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Scaling the Bitter Bean: How Blank Street Brews Success with a Dash of Mediocrity and a Shot of Frosty Service
Blank Street Coffee, a new and fast-growing coffee chain, recently completed a $20 million funding round (following the $67 million raised in 2021) with investors such as Left Lane Capital, HOF Capital, General Catalyst, and Tiger Global.
Founded in 2020 by Issam Freiha and Vinay Menda, the firm was initially set up in Brooklyn. In 2021, the company raised $67 million, including $25 million from the same investors. The firm further expanded by planning on opening 100 locations in New York and two-dozen shops in London by the end of the year. However, reality proved to be slower than their business plan.
Blank Street’s strategy focuses on selling beverages from smaller, low-rent spaces and automating espresso-making. Their pitch: “baristas only need to push a button to brew a delicious premium cup of coffee or shot of espresso.”
This is interesting in multiple dimensions: the notion of rapid growth, claiming operational excellence and automation, and venture funding for a brick-and-mortar business makes me both curious and… skeptical.
So let’s delve deeper.
The S.C.A.L.E. Framework
During my time working with several firms, I developed a framework to help managers assess their readiness to scale. The framework is built around five questions, using the word SCALE as a mnemonic device. While the order of these questions may not matter all that much, the sequence is the following:
Does the firm’s product exhibit product-market fit? In the context of a more mature firm, the question can be adjusted to whether the firm has a differentiated and defensible competitive advantage and has developed the necessary operational capabilities to support it.
Is the firm on the path to making money efficiently? The key question is whether there is a repeatable, predictable path to profitability. Note that this is not about operational efficiency (while it may be part of it, it’s not a necessary condition). The critical component is the firm’s ability to acquire customers for less than it can make.
Is the general and competitive environment, business model, and operational reality favorable for growth? The main question is whether the firm can create a scale-based moat. This usually translates into whether the firm should feel the urgency to grow.
The first three questions above should be viewed as an assessment of the tailwinds the firm experiences in its effort to grow. Is this the right time? Does it have the right economics, and the urgency to grow?
Now let’s look at the (potential) headwinds, i.e., the main growth limiters that may hinder the firm’s growth.
What is constraining the firm’s ability to grow? What are the main growth limiters?
Does it have enough cash to grow at the desired speed? Are the right operational resources available? Are the appropriate processes needed for the next step in place? Is the technology right?
And finally, does the firm have the right leadership tools in place for the next stage?
Is the leadership structure suitable? Are the right people (including leaders) in the appropriate positions? Is the firm able to culture scale?
Let’s see how the framework applies to Blank Street Coffee.
Alignment Between Operations and Strategy
Let’s start with the value proposition. Let’s go back to the statement “baristas only need to push a button to brew a delicious premium cup of coffee or shot of espresso.”
Why would this make sense to anyone who enjoys coffee? It doesn’t. And that’s exactly the point.
Coffee requires constant tinkering to get the right flavors. Grinding it too fine results in channeling and very bitter coffee. Not grinding it fine enough results in acidic coffee. When aiming for the same level of extraction yield (which is what you want the coffee to optimize for), you may need to dial the coffee’s grind level. If the roast is slightly darker or lighter, you may need to optimize your process.
None of that here:
“The beans were described as “generic” by a barista, but their final product is distinctive. The medium-roast Brazilian/Nicaraguan “Speed Dial” blend is intended to have notes of milk chocolate, almonds and strawberries. Charred embers of the former two are perceptible only on suggestion under an unpleasantly funky aroma. Speed Dial’s (small, $2.75) most obvious quality is an acid bite in spite of a splash of whole milk. The cold brew’s (small, $4.25) temperature mutes any sharp notes and it’s an acceptable vehicle for artificial energy…The cappuccino (small, $3.75) is inoffensive.”
And that’s ok.
My mantra for firms is: “Tell me what you’re not good at. Now tell me how you use that to be great in something else.”
In this case, they’re not good in quality or variety, but they have consistency (they’re consistently bland), speed (they’re quite fast), and ubiquity (which is crucial to leverage the consistency they exhibit), meaning there’s probably a shop within walking distance.
They’re also quite expensive (cheaper than Starbucks but more expensive than Dunkin’ for example). Sure, they have espresso, but if the price was a concern, this wouldn’t be where I’d go.
What else are they not good at?
