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Second Cup aims for an upmarket vibe as coffee competition heats up

The renovation of this Second Cup location in downtown Toronto cost close to $1-million. The chain is undergoing a redesign of its shops and this location is the first to undergo the makeover.

Fred Lum/The Globe and Mail

When Alix Box joined Starbucks Canada almost 20 years ago, it was the underdog taking on titan Second Cup in the fledgling coffee wars.

Today, as the new boss of Second Cup Coffee Co., Ms. Box is again the underdog, this time battling giant Starbucks – and an array of other fast-growing rivals.

Just over nine months into the job as chief executive officer, Ms. Box is rolling out a three-year transformation effort starting with a sleek redesigned Second Cup in downtown Toronto. On Wednesday, Ms. Box held court at the new "store of the future," which opens on Friday. Located in the city's hipster King Street West entertainment district, the café is an airy, white-hued space with marble counters, a "slow bar" and a high-tech Steampunk coffee brewing machine.

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But as a reminder of the increasingly brutal café landscape, the new store faces a Tim Hortons restaurant across the street and a Starbucks about a block away. There's also an outlet of the nascent, but increasingly popular, Aroma chain down the street and other independent cafés nearby.

Against the backdrop of intense competition, Ms. Box travelled the country to get feedback from Second Cup franchise owners at their almost 350 cafés – a far cry from Starbucks' 1,445. She got an earful.

"They felt Second Cup had fallen behind and was outdated," she said as she sipped a Finca La Cumbre light roast Costa Rican brew at the slow bar, priced at $4.75. "This is not tweaking," Ms. Box added, referring to Project Crema, the internal name for Second Cup's reimagination. "We're not doing a little bit here and a little bit there. This is a revolution ... It's never too late."

It may not be too late but time isn't on Second Cup's side. Having essentially created the affordable luxury café culture in Canada, Second Cup has lost steam as Starbucks, market leader Tim Hortons and global titan McDonald's Corp. have raced to perk up their coffee business here.

Now, under new leadership, the chain is betting it can get the jolt it needs with a chic café design, fresh offerings and breaks for its franchisors.

"Is it too late? Probably," said Joe Jackman, CEO of consultancy Jackman Reinvents, which specializes in turnarounds such as the ones at U.S. fashion retailer Old Navy and drugstore chain Duane Reade. "They're yesterday's brand ... But I don't count them or anybody out. It's doable. It's just a long-odds situation."

Added Darren Tristano, executive vice-president at researcher Technomic in Chicago: "Given the size of Starbucks compared to Second Cup, it's a more uphill challenge."

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Second Cup's key challenge is attracting younger customers to its fold, said Robert Carter, executive director at market researcher NPD Canada. The chain now counts baby boomers who grew up with Second Cup among its biggest clientele, he said. But millennials are an important customer segment, making up 29 per cent of all restaurant visitors, he added.

The challenge is daunting. In its latest quarter, Second Cup posted a $26.2-million loss, including provisions for café closings and a hefty $25.7-million writedown of impaired assets – the value of its trademarks – while its adjusted profit tumbled 64 per cent. Meanwhile, its same-store sales dropped 2.9 per cent, its 10th quarterly decline in that important measure of sales at outlets open a year or more.

Starbucks doesn't break out its Canadian results, but in the third quarter, same-store sales at its Americas division rose 5 per cent and "Canada is a contributor to that growth," Rossann Williams, Starbucks Canada president, said in an e-mail. It has also been adding more food and digital payment alternatives.

Starbucks will even start testing deliveries with mobile ordering and payment next year south of the border as a way to counter reduced shopper traffic to stores. "That's our version of e-commerce on steroids," Starbucks CEO Howard Schultz told investors recently.

At McDonald's Canada's 1,430 restaurants, including McCafe, coffee sales have nearly tripled since 2008, more than doubling its coffee market share here, said president John Betts. Tim Hortons for its part will soon be acquired by Burger King, counting on the heft of the fast-food chain to help it expand even further.

Even as its rivals stake out their territory, Second Cup has an opportunity to move more upscale to make gains, Mr. Jackman said. Other retailers, such as Hudson's Bay Co., have found that reinventing themselves by shifting more upmarket can be more rewarding than staying in the sinking middle ground, he said.

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Ms. Box's store of the future reflects her focus on a premium experience and offerings. Coffee at the slow bar, which she compares to the feel of a wine bar, costs up to $4.95, which can be more than twice the price of its regular brew. At the bar, the coffees include an Ehiopia YirgZ, with a "peach-like sweetness and grapefruit acidity" and Finca La Soledad, a light roast from Guatemala.

She's chosen a new, local bakery to source a more edited offering of muffins, scones and croissants, with a breakfast menu that includes egg white and kale sandwiches and granola and oatmeal. Franchise owners had told her that the food needed to be better and fresher.

The store's remodelling cost close to $1-million, although rolling it out will probably cost less than half that much as the company learns from the process, she said. An $8-million share offering will help fund the renovations in the 10 corporate stores, while Ms. Box is giving breaks to franchisors that could encourage them to invest in re-doing their stores.

Second Cup's recent $2.3-million of annual savings from cuts to head office – dubbed coffee capital – went toward shaving franchisors' royalties to 7.5 per cent of sales from 9 per cent, and their marketing spending to 2 per cent from 3 per cent if they achieve high operational scores, she said. That amounts to about $15,000 worth of annual savings for a café owner, and almost all of them so far have qualified for the breaks, she said.

At the new store. she changed the logo to a more modern-looking font and added art work by local artists to the cups. Her team has put hooks underneath the eat-in counters to hang purses and coats. And she introduced a new staff dress code of a charcoal grey apron over a white shirt and dark denim pants to replace the all-black with red piping uniform. Its "image was very fast-food-like," Ms. Box said. "It looked like everybody else. We think we can be a bit different."

"The brand was playing too close to McDonald's and Tims," she said. "I remember Second Cup as being a premium offering. I felt it lost part of that."

As a former executive of luxury fashion chain Holt Renfrew & Co., Ms. Box said she honed her skills of catering to individuals rather than the masses. In her current role, "our goal isn't to be the biggest; our goal is to be the best coffee offering."

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About the Author
Retailing Reporter

Marina Strauss covers retailing for The Globe and Mail's Report on Business. She follows a wide range of topics in the sector, from the fallout of foreign retailers invading Canada to how a merchant such as the Swedish Ikea gets its mojo. She has probed the rise and fall (and revival efforts) of Loblaw Cos., Hudson's Bay and others. More

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