Brothers Gourmet Coffees, Inc.

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Brothers Gourmet Coffees, Inc.

2255 Glades Road, Suite 100E
Boca Raton, Florida 33431
U.S.A.
(561) 995-2600
Fax: (561) 241-0139
Web site: http://pwr.com/bean

Public Company
Incorporated: 1992
Employees: 436
Sales: $72.58 million (1996)
Stock Exchanges: NASDAQ
SICs: 2095 Roasted Coffee

Brothers Gourmet Coffees, Inc., ranks first among U.S. distributors of gourmet coffees to supermarkets, grocery and drug stores, coffee bars, military commissaries, warehouse stores, mass merchandisers, and specialty stores. An integrated sourcer, roaster, and wholesaler, the company sells high-quality gourmet coffee products throughout the United States. As one of the leading U.S. wholesalers of gourmet coffees, Brothers Gourmet earned a reputation for consistently offering high-quality and the freshest possible products. Brothers Gourmet’s goals historically have been twofold: to develop brand franchise and customer loyalty to its products and to increase the company’s activity in wholesale channels of distribution.

More than three million cups of Brothers Gourmet Coffees were served each day in the United States in 1996, which amounted to 15 million pounds of coffee beans. That year Brothers led all other suppliers of branded gourmet coffees. The company, in fact, was the largest supplier of gourmet coffees to the U.S. grocery channel. Its products were available to 50 percent of all supermarket shoppers in the United States. In addition, the company supplied more gourmet coffees to U.S. military commissaries than any other provider, as well as operated as a major supplier in the specialty wholesale market. In 1996 Brothers was the only wholesaler in the United States totally dedicated to gourmet coffee.

Coffee Business Percolates

Coffee traditionally has been one of the larger traded commodities in the world, though its supply and price are volatile— dependent on weather, politics, economics, and other uncontrollable variables. In 1985,50 percent of all Americans considered themselves coffee drinkers. Ten years later, the number remained stable, but coffee drinkers’ preferences changed. Now more consumers were grinding their own coffee beans instead of buying ground and canned coffee. About 20 percent of retail coffee was roasted bean, a 7 to 10 percent annual increase in whole-bean coffee.

Historically, the coffee industry entailed three market segments: commercial ground-roast, mass-merchandised products; premium coffee products of national roasters; and gourmet coffees. Gourmet coffees—the super-premium, specialty coffees sold in supermarkets, gourmet-food stores, and specialty-coffee stores—were manufactured from the highest quality arábica beans. Superior to the robusta beans used in commercial ground coffee, arábica beans came from Hawaii, Columbia, Brazil, Kenya, Indonesia, Mexico, Costa Rica, Guatemala, and other Central American, South American, Asian, and African nations. Arábica beans offered a richer taste, lower acidity, and lower caffeine content than other coffee beans.

Though part of the overall coffee market, the gourmet coffee market was always somewhat fragmented, with most of the competition concentrated locally or regionally. Since 1986, gourmet coffee consumption grew dramatically, and industry analysts suggested that by the year 2000 half of all coffee sold would be of the gourmet variety—about a $3 billion market. “You ever see a black-and-white TV?” Dennis Boyer, president and chief executive officer of Brothers in 1994, asked when explaining the popularity of gourmet coffees for the South Florida Business Journal. “My view is that when people switch from the black-and-white version of coffees to the color versions they don’t go back. The small difference in price allows people to see this as an affordable luxury.”

Three companies played major roles in the gourmet coffee industry: Sark’s Gourmet Coffee Company, a subsidiary of Nestle S.A.; Millstone Coffee, Inc., a subsidiary of Procter & Gamble Company; and Brothers Gourmet Coffees, Inc. Unlike the other two, Brothers sourced, roasted, packaged, and marketed its own product to ensure that its coffees were of the highest quality possible. The company bought green arabica beans, roasted the beans under the strictest standards, and tested for quality at each stage of its operation. As Terry Olson, vice president of marketing/sales for Brothers, observed in a press release: “We’ve renewed our commitment to quality at a time when our competition is finding a way to cut corners. Our green beans are the world’s finest specialty and premium grade coffees according to the standards set by the Specialty Coffee Association of America.”

Brothers offered consumers 75 varietals, blends, and flavors of coffee under several brand names. The company sold its Brothers brand nationally through supermarkets. In addition, Brothers marketed several regional brands to supermarkets under the names of Hillside Coffee, Cafe du Jour, and Country Mill. Its Fairwinds brand sold to specialty stores, and the company also maintained a private label program. The company had three avenues of distribution, notably direct store delivery or direct shipments, customer warehouses, and specialty food distribution.

