Farmer Bros. Co.

20333 South Normandie Avenue
Torrance, California 90502
U.S.A.
Telephone: (310) 787-5200
Toll Free: (800) 421-6860
Fax: (310) 320-2436

Public Company
Incorporated: 1923
Employees: 1,144
Sales: $215.46 million (2001)
Stock Exchanges: NASDAQ
Ticker Symbol: FARM
NAIC: 311920 Coffee and Tea Manufacturing; 311930 Flavoring Syrup and Concentrate Manufacturing; 333294 Food Product Machinery Manufacturing

Farmer Bros. Co. is a manufacturer and distributor of roasted coffee and approximately 300 other items used by the company’s restaurant, institution, and office customers. Farmer Bros, operates in 29 western states, serving its clients through roughly 100 branch offices. Roasted coffee accounts for approximately 55 percent of the company’s annual sales. The scores of other products packaged and distributed by the company constitute a wide range, including coffee filters, stir sticks, stainless tableware, individual packets of pickle relish, pancake mix, and dozens of other items. A publicly traded, family-run business, Farmer Bros, is controlled by Roy F. Farmer, the son of the company’s founder.

Origins

The Californian legacy of the Farmer family’s involvement in the coffee business began with Roy E. Farmer. Farmer started the company in 1912, when he began roasting beans and selling them door to door. After establishing his business, Farmer diversified in logical directions. A decade after starting the company, he entered the coffee equipment business. At roughly the same time he incorporated the business, creating Farmer Bros, as a California corporation in 1923. Much of the company’s early success was credited to Farmer’s ability to foresee the growth of the western United States. Sensing which areas would experience major rises in population, he established branch offices in important markets such as San Francisco and other fast-growing metropolitan areas.

In the 1930s, Farmer steered the company in an important direction, diversifying into a business area that would account for nearly half of Farmer Bros.’ revenue volume at the end of the century. With a growing roasting and equipment business under his control, Farmer realized that he was aptly positioned to operate as a distributor as well. He reasoned that if his company was delivering coffee to customers every week with a truck, he could increase his business substantially by supplying other products needed by his coffee customers. Farmer’s epiphany eventually cast Farmer Bros, as a supplier of a range of products, everything from Styrofoam cups to spices. As the company’s customer base developed predominantly into restaurants and institutions, the prudence of Farmer’s diversifying move increased.

Roy F. Farmer Assuming Control in 1951

After enhancing Farmer Bros.’ role as a distributor, Farmer presided over the company’s development for the next two decades. Then Farmer died unexpectedly in 1951, passing away at age 59. The sudden death of the company’s founder gave control of Farmer Bros, to his son, Roy F. Farmer. The younger Farmer, 35 years old at the time, was ill-prepared for the task at hand. He had little experience, the lack of which was compounded by a minor financial crisis during his first months in charge. His father’s death left his family unable to pay for the resultant estate taxes, which forced Farmer to sell a portion of the company’s stock to the public. For a company renowned for its love of privacy, Farmer’s sale of a portion of the company to the public was seen as the starting point for tensions later in the century. Industry pundits speculated that Farmer rued the day he was forced to let outsiders into the company.

Although Farmer was able to pay his father’s estate taxes, his troubles were not over as he took control of the coffee roaster and distributor. His lack of roasting experience became evident when he accepted delivery of several tons of inexpensive Cuban coffee beans. The inferior beans produced coffee that was undrinkable, prompting Farmer to take an intensive, empirical course in coffee roasting. He spent days trying to incorporate the Cuban beans into a drinkable cup of coffee by mixing numerous higher-grade varieties with the Cuban beans. After experimenting with dozens of blends, Farmer succeeded in masking the bad taste produced by the Cuban beans. His success in correcting a mistake engendered Farmer Bros.’ strategy for the decades ahead. After the supply of Cuban beans was exhausted, Farmer continued to blend low-grade and higher-grade beans to make an affordable coffee product.

