The Trouble with Tully’s

Running at “half-caff” in a caffeinated world.

In the first of a series of “From the Outside Looking In” articles I will give my take on how I would address challenges that different companies face.

For those of you not from Seattle or familiar with Tully’s, it is a regional coffee chain based in Seattle. It probably has the distinction of being the second largest coffee chain in Seattle, although that doesn’t really help it a whole lot.

Tully’s has a big problem, or should I say a small problem. Tully’s is too small to compete with Starbucks’ buying power, but too big to be seen as a credible Starbucks alternative in the mind of those who refuse to patronize chains and instead favor local coffee houses. As a result Tully’s struggles to differentiate themselves from their larger competitor, and continues to lose money.

Tully’s has chosen to differentiate itself based on factors such as Free WiFi and Green Coffee. I don’t mean green as in color, but instead that they only use 100% Certified Fair Trade Organic Espresso and a cup that is 100% compostable. They also carry tasty treats from Alki Bakery, and premium soft serve ice cream and ice cream shakes.

The trouble is that is where the differentiation stops. Walk into your average Tully’s and unless someone told you, you might think you were in a Starbucks (only maybe slightly less nice). Tully’s needs to do more to differentiate itself from the competition. If I were running Tully’s here is what I would do:

Turn Tully’s into a destination rather than just the closest coffee shop:

1. Install 802.11n and take steps to ensure its reliability
• Tully’s has free WiFi already, but it’s not very reliable and it’s slow. Starbucks may charge, but their WiFi is faster and more reliable. If you’re going to try and differentiate on a point, you have to delight customers not frustrate them.
2. Consider having a small conference room available for use in some locations
• Some smaller coffee shops use this to great success in driving hot beverage and food sales, but more importantly to drive loyalty
3. Don’t sell any food unless you are going to sell best-in-class options
• Do a deal with Krispy Kreme to distribute their donuts, and not just for individual sale, but dozens and half-dozens as well
• Do a deal with Organics to Go or other compatible vendor for sandwiches
• Do a deal with an iconic bagel manufacturer
• Switch from Ghiradelli to Green & Blacks Organic as a chocolate supplier (hint of luxury) — Godiva might make a good second choice
4. Focus on service, encouraging employees to make personal connections with customers and take small actions to loyalize customers
• Randomly select regular customers for free upsizing (Grande for the price of a Tall) or free upgrading (you’ve been chosen for a free flavor shot)
5. Look to eliminate queueing
• Touch ‘n’ Go Tully’s Card embedded with Favorite Beverage (one-touch ordering and payment)
• SmartPhone application (see Starbucks blog entry from Feb2008)
• Phone ordering — system recognizes phone number, favorite drink, and Tully’s Card PIN
• Web ordering — Cookie recognizes user, favorite drink, prompts for Tully’s Card PIN (or allows customized orders)
• In-store kiosks for distributed ordering for people paying by credit card and Tully’s card
6. Look to improve efficiency in other ways
• Introduce cup printing system (increase speed, reduce errors)
• Pass through toaster (we put the bread/bagel in and you take it out)
7. Space is King
• Not having access to Tully’s financials, a quick analysis of Starbucks financials as a proxy shows that on a revenue per square foot basis, food delivers 20%, whole beans 10%, and coffee-making equipment 5% the revenue per square foot of hot drinks. This space needs to be worked harder or freed up for other purposes.
• Eliminate hot foods
• 65% of all coffee is consumed during the breakfast hours
• Work the space more efficiently by working hard to create a second and maybe even a third spike
• Do a deal with Jamba Juice to expand revenue without subsantially increasing space requirements
8. Continuous Innovation is the key to continuous differentiation
• I would help implement necessary organizational and cultural changes to engage the entire workforce in the process of helping Tully’s establish and maintain an industry leadership position based on differentiation

OK Tully’s, so now I’ve given eight differentiating points you can focus on. Brilliant execution will get you to the IPO you so desperately seek. Do you have the courage to take some of these steps?

What do the rest of you think out there? Are these ideas full of hope or full of folly?

Sound off!