The rising popularity of java and all its accoutrements has convinced a growing number of retailers from sectors ranging from doughnut shops and convenience stores to supermarkets and big box merchandisers to gear up (literally with bean roasters and espresso machines) to vie for a piece of the action.

The entrance of these new players and the growth of traditional coffeehouse chains means that the coffee game as we knew it has changed forever. Starbucks will certainly remain top dog among coffee purveyors. But who is next in line? Is it Caribou with its with over 300 domestic units or 7-Eleven with its almost 6,000? The answer depends on how you define a market leader and whom you ask.

Historically, the coffee segment has been dominated by independent neighborhood coffee houses, tiny mom and pop operations with cozy living room atmospheres (complete with newspapers strewn on the sofa or coffee table) where locals would meet, hang out, and sip the morning or afternoon away. Apparently we still like our homey comforts with our coffee because independents (one-to-three-unit operations) still make up 57 percent of the specialty coffee market. Microchains, with four to nine units, comprise another 3 percent.

The Starbucks-led chains (10-plus units) account for 40 percent of the market. And the successful pay as much attention to their ambience as they do to their beans. Caribou, for example, designed its sit-down stores to resemble a mountain ski lodge with a fireplace.

“Many of the competitors in the coffee segment are Starbucks look-alikes; if you take the store’s signage down, it would be hard to tell the difference,” says Caribou CEO Michael Coles. “Our goal at Caribou is to give our guests a five-minute vacation, even if they just come in for coffee-to-go, we want that coffee to trigger images of our fireplace and our relaxing surroundings.”

In terms of number of units, Caribou has grounds to call itself “the nation’s second largest non-franchised specialty coffee company.” But the company isn’t resting on its laurels, or its $160 million 2004 revenues.

Up until now, Caribou has taken its brand eastward from its home base of Minneapolis, Minnesota, opening stores in a total of 11 states. But that’s about to change as the brand gets a foothold in the west, with the addition of 12 stores in Denver, says Coles. Caribou has also targeted four other new markets for expansion.

Markets where the brand is already established will also be getting additional units. With the opening of as many as 100 units in 2005, Cole expects Caribou’s revenues to well exceed $200 million by year’s end with locations in 15 states and D.C. In 2006, the goal is 20 states.

But, Coles insists, Caribou is in no race to play catch-up with Starbucks for world domination.

“Starbucks has done us a big favor by taking big off the table, so we can just concentrate on being the best coffee company we can be,” he says. “We’re looking to maintain a pattern of 30 percent growth as long as we can maintain our current product and service standards.”

But there’s one new challenger who isn’t pulling any punches about its global aspirations—and his eye on Starbucks leadership position. Last September, Juan Valdez, the mustachioed commercial icon, threw his famous sombrero into the ring, with the U.S. launch of an eponymous chain of cafes operated by the 560,000-member National Federation of Coffee Growers of Colombia.

The first Juan Valdez Café, another version of the coffee comfort zone, opened in Colombia late in 2002 and 11 more have sprung up there since. At least 300 more global locations are in the works, with the operators forecasting sales of $350 million by 2007. According to a company press release, all retail profits will go back to the farmers to improve life in Colombian coffee-growing regions. Like Starbucks, the Federation intends to help fuel this rapid growth by taking their company public on the Colombian Stock Exchange. (Starbucks had 16551 locations when it made its initial public offering on NASDQ in 1992.)

Juan has to move quickly because, with about 2,600 international units and well-publicized plans to more than triple its current total of 8,700 locations in the foreseeable future, Starbucks is already way ahead in terms of global domination. In 2003, the company further expanded its specialty coffee profile with the acquisition of Seattle’s Best Coffee chain, which currently has close to 80 company-owned and franchised units in the U.S. and Canada. In a recently signed licensing agreement, the Starbucks Corporation agreed to open 400 Seattle’s Best cafes in more than 400 existing Borders Books & Music stores in the continental U.S. and Alaska, and within new stores as they are opened.

Is the Colombian newcomer’s ambitious agenda making Caribou feel a bit skittish? Not at all, says Coles, noting that “if competition scares you, you’re in the wrong business.” Not even the big news that giant international retailer Dunkin’ Donuts had taken the plunge into espresso could shake the company’s confidence in its position.

Until its 2002 acquisition by Atlanta-based multi-foodservice-franchisor Raving Brands, PJ’s Coffee was a 25-year-old homebody, sticking close to its New Orleans, Louisiana birthplace as well as its roots. Last February, however, PJ’s emerged as a market contender, armed with a glamorous new look, an innovative concept twist, and a no-holds-barred vision “to become the specialty coffee franchise of choice and the number one coffee concept behind Starbucks Coffee Company,” announced its website. Within three months, the company sold more franchises than it had in the previous five years.

