COFFEE BUSINESS SPECIAL ….THE MULTIMILLION DOLLAR QUEST TO BREW THE PERFECT CUP OF COFFEE

COFFEE CRUSADERS, BACKED BY CAFFEINE-BUZZED VENTURE CAPITALISTS, ARE TAKING AIM AT STARBUCKS WITH A $7 CUP OF JOE. AND YOU MIGHT EVEN CONSIDER BUYING IT.

On a Thursday morning in May, a man and a woman roll into a midtown Manhattan office with two James Bond–looking suitcases.

They slither over to the company's communal gathering area where they unload the tools of their trade: sharp-edged grinders, precise scales, a variety of specialized heating devices, and four bags of highly prized beans. These coffee missionaries have been sent in by Joyride, a Queens, New York–based distribution company that is trying to retrain the coffee-drinking palates of corporate America. In its three years, Joyride has forged relationships with "the big four"--the high-end coffee industry's most respected roasters, which include Stumptown, Intelligentsia, Counter Culture, and, of late, Blue Bottle. Typically, office managers purchase the caffeine that fuels their workers the same way they buy toner cartridges and toilet paper--in bulk from office-supply companies. Every pound Joyride delivers is roasted to order. "We're working to eliminate K-Cups altogether," one of the Joyride staffers says, referring to the Keurig coffee pods that have been colonizing home and office kitchens with Starbucks-like force in recent years.

Staffers begin wandering over to taste coffees with names like Brazil Samambaia and Three Africans. A few are coffee snobs, and for them it is a moment of vindication. A thirtysomething in a chambray shirt expresses delight at the prospect that his company might ditch the pods in the office kitchen in favor of Stumptown, which he brews at home. For others, the experience is more like an awakening, when they taste the refined brew for the first time. "I'm a coffee guy," declares a silver-haired exec in khakis. "I drink Dunkin', Starbucks, Tim Hortons--not the deli stuff," he says, echoing the sentiments of many of America's 100 million coffee drinkers. The woman from Joyride hands him something he never orders: a cup of black coffee. "It's pretty smooth," he says, surprised by how good a naked cup of coffee can taste when it's made with artisanal care. "This is really good," he confesses, taking another swig, "even without milk."

Joyride is responsible for helping more than 300 corporate clients, from Warby Parkerto Ideo, find coffee religion. And it is one of a rising army of startups seizing on the financial opportunity to convert Keurig, Dunkin' Donuts, and Starbucks drinkers into coffee purists. Known as the Third Wave, this movement started a decade ago by a splinter group of true believers who approach every part of the coffee life cycle with meticulous obsession. Coveted "single origin" beans with unique flavors--and high prices--are harvested like wine grapes: on a specific farm in specific soil at a specific altitude in a specific climate on a specific lot, in some cases even picked on a specific day. Rather than the darkly roasted coffee popularized by Starbucks--the emblem of "second wave" coffee--third-wave roasters cook the raw green beans lightly, to bring out their distinctive profiles. Brewing for peak flavor requires scientific precision: how finely or coarsely to grind a particular strain of bean, steeped in how much water and at what temperature. All this adds up to a cup of black coffee so dimensional, they believe, that there's no need to pollute it with milk or sweeteners--and so valuable that it can earn a price tag as hefty as $7 a cup.

"That's where the big money will be," says Jeremy Kuempel, an MIT engineer whose startup, Blossom Coffee, is building a machine to automate brewing third-wave coffee. "Taking the 95% of the market that likes milk and sugar and being able to turn them into coffee drinkers who can tell the difference between an Ethiopian and a Kenyan [ coffee ]."

Over the past decade, categories such as yogurt, chocolate, and juice have made this leap from commodity to mass delicacy. Some mainstream consumers no longer blanch at a $9 price tag on a bar of chocolate half the size of a Snickers or $11 for a cold-pressed juice. Not only have these become the fastest-growing segments in their respective categories, they've created multimillion-dollar markets that never before existed. Greek yogurt was an obscure 1% of U.S. yogurt sales in 2007. ThenChobani entered the scene, luring consumers away from their sugary-sweet Yoplaits. Now Greek yogurt accounts for 40% of the $7.4 billion U.S. yogurt market, while industry heavyweights like Danone and General Mills are racing to catch up.

