Second Cup’s new ingredient: escapism – it’s working

When Bruce Elliot took over the reins of Second Cup at the end of 2004, he quickly learned a valuable lesson about café culture: It's not about the coffee. It's not about food quality or clean washrooms either. Elliot, who was previously president of Labatt Breweries of Canada, discovered the secret to good café sales was something more touchy feely. 'The real drivers were emotional,' he says. 'It's about how you feel.'

When Bruce Elliot took over the reins of Second Cup at the end of 2004, he quickly learned a valuable lesson about café culture: It’s not about the coffee. It’s not about food quality or clean washrooms either. Elliot, who was previously president of Labatt Breweries of Canada, discovered the secret to good café sales was something more touchy feely. ‘The real drivers were emotional,’ he says. ‘It’s about how you feel.’

That simple revelation stunned head office, says Elliot. For years the company had been trying to tweak traditional drivers of the business, but same-store sales were flat and recruitment of new franchisees had slumped.

Second Cup opened its first kiosk back in 1975, and has since grown to 360 stores. The company didn’t face any serious competition until the mid 1990s when Starbucks Canada expanded its reach across the country. Starbucks, which opened its first store in Vancouver in 1987, didn’t launch a full-scale assault until 1996 when it signed an alliance with Chapters bookstores. Today, Starbucks operates over 400 corporate-run stores, and more than 100 licensed concept stores across the country. Timothy’s, another Canadian-owned premium coffee purveyor, also got its start in 1975, but only operates 120 locations across the country.

So the new Second Cup prez embarked on an ambitious rebranding effort. Elliot hired Toronto-based Level5 as brand strategy advisors. They walked in and threw out much of the old research on bathroom cleanliness and coffee flavours. Level5 convinced Elliot to deploy an outside research team to look at parameters that went beyond infrastructure changes. ‘Successful brands differentiate on emotional attributes,’ says Peter Drummond, Level5 VP/senior advisor. The new research showed that ‘for Second Cup it’s about escape and being a valued customer,’ he says. ‘That became the fuel to driving the [new] strategic decisions.’

Elliot unveiled Second Cup’s new strategy at its franchisee convention in May 2005. By rebranding itself as the ‘neighbourhood oasis,’ Second Cup hoped to leverage itself as the Canadian David taking on Starbucks, the globalization Goliath.

The convention was a hit. Franchisees liked how Elliot’s team honed the vision statement. ‘The concept of an oasis café was always there but we hadn’t found the right words to define it until Bruce [said it],’ says Philippe Assef, who owns a Second Cup in Laval, Que.

The convention started a brand roll-out plan that included a new store and logo design. And on the promotional side, Second Cup amped up its focus on women. The brand had success with a guerrilla marketing campaign that roped in star endorsements, and a magazine giveaway incentive program, and both efforts are being expanded upon.

Staff training also became imperative, and last June Elliot introduced online training modules. ‘We’ve spent a ton of time and money educating the front line,’ says Elliot. ‘If our brand promise is largely emotional and emotive, and the point-of-sale of the Cup doesn’t deliver, it’s a problem,’ he says.

Since its brand relaunch 18 months ago, Second Cup has seen a turnaround. Annual same-store sales climbed 6.2% in 2006, the strongest performance in a decade. (If price hikes are considered, the organic growth is actually 4.6%.) Its last quarter saw a 7.8% rise in same-store sales – higher than Starbucks.

The turnaround is significant considering Second Cup was also in the throes of a corporate changeover last year. In November, Gabriel Tsampalieros, the former CEO of Cara, bought all outstanding shares of Second Cup from Cara Operations. Premium coffee was no longer part of Cara’s core strategy, says Elliot, but Tsampalieros is committed to growing the business. ‘He knows us,’ Elliot adds. ‘So we are 100% Canadian and uniquely Canadian. It’s the perfect situation.’ The company has also engaged in a major push into the Middle East. Since 2004, Second Cup has opened 23 stores in the likes of Dubai and Jordan.

But overhauling a 30-year-old image didn’t happen overnight. Armed with info from the research firm Hotspex, Level5 helped assemble its ‘dream team.’ The role of Capital C, a new company hire, was to define the emotional space of Second Cup. (It replaced AOR Holmes & Lee.) ‘We provided new boundaries to define the look of the store, but factored in some flexibility to allow owners to create a personal stamp,’ says Capital C CEO Tony Chapman. He also pushed for seasonal in-store merchandising and simple, sexy signage. In turn, Capital C’s ideation work gave the design firm Shikatani Lacroix direction on a new look for the store and the logo.