Coming out of the gate with about 40 locations, primarily in the Southeast, PJ’s intends to bring its brand and distinctive New Orleans style to the West Coast in in early 2005, says the company’s marketing director, Nicole Lamonte.

Although PJ’s charges Starbucks-like prices, it is seeking a different palate, serving a medium roasting strategy for its coffee as opposed to the “well-done” strategy of Seattle superstar and its clones. That difference attracts about 120,000 customers per month.

Another niche-clincher is PJ’s brand new coffee and wine bar model, which company executives project has the potential to drive as much as $300,000 in annual revenue and will strengthen the chain’s position as an evening as well as a daytime draw. As of last tally, PJ’s had 50 new franchises under development and expects to have a total of 200 signed by the end of 2005 and up to 500 within the next two years, says Franchise Sales Director Tanya Mareno. The majority of new stores will be based on the wine bar model.

Port City Java, based in Wilmington, North Carolina, is launching its 10th year in business with a bang. It should be no surprise because the now 62-unit, 12-state-strong company began offering franchises a little more than a year ago and has been opening an average of two stores per month since last spring. By the first quarter of 2005, Port City expects to up the ante to two a week. And from 2006 on, Don Reynolds, founder and COO, projects a steady 100 new stores per year to open.

Last year, Port City Java’s revenues totaled close to $25 million, about 25 percent of which came from barista-prepared beverages such as espresso and cappuccino.

For the past couple of years, widely publicized debt woes have kept any plans of domestic expansion by Seattle-based Tully’s Coffee at bay. It has expanded overseas to about 200 stores in Asia, but has maintained its U.S. count to 94. But company executives express confidence that, with new president John Dresel at the helm, the chain, which reports sales of $50 million, has 94 domestic units, will rally and eventually resume its forays into new American markets.

Concept flexibility has helped The Coffee Beanery, which began as a mall-based specialty coffee retailer in 1976, to establish its brand in nearly 200 locations nationwide and in Guam. In addition to its full-scale café model, the company offers franchisees cart and kiosk models that make the brand a good fit with airports, convention centers, and other non-traditional sites.

And, yes, there was coffee before Starbucks. Coffee Bean & Tea Leaf (a.k.a. cbtl) was founded in 1963 in Los Angeles, California. About 140 of the chain’s 270 cafes are in the U.S., primarily clustered in California, Arizona, and Nevada. With locations already open in the Middle East, the Far East, Australia, and the Philippines, CBTL is forging full-steam ahead on international expansion. In this country, however, CBTL will reportedly seek to retain its regional advantage, with about 35 additional units in California and Arizona.

But apparently atmosphere isn’t everything for coffee consumers. Convenience stores sold about $1.1 billion in cappuccino and other specialty coffees in 2003, says the National Association of Convenience Stores (NACS) in its 2004 State of the Industry Report. But there could be lots more where that came from once they get their coffee programs in full gear.

Right now only about 5 percent of the more than $10 billion in sales generated by 7-Eleven’s 6,000 U.S. and Canadian stores comes from coffee products. Although 7-Eleven was, in the Dallas, Texas company’s words, “the first retailer to offer fresh-brewed coffee in to-go cups,” it has only recently stepped up to the specialty status plate with Café Combinations, a do-it-yourself coffee customization program that allows customers to play mixologist with a variety of flavored syrups, toppings and other beverage boosters. No lines, no wait for busy baristas. And, at 7-Eleven, one-price-fits-all—around one dollar as opposed to the typical coffeehouse cost of three or four.

Is price the factor that will determine who seizes the segment? Probably not, say the experts pointing to Starbucks recent 11-cent-a-cup price hike to cover soaring coffee and sugar prices.

Probably more on target with today’s consumer is the Billings, Montana-based Mountain Mudd Espresso, an eight-foot-square kiosk concept that combines the sex-appeal of barista service with speedy (“typically one minute and 15 seconds,” promises the company) drive-thru delivery. Coffee kiosks (beverage retailers without seating) account for roughly 9 percent of the total $8.47 billion specialty coffee sales. Not even near the $6.12 billion attributed to coffee cafes (beverages retailers with seating), but a nice chunk of change nonetheless.

There’s no doubt that drive-thru is the next dimension in the specialty coffee segment. Starbucks has already begun rolling out its own drive-thru window model and has announced plans to include that option in at least one-third of new stores.