Farmer settled into his role as Farmer Bros.’ chairman, chief executive, and president after recovering from his initial mistake. The company’s success stemmed in large part from Farmer’s ability to keep costs down and his efforts in building an efficient distribution network. As the decades passed, Farmer Bros, flowered into a dominant regional concern, establishing a leading position in a slew of markets dotting the western United States. The passage of time also gradually began to reveal the singular personality of Farmer, which became the focus of attention as Farmer neared the 50th anniversary of his control over the fortunes of Farmer Bros.

By the beginning of the 1990s, Farmer Bros, ranked as the leading supplier of coffee to restaurants, institutions, and offices west of the Mississippi. In the Los Angeles area—a massive market—the company controlled 40 percent of the coffee business. The company’s diversification into distributing items other than coffee had matured into a sizable business of its own, accounting for 20 percent of Farmer Bros.’ total sales. The company packaged and sold approximately 200 restaurant items by this point in its development, recording operating profit margins that were only slightly below the 10 percent profit margins it reaped from coffee sales. As a whole, the company’s operating profit margins were more than double the percentages recorded by major competitors such as Sara Lee Corporation’s foodservice operations and Rykoff-Sexton.

Presiding over this success stood Farmer, by then a septuagenarian entering his fifth decade of control over the company. For decades, Farmer’s daily routine consisted of performing a coffee-tasting ritual. In Farmer Bros.’ “cupping room,” Farmer started each day by sampling each of the company’s coffee blends. After stirring a sample and inhaling it, Farmer used a silver spoon to taste the blend, spitting each spoonful into a small sink beside him. Those blends that Farmer found offensive received a flag of disapproval, a single coffee bean placed beside it.

Farmer never took a vacation, never willingly talked to the media, and ignored Wall Street analysts. At lunchtime each day, he could be found parked behind the company’s roasting plant, sitting inside his 1969 Lincoln Continental, eating lunch alone. His reclusive nature was mirrored by Farmer Bros.: the company did not maintain a corporate relations department or an investor relations department. Although the company was a publicly traded concern, it operated much like a private company, with Farmer exerting tight control over its activities. His firm hold did not slacken for family members, which led to a contentious battle with his sister, Catherine Crowe. During the early 1980s, Crowe launched a proxy battle to gain a seat on the company’s board. When Crowe was forced to vacate her seat because of health problems, her son, Steven Crowe, attempted to take her seat. Farmer rejected his nephew’s efforts, triggering a family squabble that would endure for decades. As the 1990s progressed, Farmer’s rule became increasingly autocratic, drawing not only the ire of family members but of a growing number of shareholders as well.

Shareholder Unrest Continuing into the 21st Century

By the mid-1990s, Farmer Bros, had reached its maturation point. The company’s financial totals began to level out, neither increasing nor decreasing by any substantial amount. The stasis was, in part, intentional. Some analysts claimed Farmer could have turned Farmer Bros, into a national concern, but he had chosen not to extend the company’s presence into the eastern United States. Farmer Bros, had long since abandoned the posture of an aggressively expanding company. Sales reached a peak of $240 million in 1998, but then began to slip, helping to incite unrest among the company’s shareholders. There was nothing glaringly wrong with the way the company was performing—even Farmer’s most vocal critics would admit as much. Farmer Bros.’ continuous coffee-roasting and packaging system was regarded as one of the most efficient in the industry. Its profit margins were high. Its market position, governed by nearly 100 branch offices in 29 states, was strong. Instead, those shareholders who were troubled by the company’s actions focused their complaints on Farmer’s secretive rule. Shareholders wanted more information about the company’s operations and strategy. They wanted independent directors added to the company’s board. They wanted company executives to open up dialogue with Wall Street analysts. Perhaps most important to some of the disgruntled shareholders was for the corporate bylaws to be changed to loosen Farmer’s grip on the company. Not surprisingly, Farmer resisted every attempt to make his company more open to the public.

