#96 - Blank Street
Coffee, Counter Positioning, and Collateral Damage
Hi All 👋 - There are 4,000 coffee shops in New York City. Blank Street thinks they’re all doing it wrong. The company just raised $25 million from Tiger Global and General Catalyst to blanket the city with mobile carts and micro-stores serving low priced, high quality coffee. Today, a look at Blank Street’s business model. As always, thanks for reading.
If you find this content valuable, consider sharing it with friends or coworkers. ❤️
For more like this once a week, consider subscribing. ❤️
What is Blank Street?
Finding a cup of coffee in New York City isn’t difficult. There are about 4,000 coffee shops in the city1. Reinventing the way New Yorkers get their caffeine involves a combination of audacity, hubris, and insanity. That’s exactly what Blank Street is trying to do2.
Believing that coffee shops were slow and overpriced, and inspired by the success of street vendors in Asia and mobile-first retailers like Heytea in China and Kopi Kenangan in Indonesia3, founders Vinay Menda and Issam Freiha set out to create a new type of coffee shop. The result was Blank Street. The company operates small-format stores - mobile carts and tiny shops - trading-off square footage for price and convenience. Brick-and-mortar locations are roughly 700 square feet, about the size of a studio apartment (don’t worry, there’s enough room for succulents) and a quarter the size of a typical cafe. Shops are more places to grab and go than to hang out in.
Founded in May 2020, Blank Street opened its first location in Williamsburg in August 2020. Today, it has fourteen locations scattered through trendier neighborhoods of Brooklyn and Manhattan and ambitions to have 100 by the end of 2022. To aid its expansion, the company raised a $25 million Series A on October 13th from Tiger Global, General Catalyst, and a handful of other investors including the DTC hat-trick of Dave Gilboa and Neil Blumenthal (founders of Warby Parker), Jeff Raider (Harry’s founder), and Joey Zwillinger (Allbirds founder), as well as commercial real estate giant Tishman Speyer.
The company’s pitch is quality, price, and convenience. In addition to a small real estate footprint, Blank Street partially automates preparing drinks, cutting down on labor. Real estate and labor savings are funneled into lowering prices and opening more locations. Blank Street is priced about twenty percent cheaper than Starbucks and on par with Dunkin’4. For example, Blank Street’s cappuccino costs $3.50 compared to $4.25 at Starbucks and $5 at Blue Bottle.
New York City caps the number of street vendors around 3,000, but Blank Street found that it could skirt this by working with directly with landlords like Brookfield and the Parks Department to set up vending carts on private property.
They’ve already accomplished being cheaper. The Series A is focused on increasing convenience by expanding locations and improving the app and loyalty program.
Unit Economics
Restaurants have high fixed costs. For every dollar of sales, roughly seventy-cents goes towards food, labor, and rent. A world-class operation has a twenty percent profit margin.
Blank Street’s operating model slashes two major expenses. First, machines help to automate making drinks, reducing labor and increasing throughput. Blank Street locations are staffed by one or two employees, versus five or six at a typical coffee shop5. Second, small-format shops cut real estate costs. Instead of paying $10,000 to $15,000 a month in rent, Blank Street can spend a few thousand dollars6.
All fourteen of Blank Street’s locations are profitable. It helps that the company offers limited SKUs and sells a high-margin product. The company also urges customers to order ahead online. Today, about twenty percent of transactions occur on app7. For best-in-class restaurants like Chipotle and Sweetgreen, mobile ordering ranges from fifty to eighty present, so there’s potential for upside.
A recipe for successful restaurants finding unit economics that work, and then copying and pasting units over and over. Businesses like Chipotle and Dominos have been incredibly successful with this. It’s Blank Street’s playbook as well.
Collateral Damage
Hamilton Helmer’s 7 Powers: The Foundations of Business Strategy provides a useful framework for analyzing businesses like Blank Street. Helmer was interested in what made some businesses successful, defined as producing sustained high returns. He identified seven attributes - powers in his nomenclature - that led to durable returns. Some, like economies of scale, network effects, and high switching costs, are well known. Others, like cornered resources or counter positioning, are less so.
A powers must satisfy two criteria:
Providing a benefit: An attribute that materially augments cash flow. Something that allows a business to successfully raise prices, reduce costs, or reduce capital intensity.
Providing a barrier: Short-lived benefits aren’t worth much. To be valuable, the attribute must be persistent. Barriers are rarer than benefits.
Run Blank Street through Helmer’s framework and counter positioning stands out as its power relative to an incumbent like Starbucks8. Counter positioning refers to a situation where9:
A newcomer adopts a new, superior business model which the incumbent does not mimic due to anticipated damage to their existing business.