Chain competitors all agree that prime real estate availability is the key to growth. With its relatively small footprint, Mountain Mudd has a viable game plan. Since 1994, 56 kiosks have sprouted up in 16 states, including Hawaii—with another 20 already on the books—through “co-op” licensing agreements. Annual sales have exceeded $4 million. Number two? Not even close, but a coast-to-coast comer that is looking to create a niche of its own.

Coffee has been integral to the Dunkin’ Donuts concept since the Randolph, Massachusetts-based chain was founded in 1950. Today coffee-based beverages represent more than 64 percent of the chain’s fiscal 2004 $3.6 billion system wide sales ($3.4 billion in the U.S.). In its more than 6,000 stores in the U.S. and 29 other countries, Dunkin’ Donuts sells nearly a billion cups a year, which translates to about 2.7 million cups a day, making the chain the number one retailer of coffee-by-the-cup in America.

But both Dunkin’ Donuts and its high profile competitor, Krispy Kreme (almost 400 “factory stores” in 45 states and other countries, over $600 million in total annual revenues, about 10 percent from coffee) have been slow to recognize the espresso explosion. Dunkin’ Donuts is trying to make itself heard above the coffee chaos by appealing to American values and “igniting a revolt against the tyranny of high prices, long waits, and confusing sizes” or, more succinctly, instigating an “expresso revolution,” according to its press releases. Whether or not Americans respond to Dunkin’s “revolutionary” stance remains to be seen. As for Krispy Kreme, the Winston-Salem, North Carolina-headquartered chain acquired Digital Java, a specialty coffee roaster, in 2002 and is still fine-tuning its own answer to the café craze, the Krispy Kreme “Doughnut and Coffee Shop.”

To date, the fast-food segment has yet to produce a real specialty coffee challenger, the experts agree. McDonald’s has been exploring possibilities ranging from installing specialty coffee-focused McCafes inside its units to upscaling its offerings with one-touch espresso-makers imported from Italian manufacturer Faema. Jack In the Box switched from the high yield coffee traditionally favored by fast feeders to a richer, more aromatic premium brew, says Jim Edmonson, vice president of national accounts for S & D Coffee, a Concord, North Carolina supplier that counts Jack In the Box among its clients. According to Edmonson, Jack was quickly rewarded for his efforts with an almost immediate spike in coffee sales chainwide, 30 percent on average, with some franchisees reporting a 400 percent increase.

In its annual National Coffee Drinking Trends report for 2004, the New York City-based National Coffee Association of U.S.A. (NCA) reported that nearly 8 out of 10 Americans drink coffee, with half of the population requiring at least one jolt of joe on a daily basis. Although total coffee consumption remained steady last year, consumption of specialty brews jumped from 12 to 16 percent as Americans savored an average of 2.3 cups of gourmet coffee beverages apiece each day.

For the first time, espresso-based beverages are driving increased specialty coffee consumption, says the NCA, as shown from the rise in daily drinkers from 4 to 7 percent over the past year. On the 2004 survey, 54 percent of respondents said they had consumed specialty coffee in the last week, compared with 33 percent in 2003.

Among coffee drinkers aged 60 and older, the popularity of specialty brews rose from 0 to 13 percent. The teen market, once totally non-existent, is also exploding, says Ted Lingle, executive director of the Specialty Coffee Association of America (SCAA) in Long Beach, California.

While 77 percent of American coffee drinkers consume their brew at home, that trend seems to be shifting as well. The NCA also reported that out-of-home consumption among coffee drinkers aged 25 to 29 has risen from 42 percent to 66 percent, from 33 percent to 46 percent among 30- to 59-year-olds, and from 14 percent to 20 percent among bean aficionados aged 60 and older.

In general, the quick-service industry has been slow in catching onto changes in consumer taste in coffee and the fundamental shift to specialty brews, says Lingle. Not so with convenience stores, which Lingle calls a “sleeper” segment.

So, with all of these national, regional, and local companies vying for a share of the coffee market, is the cup finally full? Not even close, say operators and experts.

“Eight years ago, people were saying the industry was saturated; then they said it again five years ago and again three years ago,” says consultant Bruce Milletto, president of Bellisimo Coffee InfoGroup in Portland, Oregon. “Even now, we’re so far from saturation that it isn’t even funny.”

One reason for this wealth of opportunity is the fact that coffee cafes tend to draw from a radius of only five or six blocks, says Lingle. But, he cautions, that doesn’t mean that consumer demand is a bottomless cup.

“Within the U.S., growth within the specialty coffee industry will probably slow down to 3 to 5 percent for the next decade,” he says. “International markets will continue to grow at a more rapid pace.”

Even with a slower rate of growth, there’s still a lot of cash in specialty coffee. But the race for the number two power position in this segment is still too close to call.