Key Dates:

1912:: Roy E. Farmer begins selling coffee beans door to door.
1923:: Farmer Bros, is incorporated.
1951:: Roy F. Farmer takes control of the company.
1998:: Annual sales reach a peak of $240 million.
2002:: Disgruntled shareholders submit various proposals.

As Farmer Bros, entered the 21st century, the mood among shareholders blackened. From a peak of $240 million in 1998, annual sales had slipped to $206 million by 2001. The company’s profits reached a record high of $37.6 million in 2000, but fell 16 percent to $30.6 million the following year. Farmer, in his mid-80s at the time, was suffering from prostate cancer and other ailments, fueling speculation that a succession in power was imminent. His son, Roy E. Farmer, had joined the company in 1976, rising to the post of president in 1993, when he was also appointed as a director of the company. Industry pundits theorized that the younger Farmer would soon gain control over the company, or that Farmer Bros, would be acquired by a rival, but Roy F. Farmer appeared unwilling to let go of the reins of control he had firmly held for more than a half-century.

At Farmer Bros.’ 2001 annual meeting, a major stockholder rose from his seat and asked if he could tour the company’s coffee operations. According to an article in the November 4, 2002 issue of the Los Angeles Times, Farmer never looked up from his seat on the dais, and brusquely responded, “No tours. No tours for unhappy shareholders.” Resentment among shareholders was increasing, with Farmer’s headstrong behavior the object of their disdain. “His conduct is extraordinary,” an investment banker, Gary Lutin, told the Los Angeles Times in a November 4, 2002 interview. “This is the only company I have come across where they won’t send you an annual report or return your phone call. It is astonishing.” Catherine Crowe and her children had joined the fight by this point, calling for the company to divulge more information about its operations and strategy. “We are frustrated,” Steven Crowe informed the Los Angeles Times in a November 4, 2002 interview. “Our family owns 444,000 shares. That’s about $150 million, and it is controlled by people who won’t even talk to us.”

Farmer Bros.’ troubles with its shareholders festered during the summer of 2002. Franklin Mutual Advisors LLC, a mutual fund group that ranked as Farmer Bros.’ largest institutional shareholder, holding a 9.7 percent stake in the company, took the lead. Franklin Mutual unsuccessfully opposed the reelection of Farmer Bros.’ board of directors in November 2000. In July 2002, the mutual fund petitioned Farmer Bros., asking that the company register with the Securities and Exchange Commission (SEC) as an investment company. The reasoning supporting the request represented another sore point with some shareholders. Farmer Bros, held $282 million in cash and short-term investments, a sum that represented 70 percent of the company’s corporate assets. Franklin Mutual and other shareholder groups wanted Farmer Bros, either to use the capital to expand or divvy it up in the form of a dividend. Under the laws regulated by the SEC, investment companies were defined as corporate concerns whose investments represented more than 40 percent of their assets, excluding cash and government securities. By requesting that Farmer Bros, register as an investment company, Franklin Mutual intended to force the company to alter the manner in which it reported its results and to hire investment professionals to oversee its portfolio. Another shareholder group, a Costa Mesa, California, hedge fund named Mitchell Partners L.P., expressed its desires, asking that the company adopt new bylaws that would require it to place a majority of independent directors on its board.

The pressure on Farmer and his company was intensifying. In August 2002, several weeks after Franklin Mutual submitted its proposal, Farmer Bros, agreed to open its financial books to outside scrutiny. It remained to be seen whether the concession represented the beginning of a less insular attitude at Farmer Bros. The transfer of control from Farmer to whoever took his place was imminent, however. When that moment arrived, a new era would begin, ending the more than 50-year reign of Farmer. The inheritor of his empire, whether it was his son or the management team of a suitor, could look forward to presiding over a company with strong capabilities. Injecting the company with financial vitality and assuaging frustrated shareholders loomed as the primary responsibilities of Farmer Bros.’ future leader.