There are three conditions for counter positioning. First, an upstart develops a superior approach, providing lower costs or better features. By saving money on real estate (small footprints) and labor (automation), Blank Street serves quality coffee for twenty percent less than Starbucks. Second, the upstart’s product is substitutable for the incumbents. Blank Street sells coffee and lattes. Starbucks sells coffee and lattes. Last, the incumbent is not able to replicate the upstart’s business model. This can be because it lacks the ability, the managerial will, or because doing so would damage its existing business.
No doubt Starbucks could copy Blank Street on small format cafes and automation, but pricing poses a dilemma. Would Starbucks customers be happy paying a lower price at small stores while paying more at the Venti-sized Starbucks with seats and a bathroom? Probably not. The bathrooms are good, but they’re not that good. To compete with Blank Street, Starbucks would need to cut its prices across the board. While its small format locations could have better unit economics than Blank Street (because of purchasing scale and established brand affinity), Starbucks’ larger stores are burdened by higher real estate costs. Cutting prices across the board would hurt profitability. Trying to compete with Blank Street on price causes collateral damage to Starbucks’ core business. That’s counter positioning.
☕️ Need a pick-me-up? Share this post with a friend.
Uber or E-scooter?
Blank Street’s real estate and automation strategy provides a cost advantage against incumbent coffee shops. That’s a benefit. But there’s no clear barrier. While it would be painful for Starbucks with its existing footprint and cost base to compete with Blank Street on price, there aren’t many barriers to entry preventing another entrepreneur from replicating its model.
Blank Street sources its coffee from Parlor Coffee. You can source your own beans from Parlor Coffee here. Blank Street buys its coffee machines from Eversys10. You can buy your own machine from Eversys here. This is a bit tongue and cheek. Blank Street has a head start building a brand and customer base, as well as an app and its own technology. But from the publicly available information - which isn’t much - capital seems like the primary barrier. The company is a SoftBank Vision Fund 3 away from having direct competitors.
Attractive unit economics are a necessary, but not sufficient condition for building a sustainable business. Electric scooter rental businesses like Bird and Lime had positive unit economics after all.
To Hemler, counter positioning was not an exclusive power, it had to be coupled with another one. Blank Street’s management seems to understand this. Several of its initiatives are aimed at increasing defensibility. Adding locations doesn’t increase switching costs, but if customers know there’s a Blank Street nearby, it decreases the urge to be promiscuous. A loyalty program increases switching costs. Investor Tishman Speyer could potentially give the company exclusive access or first dibs on its prime locations. After increasing coverage density, I wouldn’t be surprised to see a subscription offering ($X per month for a drink per day ordered through the app), as a form of lock-in.
Capital is not a moat. The $25 million question is whether Blank Street can build barriers before competitors catch on, raise capital, and replicate its model. Anything can happen, but so far Blank Street has shown it can move quickly. Being heavily caffeinated helps.
If you find this content valuable, consider sharing it with friends or coworkers. ❤️
For more like this once a week, consider subscribing. ❤️
More Good Reads
Zack Fuss on restaurant economics and the food ecosystem. Michael Mauboussin on the economics of customer businesses. Below the Line on how Sweetgreen embraces technology and eschews DoorDash.
Disclosure: This post contains an Amazon affiliate link to Hamilton Helmer's 7 Powers. From time to time I’ll discuss a book and include an Amazon affiliate link. If you’re interested in the book and purchase through the link, Jeff Bezos throws a few pennies in my direction.
The Wall Street Journal, New York City Coffee Shops Keep Brewing Minus a Few Perks, September 20, 2020.
Street vendors and coffee carts are nothing new in New York. For years, I started my day getting a coffee at the Love truck (aka Mud truck) parked at the corner of Wall Street and Williams Street. What’s new with Blank Street is having multiple locations, the small-format real estate strategy, and mobile ordering.
New York Magazine, How Blank Street Is Rethinking NYC's Coffee Carts, August 11, 2021.
Nation’s Restaurant News, New York-based Blank Street Coffee announces $25 million Series A funding, October 13, 2021.
New York Magazine, How Blank Street Is Rethinking NYC's Coffee Carts, August 11, 2021.
New York Magazine, How Blank Street Is Rethinking NYC's Coffee Carts, August 11, 2021.
Nation’s Restaurant News, New York-based Blank Street Coffee announces $25 million Series A funding, October 13, 2021.
To Helmer, business advantages were always relative measures.
Hamilton Helmer, 7 Powers: The Foundations of Business Strategy, November 2016.
New York Magazine, How Blank Street Is Rethinking NYC's Coffee Carts, August 11, 2021.
Super interesting! Just hit the subscribe button, and I'll feature this story in today's issue of Coffeehouse :)