Diedrich Coffee, Inc.

2144 Michelson Drive
Irvine, California 92612
U.S.A.
Telephone: (949) 260-1600
Toll Free: (800) 354-5282
Fax: (949) 260-1610
Web site: http://www.diedrich.com

Public Company
Founded: 1972
Employees: 1,336
Sales: $74.5 million (2000)
Stock Exchanges: NASDAQ
Ticker Symbol: DDRX
NAIC: 445299 All Other Specialty Food Stores

Diedrich Coffee, Inc. is the second largest specialty coffee company (behind Starbucks) in the United States. The company operates more than 380 coffeehouses in 38 states and six foreign countries. Diedrich coffeehouses sell gourmet coffee, cappuccino, latte, gourmet coffee beans, and other beverages along with some food items. Diedrich coffeehouses are modeled after traditional European coffeehouses with overstuffed sofas and chairs and high-end baked goods. Diedrich coffeehouses serve as friendly town meeting places where neighbors gather and socialize. Each Diedrich coffeehouse is uniquely designed to reflect the atmosphere and people in its neighborhood. Many have outdoor patios and live entertainment on weekends. Diedrich also operates a mail-order coffee business and a wholesale coffee division that sells coffee-brewing equipment to the hospitality foodservice industry. In 1999 the company acquired Coffee People, Inc., a leading chain of mall-based coffee stores.

An Inheritance in 1916

The first Diedrich coffeehouse opened in 1972, but the company actually began in 1916 when German-born Charlotte Diedrich inherited a coffee plantation in Costa Rica. Charlotte left Germany occasionally to visit the plantation and learned a great deal about growing and roasting coffee beans. Her hard work paid off and she began shipping her rich coffee beans to people around the world. Charlotte maintained the plantation through the 1930s, but lost it during the upheaval of World War II.

However, losing her plantation did not weaken Charlotte’s passion for growing coffee beans. She perfected her skills and passed her ambitions onto her son, Carl. Before joining his mother in the coffee business, Carl Diedrich served as a conscripted infantry soldier in the German army and was a successful mechanical engineer. In 1964, Diedrich traveled the world to learn more about the coffee business. He studied coffee roasting in Naples, Italy, and toured traditional coffeehouses in the Middle East. He even studied coffee’s origins in Yemen, where the people are believed to have grown coffee beans since the sixth century. Diedrich lived for a while with the people of Yemen, so he could learn as much as possible about growing coffee beans and making coffee.

A New Plantation in Guatemala in 1966

Diedrich returned to Germany in the early 1950s and married Inga Zeitz, whose family had been coffee merchants since the mid-1800s. In 1966 the Diedrichs, along with several partners, purchased a 45-acre coffee plantation in Antigua, Guatemala, and harvested about 400 sacks of coffee beans each year. The rich Guatemalan soil and 5,500-foot elevations helped the Diedrichs grow dense, rich Arabic coffee beans. During his six years in Antigua, Carl Diedrich did business with many of the Central American coffee traders who once worked with his mother. He even built a special device—the first coffee roaster for the company—on his family’s back porch.

Diedrich was dedicated to his business and he passed his knowledge on to his sons, but he also encouraged them to pursue their own dreams.

A New Venture in 1972

In 1972 political turmoil in Guatemala made living and working difficult, so Diedrich sold the plantation and decided to import his gourmet coffee into the United States. He and his family filled up their 1962 Volkswagen bus with beans from their plantation and headed north from Guatemala to Newport Beach, California. Diedrich set up a wholesaling operation in a garage and sold his coffee beans to dealers. Word of his rich coffee spread. Within three years, he moved to a larger location. Although Diedrich was successful, his work was often grueling and his income modest. Every two months, he had to embark on a two-week journey to Guatemala in his Volkswagen bus to get more beans.

Carl Diedrich’s sons showed little interest in their father’s business at first. Michael, his oldest, sold body-care products and cosmetics in Germany. Bernhard opted for a career with the United Parcel Service in Washington. Sons Stephen and Carl, Jr., also steered away from Diedrich Coffee. Son Martin did join the business, but he was unhappy at first and did not like living in California. “I didn’t feel like I belonged in Orange County (California),” Martin Diedrich recounted in an article in the Los Angeles Times Magazine. “I grew up in Latin America, where there is a strong sense of community. I felt displaced here and had constant longings to leave and go somewhere else.”