‘Second Cup was the most un-united brand I’d ever met,’ says Shikatani Lacroix president Jean-Pierre Lacroix. ‘Every location had a different personality, some good, some bad, and some kitschy. There was a lot of kitschy out there,’ he laughs.

Lacroix brightened up the ‘dark and cluttered’ environment. He introduced blues and cream tones for the interior, added crown molding, soft seating and new light wood countertops to make the cafés look like the ‘ideal home kitchen.’ Packages of artwork for wall displays are now offered to the franchisees, and new menu mini-boards have been simplified and made easier to read. ‘Instead of being 80% different and 20% consistent, we’ve made the cafés 80% consistent and 20% different,’ says Lacroix. ‘We didn’t want to be cookie cutter,’ adds Elliot, ‘so we’ve built into [the prototype stores] the ability to be flexible in some elements. It’s a very tricky design piece.’

The new look was only part of the equation. Level5 also worked with Elliot on execution. ‘The real challenge in the service business is to develop standards and processes that will make it a consistent experience,’ says Level5′s Drummond. ‘We spent more money on training last year than we did in the previous 10,’ says Elliot.

Another innovation: the opening of a prototype ‘oasis’ store in Toronto. The corporate office is running the concept store itself, and using it to experiment with building the new brand identity and experience. Franchisee partners are rotated into this store for ongoing feedback, and owners of older stores also get a chance to soak in the new cozy ambiance, says Elliot. The new prez is also screening prospective investors more carefully. One new step in the brand experience upgrade is to insist that wannabe franchisees do an in-store try-out. Franchisee Antonio Chan describes how he has ‘informally interviewed’ potential investors at his Danforth café. After a day of cleaning tables and mixing drinks, it’s pretty clear which are up to the challenge, says Chan.

Traditionally, Second Cup spent little on advertising. But last year, through Gaggi Media, the company entered the guerrilla marketing fray. To promote its new summer blender drinks program, ‘Look Who’s Chillin’ at Second Cup,’ which targets the single urban 30-year-old female, Gaggi tried something new by collaborating with Chum. The net’s Star! Daily show engineered celebrity endorsement by corralling stars into Second Cup stores and offering them a blender drink during their interview. The gig was up however, when Dave Navarro (host of Rock Star: Supernova) caught on, and refused to be interviewed in the store. Once the word got out, other celeb agents put their foot down. But not before Chum had arranged 12 star interviews including Nick Lachey, Cyndi Lauper and Hilary Duff, says president Laura Gaggi. The interviews aired on Star! TV, as well as Citytv and A-Channel. The program included product placement, and clips on opening and closing shots. A campaign microsite was linked to star-tv.com and secondcup.com, and ads were launched in celebrity magazines. There were also radio spots on Chum stations.

To further the Tinseltown connection, Second Cup offered a contest where lucky winners would attend the Hollywood premiere of Marie Antoinette and have a chance to meet director Sofia Coppola and actress Kirsten Dunst. The contest drew 8,900 entries, a strong number considering contestants had to purchase a blender drink before signing up online, says Gaggi.

Gaggi Media just wrapped Second Cup’s new ‘Yummy Mummy’ campaign targeting the 37-year-old urban female with kids who’s scheduling a little me time. Along with one of the ‘Me Time’ beverages, such as a dark chocolate raspberry latte, consumers were offered a free magazine and other gift promotions. Gaggi, which cut a deal with Transcontinental Media, distributed 100,000 magazines such as Elle and Canadian Home & Country as part of the launch that ran from Jan. 14 to mid-March. In addition to a print campaign in Canadian Living and Style at Home, the company ran a ‘Win a Spa’ contest through mochasofa.ca. There were 10,000 entries.

Now the company is following up with a spring ‘Me Time’ launch targeting mothers and daughters, says Karen Gold, Second Cup’s VP of communications, who adds their demographic is 80% women. The program launched March 11, supported by radio ads and a newsletter. This will be followed by another ‘Look Who’s Chillin’ at Second Cup’ guerrilla celeb campaign that will kick off May 20. ‘It’s become an equity for us,’ says Gold. This year’s food innovation: new smoothie flavours.

And there are new retail strategy partners in the mix. Since the fall, Second Cup has ended its relationship with Capital C and hooked up with a new marketing partner, Toronto-based OSL Marketing Communications, says Gold.

