Starbucks

Starbucks blasted open a new market by turning a basic commodity into an indulgent necessity for the 20-million customers it serves each week, creating an espresso bar culture nonexistent in this country only two decades ago.

American coffee consumption has increased steadily since 1995. More than 109-million people, about half the adult population, drink coffee every day, and an additional 52-million (about 25 percent) drink it on occasion, the National Coffee Association of U.S.A. Inc. reported.

The biggest gains are among daily and occasional drinkers of "gourmet" coffee of the kind popularized by Starbucks. Those drinkers' ranks grew from 87-million people in 1997 to 150-million last year. Analysts and rivals say the chain has mastered real estate by picking spots populated with well-educated, well-paid and well-traveled consumers who appreciate a pricey cup of java.

Because of its "early mover" advantage, Starbucks owns almost half of the nation's 13,500 coffee bars, the Specialty Coffee Association of America estimates. The market's second-largest player, Diedrich Coffee Inc. of Irvine, Calif., owner of Gloria Jean's Coffees, lags with a mere 383 stores.

"Starbucks now commands so much "disk space' in consumers' heads that it's extremely difficult to compete against them," said Nancy Koehn, a professor of business administration at Harvard Business School. "It built its brand through its storefronts, and that is a very powerful word of mouth."

Driving a hard bargain

In 1993, the company had its first East Coast spot, on Wisconsin Avenue NW in Washington. Back then, with 272 stores, Starbucks was already a tough lease negotiator, said Chris Weilminster, vice president of anchor-tenant leasing for Federal Realty Investment Trust, owner of 23 retail properties in the region.

The typical mall or strip-mall landlord collects a percentage of sales from a retail tenant in addition to a base rent, Weilminster said. Under the lease terms, the...