Coffee crusaders are convinced that they are on the verge of a similar disruption, and they've got deep-pocketed investors cheering them on. After Starbucks's 20-year reign as coffee's dominant force, this once fringe group is launching a culinary, cultural, and financial battle to get a piece of the $30 billion U.S. coffee market. Can these purists persuade us to convert our morning ritual to a $7 cup of black gold?

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The Chemex is a sultry piece of glass. Shaped with the curves of a woman, the coffee-brewing decanter was designed in 1941 by a chemist who had an affection for both lab equipment and Bauhaus design. More than 70 years later, venture capitalist Tony Conrad is clutching one lovingly while lounging in a breezy, open-air Blue Bottle café. "There's a Panamanian Geisha that I'm crazy about," says Conrad, armed for the San Francisco elements in a cashmere hoodie and wool blazer, referring to a single-origin coffee that can cost more than $100 a pound. "It's different from the Salvadorian Geisha."

The Chemex has made a comeback thanks in part to Blue Bottle's fetishizing of the vintage "pour over" brewing method in which a barista patiently and methodically washes water over coffee grinds. (To an impatient caffeine junkie, it can feel interminable.) Conrad, a technology investor at True Ventures, describes himself as a reformed cappuccino drinker--the kind, as he puts it, who would use milk to "basically mask the reality of the flavor of the coffee I was drinking." Since discovering Blue Bottle, he carries his own pour-over paraphernalia on airplanes. "I realized I could bring my own little hand grinder and grind my own beans, and I ask for hot water." He believes that his personal conversion to third-wave coffee can be replicated at scale, if put in the hands of the right retailer.

The retailer he's betting on is Blue Bottle Coffee, which now has $45 million in venture backing. James Freeman opened Blue Bottle more than a decade ago at the Berkeley Farmers' Market in California. Through the years, Freeman has emerged as a tweeSteve Jobs–type figure. His cafés are a physical manifestation of his singular worldview. He refers to the blue in his brand's logo as "Pantone 2995C." The pastries his cafés offer are not sugary sweets but precious morsels: saffron in a cookie or fennel in shortbread. He considers Blue Bottle's Rwanda Kirezi or Burundi Twese Twoterimbere not as something merely to drink but as experiences to savor. Describing how many cups of coffee he consumes each day, Freeman tells me, "I like to think of it like you're at a party drinking champagne, and the host is refilling your glass, and at the end of the party it's like, 'How many glasses of champagne did you have?' Just one!"

Freeman's obsessive devotion to coffee purity has attracted an investor group that reads like the hottest cocktail party in Silicon Valley. A $19.6 million funding round in 2012 included everyone from Instagram founder Kevin Systrom to billionaire Twitter investor Chris Sacca. "It's probably one of the best, certainly it's the deepest, broadest investor syndicate I've ever been a part of," says True Ventures' Conrad. Last January, the retailer raised another $25.7 million, this time adding Morgan Stanley as a backer. Blue Bottle's new head of retail is a 20-year Whole Foods vet, and the new chairman sold one company to LVMH and another to Whole Foods. Says Conrad, "Ten years from today, could this be a billion-dollar-plus business? Absolutely."
In many ways, Blue Bottle is the antithesis of Starbucks. Each of its cups of coffee--which cost between $4 and $7--is brewed manually, taking at least three and a half minutes. Grandes, ventis, and other customizable options aren't offered; it's one size only. Its cafés aren't built for freelancers to camp out in with their laptops; stores don't have Wi-Fi. Given the nature of the rare beans the retailer brews, there's no guarantee of consistent offerings across stores, perhaps Starbucks's most prized virtue.
But in other ways, Blue Bottle is following the Starbucks playbook. Sure, Starbucks has 20,000 stores to Blue Bottle's 14. But Blue Bottle's investors are convinced that taste, quality, and experience--the same attributes that initially distinguished Starbucks from the local diner and other "first wave" purveyors--will chip away a healthy percentage of Starbucks customers. "Once you try this coffee, there is no going back," contends devotee Kevin Rose of Google Ventures, yet another backer. Blue Bottle is now operating at a pace not typical for the slow-coffee movement: It has plans to nearly double the reach of its café business in the next year, including its first international locale (Tokyo), and has been opening in high-profile spots such as Manhattan's Rockefeller Center.