Elliot says that the marketing efforts also extend to regional initiatives, ranging from cause to loyalty programs. Recently, 34 Second Cup franchises in the Calgary area demonstrated their commitment to their communities and the fight against breast cancer by teaming up with the Prairies/NWT Chapter for a month-long promotion during Breast Cancer Awareness Month. Local Calgary celebrities and media personalities donated their time to serve coffee at Second Cup locations across the city as part of the campaign designed to raise awareness and funds. When the campaign concluded, $13,500 had been raised.

Elliot also points to a program for cafés in Quebec City as an example of local initiatives. Five franchisees in Quebec launched a café card program whereby customers who racked up $20 on their card would get a $5 bonus.

Is all the buzz working? To be sure, Second Cup has seen a spike in its same-store sales, but some franchise owners attribute the jump to price hikes in 2006. The company increased blender drinks by 4.5% after adding real fruit and increasing the cup size; increased whole bean coffee by 12% and increased brewed and specialty coffees by 2.1%. The number of transactions at Antonio Chan’s two stores have remained flat, although year-on-year growth jumped 10% at his Markham location and 5% at his Danforth location. Second Cup, head office, however, says its overall transactions are up 10%.

Elliot is bullish about Second Cup’s future: ‘We are an affordable indulgence for people,’ he says. ‘It’s a brand people trade up to. But still, there’s much we can do to enhance and romance [coffee] and educate people.’

Why did you join Second Cup?

I thought the category was fascinating and thought the brand had unlimited potential. Second Cup has been in existence for 30 years. There are not a lot of these companies left that are really Canadian.

Early on you could clearly tell by visiting [different] cafés that we were inconsistent. And if you asked anyone internally: ‘What are we?’ or: ‘What are we trying to be?’ you’d get all kinds of different responses.

And the [premium coffee] game had changed. The competition had changed, and we had to figure out what we should be now. I was really interested that it was a franchise model. I thought it would be interesting to see if we could get 300-400 companies within a company, who are kind of doing things their own way, to work together.

How badly was Second Cup struggling when you took over?

The same-store sales were not healthy at all. They were averaging about a half-point. We were not growing units, we weren’t growing sales, and weren’t growing same-store sales, which in our biz is a key metric. Yet, what started to spur us on was talking to some of our best operators, who, independent of what we were doing as a company, were doing some wonderful things. You can you learn from that.

Our top quartile had figured it out. They were delivering wonderful cafés, wonderful lattes, wonderful food and service, and they had figured out how to connect in an emotive, caring way with their guests so that people came back more often. That stunned a lot of people. It didn’t matter if the café was a sit-and-stay or a grab-and-go. The guests were similar and wanted to relax even if it was for only one-and-a-half minutes.

Why did you hire K. Inc Marketing (now Level5) as brand strategy advisor?

We are a premium brand. We charge premium prices. Being consistently inconsistent and charging premium prices is not a formula for anything. So we had to figure out what consumers want in a café experience. We had to figure out if we can we own the brand, and if can we make it profitable.

So at the back end of 2004, we did more research with consumers than I’m sure we did in the preceding 30 years. We needed to know the key drivers, both functional and emotional. Most people in the business were trying to build a café brand on…good coffee, clean washrooms. But when we went out and did research, we found the attributes that people were looking for were all emotional.

So what did they come up with?

We started with nine concepts then whittled down to three: a ‘spa’ concept; ‘coffee bar,’ (a kind of Cheers); and ‘neighbourhood oasis’ which was come in and relax in a very local setting. We took those three final concepts to research and ‘neighbourhood oasis’ won hands down. From there we did boards of what a café would look like. Logos, an entirely new identity. Even the cups are new.

What about the design of the store?

We are still testing the new concept store. We started to build some in September 2005 on the neighbourhood oasis theme. We have a signature fireplace in all new cafés. We have a really warm palette, all the colours have changed. The number-one driver is: ‘Make me relax,’ so we’ve gone to all new soft seating. As [the older stores] naturally come up for renovation it will change.

We are evolving the prototype in steps. We have a store that [head office] is running at 518 Eglinton Ave. East. We are running it to learn from it. We’ve had other operators work the store. They tell us counter size, equipment, counter heights, back-bars. We are working out the final details. We’ve got to figure it out for our partners. Then you’ve got to get people to believe.

There’s a new point-of-sale. New signage. We’ve simplified the service end of it. We built it so we could do more merchandising, more food. The Europeans (drinks such as the lattes and cappuccinos) are the big driver, blended drinks are a huge driving force, food is a new big driver, merchandise is a totally incremental driver force.

How are you doing?

We’ve had 11 quarters of sound growth. [For the company's fiscal year just ended, net profit rose to $10.1 million from $10 million last year while net worth increased to $189.3 million from $177.5 million.]