“While many coffee shops seek to serve as a third place for people to convene outside of the home or office—a concept famously championed by Howard Schultz at Starbucks—Blank Street has a decidedly different approach. Many of the company’s locations have little or no places to sit. Freiha says that the chain is more focused on bringing in repeat visitors than customers who will linger over their cup.”
So they’re not a good gathering place or a place to sit and work. In fact, many locations have a cart as a storefront.
“As Blank Street plans for national rollout across major metropolitan areas in the future, its team says mobile carts and retail spaces will be strategically placed based on locations. ‘Carts are great for places like parks, building lobbies, or cases where you traditionally can't have a retail footprint,’ Menda noted, ‘and retail is obviously good for those very high-traffic areas, where you need more throughput per store.’”
Overall, you can see how this is well aligned. Customers who go to Blank Street (whose acronym must be a Freudian mistake…) know what they’re getting: consistent espresso or cold brew on the go for a lower price than Starbucks, with a good mobile app experience, but without a semblance of service.
These choices have clear financial implications.
Efficient Path to Profitability
The result of focusing on menu items with a high willingness to pay (such as espresso drinks and cold brew) while cutting costs on real estate (using carts in many locations and smaller footprint stores), labor (through automation), and raw materials (quality coffee requires attention and costs more) is that the chain claims to be on the path to profitability:
“The fundraise comes at a time when many startups are struggling to raise money, with investors tightening their belts and less willing to fund companies without an immediate path to profitability. Menda and Freiha say that all of Blank Street’s New York locations have been profitable on a per-unit basis within a month of opening.”
Let’s do some basic math. Starbucks generated over $900K per store in 2022. The size of a typical store is 2,000 square feet, which is approximately $450 per square foot per year. Given that many of Blank Street’s locations are less than 350 feet and sell products 20% cheaper, they only need to sell 20% of Starbucks’ volume to achieve the same level of real estate efficiency.
That’s the revenue side. The cost side goes even deeper. To keep the costs low, the chain has made a few interesting choices:
“None of the seats here (less than 20!) are substantial enough to relax into. Like in midtown, the backs of three stools at a counter that looks out on the sidewalk are too low; the one on an eight-foot banquette is more of a tailbone pillow suggestion. Convince me that the round tables here are not engineered for inconvenience. At about 21 inches high, they’re almost knee-level, just short enough to preclude laptop use or elbow leaning or leg crossing or any function other than supporting a drink. The whole arrangement recalls a car dealership or bank lobby.”
Why, at most, 20 seats? Because food service businesses in NY are legally required to have restrooms when they have more than 20 seats.
Restrooms need space and someone to clean them (both of which are costly).
Why have inconvenient seats? So people don’t linger and expect service (which is costly), and the same is true for their lack of Wi-Fi.
To be honest: this saddens me.
Does operational excellence have to mean losing dignity? Not having restrooms is one thing. Planning your business model in such a way to avoid having restrooms (and here I am conjecturing) is a whole different story.
But maybe this is what you “need” to do to be scalable.
Blank Street Coffee has limited scalability. It may have Supply-side Economies of Scale. When a firm scales in industries that exhibit supply-side economies of scale, the average cost decreases as the fixed or indirect cost becomes amortized over more units. This is the most classical notion of economies of scale, exemplified by Intel, Amazon, Walmart, and Tesla. It is the hallmark of the industrial revolution —massive investment in capacity to reduce marginal cost.
For Blank Street, growing most likely means opening stores using their own real estate and staff, and selling more cups of coffee (more direct labor and ingredients). All this means that costs grow on a linear scale.
But some aspects are scalable. As the stores sell more cups of coffee, real estate and labor costs per store become amortized over more units. Supply chain and distribution costs don’t grow linearly with the number of stores (or the number of cups sold). Finally, marketing costs on social media and app development costs don’t have to grow along with the number of locations or customers. They grow as the product offering becomes more complex and as the firm offers subscriptions.
But the chain lacks a learning curve advantage and network effects, so I don’t see reasons why it will grow very fast, other than because of its venture funding.
This brings me to the question: In order to be scalable and venture-backed, do you have to offer such uninspiring quality and inconvenience?
I hope not. But maybe.
