UPSCALE COFFEE CAFE KICKS UP BUSINESS AT TEXAS WAL-MART 2004-03-15 (2)

LYNNE MILLER

DALLAS -- Ever vigilant of its customer base, Wal-Mart is working with a coffee house operator to determine if a private partnership in certain markets can beat competitors' reliance on Starbucks.

The operators of San Diego-based Calleo Gourmet Coffees completely remodeled a 1,500-square-foot space near the front of a suburban Wal-Mart in Plano, Texas; that's where the Kicks Coffee Cafe operates. If all goes well, there are plans to brew more cafes at the retailer's supercenters in the Dallas-Fort Worth area this year, according to Ken Johnson, chief executive officer of Calleo.

"It's the Cadillac of coffee shops," he told SN.

Kicks' stylish, inviting atmosphere includes light wood tables and chairs that seat up to 40, a terra-cotta tile floor, plasma TVs and free Internet access. In keeping with Wal-Mart's core shopper, it aims to be a more affordable, family-friendly version of Starbucks.

"You have a diverse crowd shopping at Wal-Mart," Johnson told SN. "I talked to people in the supercenters who were very wealthy and the poorest of the poor."

What he learned was all Wal-Mart customers want good value for their money. Coffee drinkers find it at the Plano store. There they pay $1.25 for a cup of coffee at Kicks, vs. $1.40 at Starbucks.

"Our pricing is 7% to 15% lower than Starbucks," said Johnson. "Wal-Mart's whole thing is you have to create a value proposition for their customers. You don't have to be 50% lower than Starbucks."

Kicks is situated in a well-to-do area with several Starbucks locations nearby, including one in the parking lot. Being near Starbucks was important, Johnson said. He noted that the presence of the powerful coffee concept indicated the community understood and appreciated premium coffee. In fact, employees at Kicks are encouraged to invite customers carrying Starbucks cups to try the Kicks coffee on the house.

"We've probably converted 30 to 35 customers who were stopping at Starbucks first," Johnson said. "Now, they come here. A lot of people don't like that dark [Starbucks] roast. For those people, we're a great alternative. We have more of a medium-to-dark roast."

Eleven associates -- employed by Calleo -- work at the cafe, serving customers the usual assortment of coffee beverages, eight flavors of fresh-fruit smoothies, Chai tea, bottled waters, fruit juices, sandwiches made on-site, ice cream sundaes and baked goods that include biscotti, cookies and cheesecakes. Recently, the store started offering Kicks-brand coffee beans, retailing for $4.50 to $7.35 a pound.

The cafe also runs orders out to customers shopping in the store. Calleo invested in cup holders for shopping carts, and they get a lot of use. Most shoppers purchase Kicks' beverages to drink while they shop. A smaller group of shoppers buys sandwiches or pastry items, and sits down for a real coffee break inside the cafe, Johnson said.

Johnson was an entrepreneur and business consultant with no food-service experience on his resume when he got involved in the coffee business. He and his partners formed Calleo with the intention of doing business with Wal-Mart. The retailing giant had been looking for a partner who understood the company's customers to introduce an in-store coffee shop. Wal-Mart's competitor, Target, had an agreement with Starbucks to operate coffee shops at selected locations.

Operating a coffee house has been enlightening for Johnson. Since the cafe opened, he's had to replace several of the beverage syrup vendors. The cafe also stopped outsourcing sandwiches. The four sandwich varieties are made fresh every day by Kicks' associates, and are displayed grab-and-go style. "They're a better sandwich," Johnson said.

White mocha lattes are the most popular espresso drink. Perhaps most surprising to Johnson, though, is the demand for fruit smoothies in the winter months. The fruit drinks represent nearly 20% of total sales.

"I was expecting smoothies to be at that level in the hotter months," he said.

Without elaborating on locations, Johnson said the company intends to expand to other Wal-Mart stores.

A Wal-Mart representative said the Kicks cafe is still being evaluated, and no decisions have been made regarding its future. "We test quietly at Wal-Mart, and listen to our customers," said spokeswoman Sharon Weber.