Where do you want to be in five years?

If the economic model is healthy and you have a good relationship with your partners – the [investor] will come. We’ve been working on that. A lot of [franchisees] are mom-and-pop operators from different backgrounds. So, we’ve spent a lot of time on education. In June, we introduced online e-learning training modules that certify, not only [owners], but employees. That’s huge because we have about 5,500 employees who work for 360 different companies. As a result, we have better business skills and acumen in our system.

How many stores have opened and closed?

Last year, we opened 16 new cafés, but we were net neutral. The stores we closed were on 10-year leases and we didn’t renew.

Can you elaborate on your marketing of the neighbourhood oasis concept?

A lot of emphasis is in the café.

What we’ve tried to do is thematic programs with a lot of touchpoints for guests. We do a lot of beverage/food pairing. It’s a good way to bundle and introduce new products to our guests. We try to do a lot of value-added in terms of the experience, in terms of gift at purchase, things that tie back to support the brand.

We’ve been very active in supporting the food program – the ‘Good for you.’ We are eliminating transfats in all our beverages. We are looking at healthier options in our baked goods. We are doing more seasonal merchandising. The brand promise is: ‘Come in, be recognized, get rewarded.’

What about outside the café?

We’re starting to do things that drive traffic and transaction count up.

We don’t buy TV spots. We have some innovative things, like the programming on Chum, but it was promotional TV, part of Star! Daily’s promotion around our summer blender drinks. With that program, we launched the ‘Made with real fruit’ promotion that was part of our ‘Good for You’ lineup of summer blender drinks. The promotion was bundled and targeted to young females in the summer time who are Star! watchers and heavy readers of glamour magazines, as a vehicle to get them to spend more time with us.

We do a lot of regional marketing such as working with charitable organizations [like] run for the cures that are close to neighbourhoods. We rely on our [franchisee] partners in communities.

We also have a major affiliation with Foster Parents Plan. [In May 2006, Second Cup introduced Plan Canada pure spring water, and with every purchase makes a 10-cent contribution to clean water projects in key coffee-growing regions around the world.] Once again, how does that tie up with brand? Well it ties back to this notion of caring. We’ve been part of FPP for 10 years. This is just a new spin on it. It’s a simple way to donate to FPP. If that’s on your list of things to do, we are a Canadian company that cares, here’s one way to help share with that.

Why is Tim Hortons getting such great consumer feedback? What threat do they pose?

So they get good marks for brewed coffee, go figure! The brand is strong and healthy and they deliver it consistently. They have just done a spectacular job over a long period of time on the brand. But they are QSR. They are fighting with McDonald’s. We trade users [with them] but we are a different game.

Some say all the coffee – even at the premium brands – just isn’t great. I disagree. I’ve just come back from Panama. We pay top prices, more than most people anywhere, to get the best coffee in the world. A lot has to do with how it’s prepared and how it’s presented and how it’s romanced, but in the bean there’s a significant quality difference bar now. We’ve got more variety.

How do you distinguish yourself from Starbucks?

Our most significant point of difference is that we are franchised. The average tenure of our franchise partner is nine years. In a corporate driven model, corporate managers are moving on to another corporate store. But our franchise partners have a lot of skin on the game. They have a unique point of difference. It’s my café, I’m the owner, you’re my customer, we have a relationship. My wife works here. My daughter works here. And in the top quartile you can put two of whatever around them and it doesn’t matter.

We also have a lot more variety in food. Our stuff is all locally baked and delivered fresh daily. That’s a huge competitive advantage.

Is there a backlash against companies like Starbucks when they get too big?

I look at some of the campaigns they are running, and they are getting out in front of that challenge. Gosh, you have to give them full marks. That brand didn’t exist 30 years ago and they are a global brand. They are for real. They are different. They are a corporate-run big global brand, and we are an independently-owned, franchised model that has a position that is about the heart of the neighbourhood.

Compared to Starbucks, we are doing it differently. We are trying to educate our franchise partners and that’s the biggest differentiator there is. It’s about you and your staff and how you make me feel. And if you take the time to figure it out, and do it every cup, every shift, every time, people will come back, bring friends and bring more money. No one gets that at retail in Canada.

What keeps you up at night?

To continue to find really good partners.

Having our position nailed, and [having] figured out what differentiates us, has had a huge impact on who we recruit. We’ve changed all of our screening, recruiting, profiling models to help us find people to deliver that brand promise. We had people in that were technically wonderful, but they didn’t have that package, that caring.

And finding strong pieces of real estate.

We want to build a bigger network.

We have to move faster on how we get to market…