Getting Started

Sam and Dennis Boyer were the brothers behind Brothers Gourmet Coffees. Their father operated an institutional coffee company in Denver, so they were familiar with the business from him but initially pursued independent interests. During the 1980s the brothers established their own coffee company in a 20 by 20 foot office in Denver. They had three employees. Their company operated on a regional basis until merging with Specialty Coffee Holdings of Concord, New Hampshire, in December 1992. The merger created a privately held company with four sales territories, 13 regional sales offices, and manufacturing and distribution facilities in Denver, Concord, and Pittsburgh.

Thus, the current company formed in 1992 with a recapitalization and merger with Brothers Gourmet Products, Inc., and Boyer’s International, Inc., both established in 1988. Collectively the two companies were the leading wholesaler of gourmet coffee products in the Rocky Mountain region. Two wholesale gourmet coffee distributors—Nicholas Coffee company (founded in 1919) and Elkin Coffee, Inc. (founded in 1933)— were predecessor companies of Brothers Gourmet Coffees.

After the merger Brothers Gourmet Coffees became the largest wholesaler of gourmet coffees in the United States. Brothers was now the major supplier of gourmet coffees to grocery stores in the United States, as well. Dennis Boyer explained the appeal of Brothers to supermarkets in the Tea & Coffee Trade Journal: “We have the infrastructure to deliver to our markets as well as advertise our various brands.... [W]e can assure quality and freshness from roaster to store.” The company distributed its Brothers brand, Cafe du Jour, and Nicholas Gourmet Coffees to more than 6,000 grocery stores and its Fairwinds gourmet coffees to 3,000 gourmet stores. With product in all 50 states, the company became a national presence. Dennis Boyer explained in Supermarket News: “Our combined resources will enable us to continue our shared corporate visions to offer our customer the very best gourmet coffees as we compete in the national marketplace.”

In 1993 Brothers Gourmet Coffees acquired Hillside Coffee of California, a West Coast wholesale coffee roaster and distributor. The company paid $38.5 million in cash for the subsidiary of Chock Full o’ Nuts Corporation, in addition to offering $1.5 million in Brothers common stock and assuming $22 million in Hillside obligations. Hillside Coffee was to operate as a wholly owned subsidiary of Brothers. As Dennis Boyer explained at the time in Supermarket News: “We’re in the business of providing a gourmet coffee experience to as many consumers as possible. The acquisition allows us to advance this objective by strengthening grocery store distribution and securing the fine Hillside operations.”

Moving South

From 1989 through 1993, Brothers enjoyed a 2,000 percent increase in sales, so the Boyer brothers were ready to make some changes. First, the Boyers moved the company from Denver to Boca Raton, Florida, in order to be closer to the coffee bean trade. Then they positioned the company in a second channel of distribution: The brothers brought the company into retail coffee outlets. Feeling that grocery store and coffee bar sales were not mutually exclusive, the Boyers realized that grocery-store customers would buy the coffees that they sampled at coffee bars. To finance the purchase of retail outlets, the company initiated its first public stock offering of 4.2 million shares in 1993. Brothers then purchased 200 Gloria Jean’s Gourmet Coffees outlets in 1993 to move into mall-based retail operations. In 1994, the company also opened retail coffee stores in urban settings under the Brothers name.

Company Perspectives:

Brothers Gourmet Coffees has adopted a six-point Gold Quality Standard that touches every aspect of our business. We are committed to: The best in green coffee bean sourcing; testing each coffee bean lot to ensure that it meets the highest standards of aroma and flavor; excellence in bean processing for visual appearance, consistency, and flavor; excellence in package design to assure customers they are getting superior quality products; maximizing the freshness of our coffees by enhancing merchandising rotation; confirming our superior quality through a detailed program of random sampling of finished goods. We do coffee — that’s all we do.. . . Our leadership role in the gourmet coffee category comes from the reality of our product quality and innovations and our dedication to the wholesale gourmet coffee business.

Improving Plant

In addition to relocating its headquarters and moving into the retail business, Brothers improved its manufacturing plant in Denver. The company installed new and faster auger fillers for the one-pound can line and reconfigured its line. Output at the plant doubled after adding computerized controls for filling, check weighting, seaming, labeling, and capping machinery. The company saved $60,000 annually in labor costs, and sales increased by 40 percent, allowing Brothers to realize $25 million in sales from the upgrade.

During this time, Brothers also acquired a 250,000-square-foot coffee roasting and packaging facility in Houston from Procter & Gamble. The company completed a $1 million-upgrade of this facility in 1994.

