can’t make good coffee with Blue Bottle beans, how will a consumer at home be able to do that? I would also guess that their wholesale business has higher margins (definitely higher than retail), so as their VC backer, I would question this decision as well.

    1. Thanks, Vitali – really interesting question. Some of Blue Bottle’s investors definitely feel the same way (Fidelity recently cut its market valuation on the Blue Bottle investment large due to concerns over the move away from wholesale business). However, I think Blue Bottle views the wholesale and direct-to-consumer wholesale business as fundamentally different in terms of its control of the customer experience and impact on brand equity and therefore, Blue Bottle’s ability to capture a premium price for their products.

      For the wholesale business, the concerns start even before the coffee is made – it starts with customer service issues Blue Bottle management observed at retailers serving Blue Bottle they didn’t feel they could effectively screen for. Also, if a consumer at a retail coffee shop that brews with Blue Bottle beans did not like his coffee, there is a strong chance he would assign blame to the quality of the product – the Blue Bottle beans (probably highlighted on a big sign in the store) – rather than take issue with how the coffee was made.

      However, with the subscription business, Blue Bottle has made a significant investment, particularly through the acquisition of the e-commerce service Tonx, to design an immersive e-commerce experience that differentiates itself from its competitors (more details in this video: https://library.gv.com/blue-bottle-at-home-30f428eaf7f4#.cd8jczlqc). As a result, Blue Bottle believes it has created a service that adds to the brand’s reputation for high quality and technological expertise that resonates with the home brewer. You do have a good point that the home brewer cannot replicate the in-store coffee they had at Blue Bottle, but the expectations for the cup of coffee and the impact on the Blue Bottle brand are not the same as when that same customer goes to the coffee shop.

      While Blue Bottle is clearly sacrificing a sizable part of its current business, I think the narrower focus on Blue Bottle’s directly-owned retail cafes, e-commerce subscription business, and ready-to-drink lines, actually do create a more effective alignment between its business and operating models centered around product quality and deeper control of the customer experience.

  2. I can understand the logic to pull out of wholesale that you described above, however what I struggle with is understanding how this meshes with the ability o both expand and manage demand. If there is a 48 hour hard stop between roast and consumption, I imagine this puts immense pressure not only on the supply chain but also on demand forecasting. How do you think they are going to tackle this issue, especially as it is compounded by geographical expansion (e.g., require far more roasting fascilities)?

    1. Thanks, Ben! I think this is definitely the primary challenge for Blue Bottle as they scale. It will be interesting to see if the company feels comfortable shifting away from the 48 hour time between roast and consumption. In the short-term, I think they are looking to continue a deliberate expansion strategy with roasteries/retail in high potential markets (SF, LA, NYC, Tokyo, etc.) and expand geographic coverage through their ready-to-drink coffee lines and subscription service.

      However, with Blue Bottle’s new investors looking for sizable growth and returns, I would not be surprised if Blue Bottle moves toward a broader customer promise of an “end-to-end high quality craft coffee experience” as opposed to Freeman’s current 48 hour philosophy.

  3. I love Blue Bottle too, it’s heavenly. Where is that Blue Bottle in the photo?

    I’m curious to know who is on their Board of Directors (external board members) and how their opinions range on their main issues. I just looked it up and crunchbase says it’s Garrett Camp (Founder @ Expa, Co-founder @ Operator, Co-Founder & Chairman Uber), Tony Conrad (co-founder and CEO of about.me & VC), Ryan Freitas (co-founder and chief product officer of about.me), and Steve Jang (Founder and CEO @ Schematic Labs, angel). Notably, none of them deal in traditional supply-chain management in their own businesses. Operator comes closest (personal shopping type app), but I’m pretty sure they’re 100% drop-shipping, they don’t create any goods. I would love to know how they are influencing Blue Bottle’s strategy (if much at all, since Freeman seems to be very opinionated/’visionary’).

    Do you think they (and management) see this as a “huge scale” opportunity ($88BN MCAP like SBUX?). I’m guessing with $70M in VC funding, that must be the general belief, but I wonder how they are planning to do it with their self-imposed restrictive operation model on retail stores. That leads me to belive that growth must be more predicated on Blue Bottle at Home / ready-to-drink… what do you think?

    1. Thanks, Jean – this is a really good point about Blue Bottle’s governance and how well the company is equipped to maintain their current business and operating model alignment. An interesting part of Blue Bottle’s leadership structure is that Freeman, the visionary founder, is the CEO of the company but not the Chairman of the Board. The Executive Chairman is Bryan Meehan, an investor and entrepreneur behind Fresh & Wild, the London-based organic market chain that was acquired by Whole Foods in 2004. He provides some of that expertise in quality supply chain management, but I think that Blue Bottle would definitely benefit from expertise in supply chain operations and expansion.

      Blue Bottle’s investors have stated that there is huge potential even if Blue Bottle takes just a sliver of Starbuck’s market share to become the national leader of the craft coffee segment. I think that in the short-term, growth will be predicated on ready-to-drink and Blue Bottle at Home, but medium to long-term retail expansion will definitely be critical. It will be interesting to see if/how the company changes in the process.

  4. Great post Rafiq!
    Blue Bottle Coffee just opened its first store in Japan, and people are waiting for hours in line to get a cup of coffee. I think this popularity comes from what you mentioned in the article i.e. Blue Bottle being genuine about their value proposition of “deliciousness, hospitality, and sustainability”. Meanwhile, I’m really curious if they will be able to maintain their business and operation model while expanding their stores worldwide, without introducing any kind of process standardization. My guess is that at some point they will have to stop expanding to preserve their culture, if they were to maintain the current business/operation model.

    1. Hours?? Wow. That reminds me of Shake Shack in NYC for the first couple years it was in operation. However, this is no longer the case after significant expansion – just look at the one in Harvard Square.

      Not sure how similar the two cases are. Just wanted to draw the parallel and put it out there. Maybe Ben can comment.

    2. Great point, Ko! I think it will be very interesting to see if Blue Bottle can use its current core competencies quality and innovation to build the processes operations that can allow it to expand while still maintaining its current value proposition.

  5. Great post, Rafiq! I’ve never been to Blue Bottle or tried their coffee but this makes me really want to try them out.

    It seems like the experience they’re selling in cafes is very specialized. It seems like customers would have to be pretty knowledgeable to appreciate their nuanced coffee products. And the no wifi/no computers rule really surprises me. A lot of people use cafes as a workspace, and that totally turns the typical model on its head.

    It also seems like they have to make pretty significant investments for each location they open, with the local roasteries and the extensive employee training.

    Do these factors put a ceiling on their growth potential? Will they always be a niche product?

  6. Rafiq – thanks for the amazing post. As I observed, the new entrants of high end coffee chains have emerged in different locations around the world when Starbucks became more and more every day coffee. For high end coffee chain, the quality, freshness and deliciousness of its coffee is definitely an attraction to consumers as well as medias to gain huge publicity. But what I’m wondering is that do you think the focus on coffee quality alone can lead to a successful future? From the pictures above, I see the environment of the shop is not necessarily high end considering the comfortableness of chairs and tables and the fashion of decorations. So I thought the only differentiation they are working on is the quality of the coffee. It might be vulnerable for competitors to easily copy the high quality model instead of creating a total experience.

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