The First Coffeehouse in 1985

It was the younger Diedrich’s feelings of displacement that led the company to open its first coffeehouse. In 1985, he persuaded his father to let him open a coffeehouse to help bring people in the neighborhood together. The first Diedrich coffeehouse was very popular, and the following year the company opened a second. “I realized later I was building the kind of places that I found missing in Orange County. They were the fulfillment of my desire to make a home for myself here. At the same time, the community embraced what I was doing. The two came together like a hand in glove,” Diedrich said in a Los Angeles Times Magazine article.

In time Carl, Jr., joined the business and persuaded his brother Stephen to leave his career in aviation to manage the coffee bean roasting division of the company. With Stephen’s help, Carl began building coffee roasters unlike anything the industry had ever seen.

Some industry experts predicted that Diedrich coffeehouses would have trouble competing with the giant Starbucks, a national chain of gourmet coffeehouses. The Los Angeles Times Magazine reported that analysts believed that “smaller vendors would be crushed beneath the Starbucks steamroller.” Martin Diedrich believed, however, that Starbucks converted a lot of institutional coffee drinkers to specialty coffees, which helped smaller coffeehouse chains, including Diedrich.

Going Public in 1996

Diedrich Coffee launched an initial public offering (IPO) in 1996, which put Diedrich in direct national competition with Starbucks. Adams Harkness analyst Kim Galle summarized the situation when she said, “There is no Pepsi to their (Starbucks) Coke.” Starbucks was much too powerful to compete with directly.

Diedrich expanded rapidly, but its stock slumped. According to the Los Angeles Times Magazine, Diedrich stock peaked at $11 and then plunged to less than $2.50. The company lost more than $1 million in 1996.

Restructuring in the Late 1990s

Martin Diedrich attributed the company’s financial woes to inexperienced management and restructured the company. He named John Martin as chairman. Martin had worked for Taco Bell for 13 years and was credited with much of the company’s success. Martin helped Taco Bell grow from $600 million in sales and 1,500 outlets to more than $4.5 billion in sales and more than 25,000 outlets.

Martin Diedrich also hired Tim Ryan as president and chief executive of the company. Ryan had pulled Sizzler USA out of bankruptcy and had worked with Martin for seven years at Taco Bell. Martin invested $1 million in Diedrich, making him one of the company’s largest shareholders. Martin managed the “overall strategy, vision, and support” of the company while Ryan managed the day-to-day operations. According to an article in the Orange County Register, the duo planned to transform Diedrich “from a struggling regional player into an international chain with a globally recognized name.” Martin and Ryan closed unprofitable stores and solidified agreements with franchises to give Diedrich a stronger national presence, especially on the East Coast. Said Martin in the Orange County Register: “We have a lot of dough and we want to grow.”

Ryan saw the specialty coffee market as three different segments: mall-based coffee shops, dominated by Coffee People’s Gloria Jean’s; espresso bars, dominated by Starbucks; and coffeehouses, the niche in which Diedrich hoped to take the lead. Diedrich elaborated on the company’s plans in Nation’s Restaurant News by explaining that Diedrich Coffee planned to further differentiate itself from Starbucks on a national level by providing a more inviting atmosphere tailored to individual neighborhoods and by using custom-roasting procedures. “Coffee is like wine,” he said. “If you were to roast all coffee identically as our number one competitor does, it would be like aging all wines identically.”

Company Perspectives:

“At Diedrich Coffee our mission is to provide communities with a coffeehouse experience which sets the standard for the coffee industry, and with service which consistently exceeds the expectations of guests in an atmosphere where guests can enjoy the authenticity and heritage of Diedrich Coffee.

To sip a cup of Diedrich coffee is like opening a door to another world.. . a world where the ancient art of roasting and brewing is still revered. You can taste the difference in our coffee. Each cup of coffee is the fruition of four generations of my family’s history and our quest to serve the world’s finest coffee.” —Martin Diedrich, vice-chairman

In 1997 Martin Diedrich announced that he was stepping down from his role as chairman to take the new position of vice-chairman and chief coffee officer. Diedrich planned to concentrate on buying the highest quality coffee beans.