In the past 20 years, we’ve seen several well-funded, fast-casual restaurant chains and cafes, such as Sweetgreen, a salad chain that raised over $478 million; MOD Pizza, which raised over $339 million; Chopt Creative Salad Co., with over $100 million raised; and Cava, a Mediterranean chain that raised over $130 million. Other notable companies include Bluestone Lane, Philz Coffee, Clover Food Lab, Tossed, Torchy's Tacos, and Vapiano. The list is not exhaustive, but it highlights the growth and popularity of these innovative food businesses.
Let’s look at Blue Bottle Coffee. The firm raised $120M throughout its funding rounds. In 2017, Swiss food giant Nestle bought a majority stake in Freeman’s company in a deal that reportedly values Blue Bottle at more than $700 million. A 5.8X return. Not bad but definitely not a successful venture exit.
When asked to justify venture funding, the CEO of Philz Coffee explains:
“‘To expand, grow, open up things and hire people, it costs money,’ said Jacob Jaber, the CEO of Philz Coffee. ‘When you have something really special that you care about backed by your sincere ambition to grow it because you're so passionate about it, you want to make sure you have the resources to do that,’ Jaber said.”
But this isn’t a reason to seek venture funding. There are many funding models that fit the goal above, but venture funding shouldn’t be one of them.
A main difference between Blue Bottle, Philz, and Blank Street is that the first two tried (and still try) to offer good coffee and the feeling of a coffee shop. I haven’t been to Blue Bottle post-Nestle acquisition, but I go to Philz when I’m in SF. It may not be the best coffee, but it’s definitely good, and definitely has a feeling of a café. It may scale, but it was clearly not “built to scale” in the same way Blank Street is.
So with such a great model, what are the headwinds?
Constraints: Growth Limiters
Blank Street has been growing very fast.
But that’s about to stop:
“The pitch attracted investors and helped Blank Street quickly gain ground in key cities. But Menda and Freiha say that they’re now planning to slow the pace of openings. They’re deploying the new capital to increase the in-store offerings at their current cafés.”
A serious constraint for a firm like this is cash. Growth requires cash and capital. The valuation based on which the firm raised the funds has remained the same for over a year, a fact that may not necessarily raise a red flag, but definitely doesn’t instill confidence either.
So what do you do when cash is a constraint? You choose a path that requires less cash.
“With a quarter of the company’s sales coming from its cold brew, Freiha and Menda are also focused on expanding Blank Street’s food offerings. Freiha says that Blank Street has been working to develop a breakfast menu, though one that won’t require a lot of manual labor from baristas. ‘Right now, we’re partnering with local bakeries to deliver fresh goods to our stores, so we can’t provide an exceptional price to our customers. We want to make a breakfast that’s nutritious, warm, and affordable,’ he says.”
But this will strain the existing operational model. It’s easy to keep a limited number of employees when you’re just serving espresso drinks, cold brew, and an occasional croissant.
There are chains that have adjusted well, and others that haven’t. Dunkin' (formerly Dunkin' Donuts) shifted its focus from donuts to beverages and a variety of food options, driving growth. Krispy Kreme tried to diversify its offerings but ultimately reverted to focusing on its core product, donuts, after experiencing a decline in sales.
There are many other ways to grow in a cash-limited world, but many require going against a firm’s current operations strategy. For example, Blue Bottle built a loyal following through customer experience and consistently high-quality coffee. Blank Street has repeat customers, but I can’t imagine any of them being “loyal.” They’re loyal until the next fad.
And this brings me to the final constraint, which is criticism from residents in the areas they launch:
“With that kind of backing, Mr. Freiha and Mr. Menda had anticipated rapid growth. They did not anticipate that by debuting in Williamsburg and advertising their support for local business, they would invite the kind of scrutiny normally reserved for Met Gala outfits and Mets pitchers. Skeptics, who see Blank Street as an avatar of gentrification and automation, and resent the use of Wall Street money to compete with local businesses, have aired their objections on social media.”
Dealing with such criticism calls upon the firm’s leadership and culture, which I haven’t addressed much. I'm not familiar enough to comment on their culture, but it’s clear that as long as things fly under the radar, leadership focuses on operational excellence and growth since it has new challenges. In fact, union conversations have started already.
I tried Blank Street on 68th and Columbus in New York and if you’re asking, I wouldn’t return unless there was nothing else around. Luckily it’s within walking distance from Black Press Coffee and Solid State Coffee, which are both superior, and their lack of interest in scaling and venture funding a virtue. So I’ll continue to take my coffee black and unscalable, thank you!
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