When Jan Davis and Gary Meyer opened their coffeehouses in Des Moines in the 1990s, they knew it was only a matter of time before big chains like Starbucks Corp. came to town. Today, the specialty coffee market is exploding, and these business owners don’t have to look far to see evidence of that.

“Last year Caribou (Coffee Co. Inc.) opened a store about 20 blocks from my Windsor Heights location, and I heard now that they are planning to open another store right across the street from me,” said Davis, who owns the local Grounds for Celebration coffeehouse chain with her husband, George. “When there are only so many potential customers in a given neighborhood, that’s bound to take business away from us.”

The revenues of café segment of the specialty coffee market, which includes cafes, kiosks, carts and coffee bean roasters and retailers, grew from $8.96 billion in 2003 to $11.05 billion last year, according to the Specialty Coffee Association of America. But the explosion of new coffeehouses, both from national franchises and locally owned stores, have forced independent business owners to find ways stand apart from the competition in order to share in the profits.

According to the National Coffee Association USA, 49 percent of Americans age 18 or older drink some type of coffee beverage daily, and many of them are stopping at a local specialty coffee retailer instead of downing a cup of Folgers at home.

Despite growing demand for specialty coffee, maintaining a steady customer base can be day-to-day battle as more stores open. Davis sees a tough time of transition right now for independent coffee retailers.

“Our Windsor Heights store is doing well, and it’s barely breaking even,” says Davis. “To break even in the coffee industry these days is good. When you sell coffee for $3 a cup, the customer might have the impression that you’re making a lot of money, but you’re not.”

Even with five Greater Des Moines locations – Beaverdale, West Des Moines, Ingersoll Avenue, Windsor Heights and Norwalk – Davis blames a tight profit margin on increasing competition from national coffee chains. Twin Cities-based Caribou, which opened its first Greater Des Moines store in Clive last year, now has four stores in the area, two of which are located within a few minutes of her Windsor Heights and West Des Moines locations. She has heard that Caribou wants to open another store in Windsor Heights across the street from where she has been for three years.

“Caribou is infamous for moving across the street from a local person, and that definitely hurts business,” Davis said. “Even though we think we have a better product, people are naturally drawn toward something new, and there are only so many people in a given neighborhood who could be potential customers.”

Davis noticed when the new Starbucks opened on Merle Hay Road, many of his customers were telling him they tried its coffee. Starbucks has 13 locations within 10 miles of Des Moines.

“A lot of times you don’t know what business fluctuations are from,” Davis said. “But once in a while, we see a little dip and wonder if the new coffee shops are part of it.”

Finding their place

Gary Meyer, co-owner of Friedrichs World Coffees with his wife, Colleen, believes these fluctuations are part of a transitional period that will soon smooth over.

“Overall, the Starbucks and Caribous coming into this market do nothing but expand the specialty coffee market in the Des Moines metro,” said Meyer. “If they move close to an existing Des Moines area coffeehouse, it could sting for a while, but as they grow the market, those coffeehouses will rebound.”

Americans drink more than 300 million cups of coffee a day, according to the Specialty Coffee Association of America.

To stay one cup ahead of the competition, these small specialty coffee businesses have been forced to expand and look for new ways to reach the market. Many roast their own coffees to ensure the freshest taste. Davis also added full-service lunch and homemade gelato and Meyer makes all products from scratch, including smoothies made from whole fruit.

But loyalty has been traded for convenience as high-end coffee has made its way into the daily routines of many Americans.

“People used to be more loyal to drive a few miles out of the way,” Davis said. “But it’s turned into a convenience thing. Now if you don’t have a drive-through, it’s a little harder to compete.”

In about six weeks, Davis will move Grounds for Celebration Ingersoll Avenue’s store to a new location at 24th Street and Grand, which can accommodate a drive-through and is more on the path of potential customers.

“We’re always looking for new locations,” says Davis, “And that’s part of trying to keep up with what’s going on in the city.”

Meyer sees the rise in consumption as a desire among consumers for a quality coffee. Built upon the idea of his great-grandfather Friedrich’s quest for great coffee, Meyer has focused on the manufacturing and retail opportunities for his roasted coffee.

With a manufacturing plant in Urbandale that can roast about 1,500 pounds an hour, he has found a place for his products on the shelves of many grocery stores, restaurants and specialty stores in the Midwest.

“The brands,” says Meyer, “are so uniquely different that I think there’s room for a Caribou, a Starbucks and a Friedrichs.”

A new wave of coffee franchises

Many coffee companies give some credit to Starbucks for bringing coffee into the forefront of American culture. The demand the Seattle behemoth has created in the public for quality coffee has inspired other small shops to open.

“One thing Starbucks has done,” said Anthony Bonanno, area development manager for the state of Iowa for Omaha-based Scooter’s Coffeehouse, “is they’ve educated the public on how there’s more than just Folgers out there.”

Scooter’s recently opened a store in West Des Moines and has three more under construction.

Kyle Krause, CEO of the Kum and Go convenience store chain, and his wife, Sharon, traveled all the way to Italy to find inspiration for a new coffee business. Kyle Krause admired the artistry of the coffee and the Italian coffeehouse experience, so much so that he was inspired to open similar shops in the Midwest.

“Americans are really accustomed to grabbing their coffee as they go out the door,” Sharon Krause said. “But in Italy, it’s really an opportunity to sit down with friends, take a break from your day, have a specialty beverage and enjoy the conversation.”

After they returned, Krause decided to bring the same experience to Des Moines and asked Greg Tornberg, who has roasted his own beans for several years, to become president of Mille Miglia Coffee, LLC. Mille Miglia is an Italian phrase meaning “1,000-mile coffee” referring to the 1,000-mile band around the equator where coffee can grow. While most chain stores are pressing the buttons of high-powered automatic machines, Tornberg and Krause are focusing on the skill and artistry of making a coffee drink, with advice from a coffee roasting company in Italy.

“Every drink that comes out into a customers’ hand,” said Sharon Krause, “has been personally created by our barista. It’s very much an art as well as a science.

“We’re hoping that people will take the time out of their day to come into the shops and enjoy the coffee more than just running out the door.”

The Krauses opened three kiosks last month and by the end of 2006, they plan to have between nine and 12 stores in central Iowa, including a downtown location with a drive-through at Sixth Avenue and Mulberry Street in September.

Though some independent coffeehouse owners feel that the coffee market in Des Moines can withstand the rapid growth, smaller operators like Davis feel the strain of national franchises. Before Starbucks and Caribou moved in, her customers were already enjoying lattes and cappuccinos from the local stores.

“It’s a pretty mature market in Des Moines,” said Davis. “When we opened, a lot of people didn’t know what a cappuccino was. The market has been built up by local retailers and then the big guys move in.”