Second Cup – A slow death or a second-act of revival?
The transformation of an authentic Canadian java experience from a premium brand to an outdated brand
Second Cup is a Canadian brand that sells specialty coffee and other food and beverages at over 325 locations across Canada and a few locations worldwide. Founded in 1975, this brand became a pioneer of high-end coffee, dominating the coffee landscape in Canada. However, with the entry of Starbucks and other competitors like Tim Hortons and McDonald’s meant that the glory days for Second Cup were over.
At the end of fiscal year 2014, Second Cup reported $26 million loss, including provisions for café closings and a hefty $25.7 million writedown of impaired assets. Meanwhile, its year-over-year same-store sales continued to decline since 2009 at a steady rate of 5%.
Why did a leading coffeehouse company turn into a struggling brand? Was there a misalignment between its business and operating models that led to this shift?
Business Model – ‘A little love in every cup’
Second Cup’s value proposition was in delivering a superior customer experience in an upscale setting. Although providing good quality coffee was an important business goal, it prioritized the overall experience of buying and enjoying the coffee at its stores. Baristas were considered experts in providing personalized service and in ensuring that every cup of hand-crafted coffee offered the same level of consistency and quality.
Unlike other coffee brands, it built its reputation by focusing on store experience, quality coffee and loyal patronage through word of mouth promotion rather than traditional channels of promotion.
Operating Model
As a ‘business that cares’, Second Cup sourced its coffee beans from farms that grew them organically and employed fair trade practices. It established long-term contracts with suppliers to maintain quality, however, these relationships left Second Cup with little control over the price they paid their suppliers at any given point in time.
Second Cup focuses on an asset-light business model by franchising 95% of its stores. The idea behind this model was to give the owner the flexibility and independence in creating a unique store experience that would drive customers to become repeat purchasers. To open a store, owners underwent a 4-week training at the Second Cup Coffee College to learn about the products and the business and were then left to their own devices to make the model work.
Problems brewing up: What reversed the success of a premier Canadian java house to mediocrity?
Organizational support. Franchisees were offered very little support from the head office. When looking for guidance on operational issues, the franchisee owner had to call customer support which was i) very hard to reach due to long call wait times and ii) to resolve any given problem the franchisee owner had to approach 10 different people until he/she got hold of the right person who could offer help. To avoid this cumbersome process, franchisee owners often avoided getting help from the head office and used their best judgment to resolve issues.
Inconsistency in store-run operations. Due to minimal supervision and support from the head office, individual franchisees ended up being were managed very differently. As a result, consistency in quality and service offered across the stores suffered. Owners of better-run franchises often exited the business due to poor margins, thus leaving the pool of franchises within the hands of the underperforming managers who were inexperienced and inadequate in running store operations according to the Second Cup standards.
Labor and Technology. The baristas were not sufficiently trained to handle wide-ranging customer requests and prepare beverages per the required standards. The average cycle time from order to delivery varied immensely due to the variances in skill levels of the baristas preparing the drinks. In addition, specialized equipment (coffee machines, customized blenders, etc.) were often outdated or broken which further impeded the job of the baristas in delivering the beverages in a timely manner.
Suppliers. Second Cup had a very restricted supplier list that franchisee owners were made to order from. This resulted in products being overpriced and lacking the desired quality and freshness. This problem could have been fixed if they had added flexibilities around sourcing from local suppliers to order fresh ingredients and negotiate better wholesale bulk pricing and logistics costs.
Lack of Product Quality and Innovation. Customers found Second Cup coffee beverages to be boring, less caffeinated, and poor quality in comparison to the variety and quality in beverages that competitors like Starbucks and Tim Hortons offered. In fact, customers were often unaware of the inherent goodness of the coffee they were drinking (organic, more acidic) due to a lack of advertising on their products, where they came from, and how the beans were processed to offer an acidic coffee with better taste.
Too-asset light. While Second Cup had been focused on its ‘asset-light’ model, Starbucks and Tim Hortons forged ahead to open more stores. In comparison to Second Cup’s 325 stores, current store count stands at 1400 Starbucks stores and 3600 Tim Hortons stores. With far fewer locations to serve, Second Cup was simply inaccessible to customers.
Designing ‘café of the future’: A second attempt at revival.
The company had struggled in the past to restore its brand and gain market share. To better align its business and operating models, Second Cup’s new CEO announced a 3-year turnaround plan in 2014 to reinvent the brand as the best coffee retailer and to create emotional attachments with its customers. New stores would feature a coffee bar with ‘beverage on tap’ options along with a brand new menu featuring more variety in coffee brews. In addition, the stores were to be remodeled to look more modern, feature white walls with adequate lighting and comfortable seating.
Photos of a remodeled Second Cup store in downtown Toronto.
While the new store offers a better menu and looks unique and differentiated, the fate of this dying brand would only translate into success if the company is able to execute on its new vision and ensure that the franchised operations run under the same banner and brand standards by treating the franchises as customers and collaborating with them and training them, by seeking new supplier relationships, and finally innovating on its products by taking customer preferences into account.
Sources:
- Second Cup company website
- Hoover’s Online, Second Cup company overview
- http://www.theglobeandmail.com/report-on-business/second-cup-rolls-out-transformation-effort-as-coffee-competition-heats-up/article21938758/
- http://www.theglobeandmail.com/globe-investor/a-second-shot-for-second-cup/article562337/
- http://www.canadianbusiness.com/leadership/interview-second-cup-ceo-alix-box-on-reinventing-an-outdated-brand/
You’ve painted a pretty clear picture in my book – it seems like their operational model absolutely undermines their business model. It’s shocking to me, given the clear lapses in execution, that they were able to grow to 325 stores (although lack of competitors likely helped). While the turnaround strategy seems interesting, it seems critical for Second Cup to directly address the lapses you’ve highlighted. It doesn’t feel like a redesigned store and slightly revamped product offering is going to be able to rectify the lack of training, inconsistent support, and poor product quality overall. Plus, I would be curious to hear whether you think the public turnaround is even capable of overcoming current public perception of the problems.
In contrast, I think you highlighted an interesting point above that I’m not sure they’re realizing in the turnaround model – the opportunity to capitalize on local sources and pride. To me, the big opportunity would be to try to take share from Starbucks (not Tim Hortons, which I believe is a lower price point anyway) as the “Canadian” alternative so that those with pride for Canada would choose Second Cup over the American competitor. It feels like they are trying to directly compete with Starbucks through their “emotional” connection to consumers, but can they really beat Starbucks at their own game?? Instead, I’d be curious to see market research on whether or not they would position themselves as the local alternative, or a higher-end Tim Hortons.
Thanks for highlighting an interesting struggle in an industry that definitely impacts my life!
It seems like Second Cup is making some strong efforts to redesign behind the scenes, in terms of their supply chain and relationships with customers.
However, I’m failing to see how they will attract new customers that are already familiar with their brand to a store with a new look. I also wonder how the store redesigns will affect their current customers, many of whom rely on the location as a bustling and homey study location and/or are regulars for their current menu. Could they benefit from offering new types of products (juices, perhaps?) that also fit with the new look, in order to attract new customers that may not be willing to enter and re-try coffee?
In terms of store operational performance, it seems like they may need to start standardizing their equipment in order to standardize the experience. However, I am not sure whether they have the power do so with their franchise model.