Blue Bottle wants to teach everyday coffee drinkers to appreciate rare, distinctive beans, in the way many have learned to appreciate the difference between a bottle of 2011 Russian River Pinot Noir ($72) and the $20 house red at the local red-sauce joint. "I go to Tokyo and pay $15 at my favorite café for the most incredible pour-over," says Freeman, who believes Americans are increasingly willing to shell out cash for an elevated product experience, whether it's a Nestthermometer or a MacBook Air. "People are paying more for olive oil, more for cheese. People will inevitably pay more for coffee."

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His red calloused hands give him away. Khristian Bombeck is dressed in oversized American Apparel–style hipster glasses and an undersized corduroy jacket. He is every bit as coffee obsessed as Blue Bottle's Freeman and could be easily mistaken for a barista. But Bombeck is a 36-year-old perpetual tinkerer with an economics degree, who lives in Salt Lake City. He is part of an emerging group of coffee engineers who believe that technology, rather than hand-brewed artisanal craft, will bring the third wave to ubiquity. There are only so many highly skilled baristas, never enough to populate suburban strip malls across the country. But what about a machine? "If we can make world-class professionally brewed coffee more accessible and easier to make, that will be a real success," says Bombeck.

Bombeck's machine is called the Steampunk. After four years of R&D and 10 prototypes, it could be enshrined at the MoMA. The machine has a broad stainless-steel and quartz body with four elegant glass chambers sprouting upward. Bolts of steam are released in each glass chamber, heating the water to brew four separate cups of coffee. As the temperature rises, the Steampunk operator uses a piston to lower freshly ground coffee into each chamber. When the water reaches a designated temperature, it launches up, dousing the grinds, resulting in a cup of black coffee so nuanced, claims Bombeck, it could be analyzed by the coffee equivalent of a sommelier.

This machine can also be operated by almost anyone thanks to a Google Nexus 7tablet that sits at its core, acting as both the Steampunk's operating system and a wireless pathway to the Internet. Through this digital interface, any barista can access recipe profiles from other Steampunk users to identify and program how much water to brew a specific bean in, at what temperature, and at what steep time. "It's science and chemistry, but at the end of the day I like to think of our machine as a player piano," says Bombeck. "It can be played by an expert, but also by anyone who wants to play music as if they were an expert."

In 2012, the Steampunk won Best New Product at the Specialty Coffee Association of America's annual confab. Since then, Bombeck's company, Alpha Dominche, has sold Steampunks to more than 400 cafés, which can cost as much as $16,000 a machine. Its hottest segment of customers are in South Korea and China, but a telling sign that the concept is starting to tip into the mainstream--and where Bombeck hopes the future of his business lies--is that Whole Foods has purchased the Steampunk for some of its in-store cafés. That means top-shelf coffee is now being brewed in supermarkets where people are shopping for toothpaste and cereal, and the employees serving it could as easily be working the deli counter. "People brewing coffee at Whole Foods aren't lifelong baristas," says Bombeck. "But they'll be putting out coffee as if they were."

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Many third wavers are not shy about their coffee elitism. "Every time someone orders a 20-ounce decaf soy latte with two shots of vanilla, [true] baristas die a little on the inside," says Michael Phillips, a former World Barista Champion who recently sold his startup to Blue Bottle.

I personally offended one third-wave entrepreneur when I poured milk into my coffee. "It's like putting ketchup on your steak," he huffed. Michael Horn, the entrepreneur behind Craft Coffee, another artisan-bean subscription service, admits, as if speaking on behalf of the entire movement: "It's really hard to talk about coffee without sounding like a douche bag. It literally is the core challenge of our company."

No business illustrates the challenges and opportunities of the third wave better than Stumptown Coffee Roasters. The Portland, Oregon–based company was founded in 1999 by a grizzly hipster named Duane Sorenson. Stumptown pioneered building direct relationships with coffee farmers and buying the finest varietals, carving out a reputation in hotbeds of cool such as the Ace Hotel. Then in 2011, to the horror of die-hard followers, Stumptown sold a reported 90% of its business to TSG Consumer Partners, the same private-equity group that bought and flipped Vitaminwater. Now Sorenson's business partner is Joth Ricci, who spent his career at the helm of soda and beer distribution companies. "You're talking about consumer behavior," says Ricci, of his charge to bust Stumptown out of the third-wave ghetto. "Anytime you have to change behavior, it takes dramatic events."

