The $5 cup of coffee. When did this become a thing?
Enter the third wave coffee movement where coffee is considered an artisanal food like wine or craft beer rather than a commodity and people are willing to pay the price. Blue Bottle is riding this trend and expanding its reach across North America and Asia.
But how did Blue Bottle grow from a single coffee cart into a 700 million dollar company?
The Rise of Blue Bottle
The company’s meteoric rise started in the small apartment of a struggling musician in Oakland California.
Here is what James Freeman (founder of Blue Bottle coffee) has to say:
I’ve only wanted to do two things: Play the clarinet and make Coffee
Freeman began wondering if there were other people like him who were just as dedicated to drinking extremely fresh coffee.
At the time there literally was not a place in San Francisco one could go to get a bag of coffee with a roast date stamped on the back. It seemed very compelling to me this idea of coffee being fresh food.
Freeman was convinced that coffee companies like Starbucks over-roasted their beans. The quality of the coffee needed to be the primary focus.
Enter The Third Wave Coffee Movement
Freeman rented a 186 square-foot shed near his apartment in Oakland bought an old coffee roaster in hopes of expanding his operation.
In 2001, Freeman began his commercial operation. Freeman racked up $15,000 in debt to launch Blue Bottle and spent two years selling his coffee at farmer’s markets around San Francisco and Oakland slowly building a dedicated following but in January 2004 that all changed.
One year later, Blue Bottle opened its first location in the heart of San Francisco in a small converted garage.
But just how many consumers are willing to pay five dollars for a cup of coffee?
Here are some comments from people from people that have been asked the same question:
- The thing is crazy for people to pay five dollars for coffee when there’s people here selling coffee for $1
- I usually pay like five dollars for coffee
- Personally I wouldn’t pay five dollars for coffee but that’s just me.
- I think it’s crazy to pay five dollars for a cup of coffee.
- If it’s a good cup of coffee I’d say about ten dollars.
- The maximum amount I would ever pay for a cup of coffee is probably six dollars. That’s about when it starts getting ridiculous and I hate myself perpetually until I finish the cup of coffee.
Blue Bottle's Expansion
Today there are more than 80 Blue Bottle cafes around the world. As of July 2019, there are dozens of locations in the United States as well as 14 locations in Japan and two in South Korea.
Blue Bottle has helped drive trends within the coffee industry – particularly cold brew and “New Orleans”-style iced coffees. It has also developed ready-to-drink products as well as an online coffee subscription with prices ranging from $8 to $47.
Blue Bottle has a reported 700 million dollar valuation and the company raised a total of 117 million dollars from some impressive outside investors like former Twitter CEO Evan Williams & the Instagram co-founder.
In 2017, Nestle acquired a 68 percent stake in Blue Bottle. Blue Bottle sold a majority stake to Nestle that reportedly valued the company north of 700 million dollars. The reactions to the Nestle news were mixed.
Just how strong is the demand for super premium coffee?
Here what a senior analyst from IBISWorld has to say about it:
High-end semi expensive coffee is simply just not recession proof. When the economy changes, people are going to switch from buying this third wave of coffee, spending $5 a day on their cappuccino to spending more on dunkin donuts or the street card outside for that caffeine fix if they need it.
Blue Bottle’s expansion beyond the bay area started once the US economy turned around after the 2008 financial crisis. It opened its first New York City location not long after in 2010.
In the past five years, the retail coffee market and the coffee and snack shops industry specifically have increased by 4.6% to reach about 50.7 US billion in 2019
64% of Americans aged 18 or older said, they’ve had a cup of coffee the day before, according to a survey from the National Coffee Association in 2018. The latte was the most popular coffee drink among Americans in 2018.
Between June 2017 and June 2018, Americans drink more than 67 million lattes. In 2018 cold-brew orders were 42 percent higher than iced coffee orders in the USA.
From 2014 to 2019, prominent third wave coffee brands such as Blue Bottle, Stumptown Coffee Roasters and Intelligentsia Coffee have grown at annualized rates of more than 20% according to IBIS world.
Blue Bottles entrance into new markets hasn’t always gone smoothly. In 2019 it closed its Miami locations about a year after opening.
In the US, artisanal coffee and third wave coffee has become really popular. That has been mainly segmented to really large cities with typically higher incomes and a lot of international consumers.
While much of Blue Bottle’s appeal lies in the quality of its coffee, it still faces many challenges – most notably increased competition.
Blue Bottle’s top competitors include Stumptown and La Colombe.
Even Starbucks got into third wave coffee in 2014 when it opened a Starbucks reserve roastery in Seattle. It has since opened up new locations in New York, Shanghai, Milan and Tokyo
Even their cups don’t even say “Starbucks” – They just kind of have a star on them. They are want to associate the people with the brand they know & love but also separate themselves a little bit by trying to become more niche and nuanced. We have a lot to thank Starbucks in terms of creating a market where people want to go out to coffee and feel like that is a fun and acceptable thing to do. I don’t see Starbucks as a competitor – I look to companies for inspiration rather than think about competition.
Blue Bottle Would Not Be Here Without Starbucks
Blue Bottle is still going through growing pains in May 2019. The company recalled 194,000 of its coffee cans after they started exploding when people open them.
That’s a sad one because the product itself was really, really great. The coffee magically preserved at peak of freshness for many, many months. I personally don’t think you should give up on the cans entirely.
What will help the company continue growing is staying true to Freeman’s original mission:
In San Francisco, when we started there were these models – like Starbucks models of how cafes were supposed to be and I didn’t like those models and I wanted to do something different. I was advised by many people with many opinions that those differences were going to make me unsuccessful. Actually people were quite attracted to those differences. Differences of making coffee one cup at a time. Difference of not roasting things super dark. The difference of having each milk drink steamed to order and with latte art on top. Those things that made it slightly more labor-intensive – a little bit harder – a little bit more expensive…
Those were actually the differences that attracted you.