It's hard to believe today, but there was a time when specialty coffee retailer Second Cup had a big chunk of Canada's urban market all to itself. When the Canadian pioneer began its aggressive expansion in the late 1980s, a small Seattle-based retailer called Starbucks was just making its first foray north of the border into British Columbia.
By 2000, the country's largest home-grown specialty coffee seller was peddling its premium brew at 390 Canadian locations, 152 more than Starbucks. The dozens of higher-end coffee and espresso bars that now dot every urban landscape were still years away. Tim Hortons was focused on a different segment of the market and nobody went to McDonald's for its see-through coffee.
But those heady days of solid growth have become a distant memory, as Second Cup's latest results underscore.
The company posted a third-quarter loss of $26.2-million or $2.65 a share. This included provisions for cafe closings and a hefty $25.7-million writedown of impaired assets – specifically the value of its trademarks. Adjusted profit slid to 4 cents a share from 11 cents a year earlier.
The mid-market operator, which still has 349 cafes, did not keep up with more innovative competitors as they launched a steady stream of new products and displayed more savvy in winning and retaining customers. As a result, it became vulnerable to assaults from more muscular upmarket specialists and a host of other newcomers, as well as the mass chains below. Its results over the past five years have been underwhelming, and the company suspended its dividend in August.
Second Cup, which was founded as a single mall kiosk in 1975, now seems stuck in the mediocre middle, as it searches for a distinct identity – what marketers like to call a unique selling proposition – that might differentiate it from its horde of competitors and persuade more consumers to switch caffeine pushers. That task is made all the harder because the market is saturated. There's a limit to how much more coffee dedicated addicts will consume, particularly as prices rise.
The Brazilian drought caused an 8 per cent cut in this year's harvest. And its all-important arabica crop fell 16 per cent from the previous year. Brazil is the largest producer of arabica, the bean of choice for North American java guzzlers. That will mean higher prices at the barista counter.
The actual coffee in a given cup will still cost only pennies – the dairy portion costs more, if it's real – leaving room for outsized profits for those skilled at keeping their other costs in check and able to steer more traffic into their establishments.
Second Cup has been working harder on those fronts, but much depends on its latest three-year plan to breathe new life into both its network and its tired brand. That daunting task is in the hands of Alix Box, a former Starbucks executive and later a senior vice-president at Holt Renfrew, the luxury goods retailer.
"Fiscal 2014 has been a year of transition," Ms. Box said in a statement Monday. "While much remains to be done, we are now fully engaged in the process of transformation to restore Second Cup to a place of leadership and greater profitability."
So the direction is plain: Second Cup has its sights set on a revamp that will regain the attention of the upmarket crowd. Which is definitely the correct call. To that end, the company intends to raise up to $5-million through a private equity placement.
The new management is making the right noises. But the road back to decent top-line growth and profitability is strewn with obstacles that will be tough to overcome.