Ricci's dramatic event is packaged cold brew. An upgraded version of iced coffee that began to find favor with coffee aficionados in recent years, cold brew is the result of steeping grinds in water at room temperature for at least 12 hours. Unlike hot brewed coffee over ice, the result should be strong, smooth, and void of coffee's bitterness. A plus for the brewer: It's a product with great margins since the beans don't have to be as fresh. Package it in milk cartons and sell it alongside chocolate milk at supermarkets and gas stations, and all of a sudden third-wave coffee doesn't look so polarizing. "There are a lot of people in the country who will probably end up thinking Stumptown is a cold-brew beverage. They won't even know we have [hot] coffee," Ricci says. "By pulling a lever like cold brew that might be only 10% to 20% of your business, it engages people into the other 80%. That's how you grow the pie."

Wearing an orange Patagonia puffer jacket, Ricci shuttles me to an upscale Portland supermarket for an immersion in "mass premiumization." One of our first stops is the beer section. Just like high-end coffee, he tells me, people were skeptical that craft beer would ever end up on Main Street. "We were going around the country and you'd have people from Kentucky or Ohio look at you sideways, like, 'Whoa, craft beer? It's never gonna be big,' " he remembers. "Now craft beer represents nearly 15% of the U.S. beer business." So far, Stumptown's growth has come largely as a wholesale roaster, selling its beans to cafés and restaurants. Supermarkets are Stumptown's next battleground. Ricci says the fastest-growing segment of whole-bean coffee is premium, which usually is more than $12 a pound. If coffee's ascension follows the same trajectory as beer, beans with Stumptown's prices--$14 to $25 for less than a pound--could become the new normal.

This isn't Stumptown's first lap around the grocery store. Three years ago, the company came out with Stubbies, a bottled black cold brew. But with an austere flavor, its sales were tepid. Under Ricci's watch, the new cold brew is blended with milk and "lightly sweetened." He's planning to spin out new varieties, from Thai to chocolate cold brew. Ricci isn't alone in recognizing the importance of courting customers with this tactic. This spring, Blue Bottle debuted its own version of a packaged light and mildly sweetened cold brew. Yet while Blue Bottle's tastes identical to the concoction it sells in its cafés--including organic chicory--the new Stumptown carton, with 28 grams of sugar, tastes more like melted ice cream. It is basically a Frappuccino dressed in hipster packaging, which to Ricci is part of the point: It brings him closer to the competitive orbit of Seattle's green giant. "The [packaged][packaged] Frappuccino business," Ricci says, "is well north of a billion dollars."

Starbucks doesn't like anyone infringing on its turf. "You think about Blue Bottle and Stumptown and Intelligentsia; they're doing marvelous things around coffee," says Major Cohen, who helps lead Starbucks's coffee engagement team. "We're not perceived to be in that group. But that's really not fair. All we have to do is decide how we want to be in that group--we have the coffee, we have the people, we have the sites. It's just a matter of what we want to focus our attention on."
Roy Street Coffee & Tea is an unbranded Starbucks in Seattle that is in many ways a prototype of what the chain could look like if it decided to go full throttle on third wave. When customers step up to order, they're invited to get their Burundi Ngozi or Peru Aladino or any of 25 single-origin Reserve coffees available on a rotating basis. There's a manual pour-over bar, as well as the Clover--a high-tech brewing machine that preceded the Steampunk. (CEO Howard Schultz reportedly said the Clover produced the single best cup of coffee he had ever tasted, prompting him to buy the company.) When I step up to order, I ask the guy behind the counter to explain the difference between brewing methods; it's clear this barista wouldn't dare microwave an egg sandwich. "The Clover cup gets more sediment. It tastes closer to a French press," he says with studied intensity. "With a pour-over, the paper of the filter soaks up the oils, so it gives you a cleaner cup." The Sun-Dried Ethiopia Yirgacheffe he serves me is by far the best cup of Starbucks I've ever tasted. There's no burnt aftertaste, and it has a sweetness that's more typical of Stumptown or Intelligentsia.