Coffee People in 1999

In 1998 Diedrich signed deals to offer Diedrich Coffee in national food franchises, including Taco Bell. The deals allowed Diedrich to sell its coffee in carts and kiosks to franchise customers. The Taco Bell alliance covered 44 units in North Carolina and gave Diedrich its first presence in the eastern United States. “It would take us 10 years to build out what we can do in less than half that time using franchises,” Ryan said in Nation’s Business News. He also claimed that franchises could tailor the concept to local markets better than the company could.

The following year Diedrich acquired the Coffee People, Inc. chain, whose Gloria Jean’s and Coffee People and Coffee Plantation outlets totaled 315 stores in 36 states and six countries. The $14.25 million deal ranked Diedrich as the number two specialty coffee retailer in the United States, second only to Starbucks. Coffee People’s 280 Gloria Jean’s stores held a dominant position in mall-based coffee locations, which gave Diedrich an edge in both the coffeehouse segment of the market and the mall-based store segment.

A Bright Outlook for the Future

In 2001 analysts believed Diedrich Coffee was doing well in rebounding from its earlier losses. The company’s profits at the end of 2000 were about $1 million higher than in 1999. John Martin believed the company was now in a position to move ahead with expansion plans and open many new stores. As of 2000 he hoped to open 1,200 to 1,500 new units over the next five years. In 1999 and 2000 the company signed two agreements with M & P Coffee, Ltd., a national franchise operator, to develop 50 coffeehouses in southern California and 17 coffeehouses and an undetermined number of kiosks in Nevada. In 2000 former Boston Chicken executive J. Michael Jenkins replaced Tim Ryan as president and CEO when Ryan retired.

Principal Subsidiaries

Coffee Plantation; Gloria Jean’s Gourmet Coffee; Coffee People, Inc.

Principal Competitors

Starbucks Corporation; Tully’s Coffee Corporation; Kraft Foods North America; Einstein/Noah Bagel Corporation.

Key Dates:

1916:

Charlotte Diedrich inherits a coffee plantation in Costa Rica.

1964:

Charlotte’s son, Carl, travels the world to learn about the coffee business.

1966:

Carl and wife Inga purchase a plantation in Antigua, Guatemala.

1972:

Diedrichs sell their plantation and move to the United States.

1985:

Martin Diedrich opens the first Diedrich coffeehouse.

1996:

Diedrich Coffee goes public.

1998:

Diedrich signs deals with Taco Bell and other franchises.

Further Reading

Banoo, Sreerema, “Coffee House Wafting in Aroma of Success,” Business Times (Malaysia), December 10, 1999.

“Diedrich Coffee to Acquire Six-Unit Café Chain,” Nation’s Restaurant News, 1997, p. 24.

“Diedrich Expands Further in Colorado,” Denver Business Journal, July 14, 2000, p. 13A.

Hamstra, Mark, “Diedrich Coffee Inks Franchise Deal with Taco Bell,” Nation’s Business News, September 28, 1998.

Hardesty, Greg, “Chairman Plans Big Growth at Diedrich Coffee Inc. of California,” Knight-Ridder/Tribune Business News, November 19, 1997.

Hirch, Jerry, “Diedrich Coffee Inc. Lost Half Its Market Value Over the Week,” Knight-Ridder/Tribune Business News, March 14, 1997.

Martin, Richard, “Martin Debuts Start-Up, Bites into BBQ As Diedrich Regroups,” Nation’s Restaurant News, April 27, 1998, p. 1.

Mouchard, Andre, “Despite Booming Sales at New Locations, Coffee Company Must Sell Stores,” Knight-Ridder/Tribune Business News, April 30, 1997.

Smith, Martin J., “Of Human Beings & Coffee Beans,” Los Angeles Times Magazine, July 26, 1998, pp. 14 + .

Spector, Amy, “Diedrich Coffee Taps Ex-Boston Chicken Chief Jenkins As CEO,” Nation’s Restaurant News, October 9, 2000, p. 4.

——, “Diedrich to Gulp Coffee People, Brew Up No. 2 Segment Ranking,” Nation’s Restaurant News, February 22, 1999, pp. 6, 108.

——, “Quarterly Return Brews Profit, But Diedrich Has to Perk Up Unit Growth, “Nation’s Restaurant News, February 21, 2000, p. 11.

—Tracey Vasil Biscontini