Positioned as the Largest and Fastest

Brothers was the largest roaster of gourmet coffees in the United States in 1994. The company distributed more than 130 varieties of coffees under several brand names. At this time it converted some supermarket brands to the Brothers name. Beginning in 1994,50 percent of Cafe du Jour brand was renamed, then 25 percent of Hillside products. At this time, Brothers distributed coffees to 195 retail outlets, 3,200 specialty stores, and 8,000 supermarkets.

Listed on Inc. magazine’s list of the fastest-growing small companies in the United States, Brothers became a significant presence in both the wholesale and retail segments of coffee sales by the end of 1994. The company commanded 25 percent of the wholesale gourmet coffee market. It sold whole-bean coffees, ground coffees, cocoa, and flavored non-dairy creamers to 11,000 supermarket and specialty stores. It had a line of iced coffees under development, and Brothers had about 230 retail coffee bars in operation in malls and urban settings when the Specialty Coffee Association projected by-cup sales of gourmet coffee to be $1.5 billion annually by the year 2000.

Financial Woes

Yet, the company began to founder financially. For the year ending December 30, 1994, the company showed a net profit of $2.4 million, but the year after that was not profitable. So Brothers reviewed its retail operations closely. After careful study, the company decided to end retail operations to focus on its wholesale business. Brothers sold its Gloria Jean’s coffee bars to Second Cup Ltd. for $30 million and the Brothers Gourmet Coffee Bars to various buyers, including Diedrich Coffee and Foster Brothers.

To recover financially, Brothers planned to align its cost structure with the wholesale business by decreasing the number of sales, management, and administrative personnel and by consolidating roasting, packaging, and warehousing facilities. The company announced a corporate restructuring in 1995. Dennis Boyer—the last brother at the company—left in August. The new chief executive officer David Vermylen stayed a mere five months before leaving for an executive position with Keebler. Despite the short time of his tenure, Vermylen, cut management staff by one-quarter and consolidated production at the Houston plant after closing the Pennsylvania production facility. (The roasting facility in Denver closed shortly thereafter as well—in January 1996.)

When Vermylen left, Brothers appointed executive vice president and chief financial officer Donald Breen as president, chief executive officer, and a director of the company. The company charged Breen with restructuring the company, finishing the closing of the retail business, and establishing a plan to concentrate on the wholesale business again. Breen told the South Florida Business Journal: “We’ve laid the groundwork for what we want to accomplish, and we’re working on it.” Nevertheless, the company posted a net loss of $53.5 million in December 1995.

Working Toward Tomorrow

In 1996, Brothers explored new avenues of distribution for coffee. It became the ’’preferred provider“of trial-size and gift-packs of coffee for Hallmark Cards Gold Crown retail outlets. Continental Airlines—which brews four million pots of coffee each year—also signed Brothers as the primary provider of gourmet coffees. The airline served the popular supreme roast coffee Foglifter on all its domestic and international flights. As Continental chief operating officer Greg Brenneman explained in a press release: “We conducted extensive taste tests among our passengers before we made our selection—and Brothers was clearly the favorite.”

In addition to increasing customer awareness of Brothers products through new distribution channels, the company also expanded its supermarket presence by selling to chains, to grocery and warehouse stores, and to mass merchandisers that were not its customers in the past. Brothers hoped to expand its presence in specialty stores in the wholesale distribution channel, as well as to explore other distribution opportunities in the wholesale market.

Brothers also worked to command more shelf space in stores of current customers. The company renewed its sales agreement with Publix Supermarkets of Lakeland, Florida, in 1996. Publix Supermarkets—one of the world’s 30 large grocery retailers— was Brothers’ largest customer that year with 525 stores in four southeastern states. Under the new three-year agreement, Brothers supplied a full coffee program to the stores, including bulk whole-bean gourmet coffees and pre-measured packages in state-of-the-art display units.

The company introduced new sizes and types of packaging for customer convenience in 1996; for example, an eight-ounce can and a 1.75-ounce mini can as a trial size. Brothers also redesigned all packaging in eye-catching jewel tones. “Our new packaging says it all,” said Olson in a press release. “We wanted to put product on the shelves that tells the story of our business this year—it’s a brand new company with a bright future.”

Brothers also introduced an enhanced product line in 1996, including new gourmet flavors and supreme roasts. The company repositioned its Brothers, Fairwinds, and Hillside brands in different markets with different price points. As Olson observed in a press release: “We know that today’s coffee customer is looking for higher quality and unique items, and we moved quickly to answer that call.”

Although the company reported a net loss of $10.2 million in 1996, Brothers management felt it was positioned for success in the future. As Breen wrote in the 1996 annual report: “Nineteen ninety-six was a year of fulfilling promises. We set a product strategy and established a firm financial foundation. We improved customer service levels and renewed our commitment to quality. Our next step is to improve profitability by becoming the undisputed leader in at-home gourmet coffee products nationwide.”