Recently, Starbucks has been working on its broader third-wave street cred. It purchased a coffee farm in Costa Rica, introduced a lighter "blonde" roast, and is working to open its first-ever high-end roastery/café in Seattle. At headquarters every morning it now holds coffee tastings, where everyone from accountants to marketing folks can learn about coffee vintages and terroirs. Earlier this year, Starbucks announced that the Clover, which had essentially been in hiding the past six years, would get an accelerated rollout, doubling the number of machines in circulation.

Just as Whole Foods did with natural foods, Starbucks wants to become the destination for both the purists and the generalists. And if it wanted to co-opt the entire movement--either with rollouts or acquisitions--it could. Yet Roy Street, which is referred to internally as the company's "learning lab," is unlikely to ever become the retailer's status quo. That's because the economics simply aren't as attractive. While pour-over options are technically available at every Starbucks location, the chain practically hides the devices because it doesn't really want the customer to ask for it. The ritual takes too long. Even though Starbucks can sell a more expensive cup of coffee (at one point it had a rare Costa Rican Geisha for $7 a cup), that requires more expensive beans. The margins are a fraction of what it earns off a Frappuccino.

This is the financial conundrum facing coffee purists and their investors. The economics required for the third wave to triumph massively are difficult. That doesn't mean Blue Bottle, say, can't grow to be a billion-dollar business. But overtaking Starbucks would be a tall order.

You never know, though. While visiting Starbucks's headquarters, I broach with Cohen something that has bothered me as a customer for years. "How come Starbucks still doesn't know how to froth milk correctly?" I ask, describing it as a thin and airy tasteless fluff, instead of the creamy froth produced by third-wave baristas. "I'm not sure I would disagree with you," he says. "And I'm not sure a lot of people inside Starbucks would disagree with you. But"--he adds, in euphemistic Starbucks corporate-ese--"you've just pointed out an opportunity. With hundreds of thousands of partners [baristas] in the field, there may be an opportunity for us to continually revisit making great milk."

Frothing perfect milk is clearly not Starbucks's top priority. Look at its recent acquisitions in teas (Teavana), cold-pressed juices (Evolution Fresh), and pastries (La Boulange), and you see the emphasis of the world's biggest purveyor of milkshakes (Frappuccino) moving beyond coffee. This spring it had another quarter of record
financials--$427 million in profit and $3.87 billion in revenue--with expansion plans focused on food, fizzy drinks, and drive-throughs. Which leaves a sliver of opportunity for Blue Bottle and other true believers.

In a warehouse in an industrial park in L.A., the third-wave coffee world is holding its own version of the Man vs. Machine battle. A barista named Nick Cho, from Wrecking Ball Coffee Roasters, is facing off against the Steampunk, with its creator Bombeck at the controls. "He said, 'Your equipment doesn't make as good a coffee as a manual brewer can,' " says Bombeck, who is a tangle of nerves. "And I said, 'Well, it can and we're going to prove it. Let's go head to head.'"

As Cho and Bombeck take their positions, the crowd starts to roar. Todd Carmichael, founder of another third-wave chain, La Colombe, leans in to whisper to me, "This one's a big one, because these people [in the room] define what the edge of coffee is."

The battle is tense, and when the judges' final tally is read, the Steampunk ends up winning by one point. I notice someone in the back of the room leaning against the wall with his arms folded. He's a tattooed, gold-ringed massive hulk of a man dressed in all black. It's the legendary founder of Stumptown, Duane Sorenson. As the crowd thins out, I make my way over. In many ways, Sorenson is the embodiment of the life cycle of any movement that begins with artists and ends with big business. Not long ago, he was considered the oracle of coffee; now many regard him as the traitor who sold out.

I ask him why it's so important for third wave to go mainstream. "I don't know about mainstream. I hate that word, but I think everyone deserves a great cup of coffee," Sorenson says. "I want to blow someone's mind every single morning, like FUCKKKKKK! Because waking up sucks. Getting out of bed sucks. I wish I could lie in bed longer, but I'm motivated to get up and take a shower and get to work to turn someone on to a cup of coffee. It's worth it. I got out of bed this morning."

BYDANIELLE SACKS

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