Peet’s Coffee & Tea, Inc.

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Peet’s Coffee & Tea, Inc.

1400 Park Avenue
Emeryville, California 94608
U.S.A.
Telephone: (510) 594-2100
Fax: (510) 594-2180
Web site: http://www.peet.com

Public Company
Incorporated: 1966
Employees: 1,500
Sales: $67.8 million (1999)
Stock Exchanges: NASDAQ
Ticker Symbol: PEET
NAIC: 31192 Coffee and Tea Manufacturing; 45299 All Other Specialty Food Stores; 42199 Other Miscellaneous Durable Goods Wholesalers

Founded in Berkeley, California, in the mid-1960s, Peet’s Coffee & Tea, Inc. encompasses 57 retail stores (38 in northern California) and a mail-order and online channel selling 33 types of coffee and assorted teas. By late 2000, it was launching its first effort to appeal to a national audience and was preparing for an initial public offering (IPO). The IPO, held on January 25, 2001, met with resounding success, raising $24.6 million for the company. Peet’s sales profile is unique: roughly 15 to 20 percent of its sales come from brewed coffee as compared to 85 percent at other mass-market coffee houses. Online, instore, and mail-order sales of beans and teas account for the remainder of its sales. From the start, the company has prided itself on the excellence of its beans and the immediacy of its service. Peet’s roasts coffee to order six days a week and schedules orders received each day for roasting and shipping the day after. Peet’s consciously appeals to a college-educated clientele in the 25- to 45-year-old bracket. A third of Peet’s customers buy beans only, a third buy drinks, and a third buy some of each.

The Founding of Peet’s: 1966

Peet’s Coffee & Tea came into being in 1966, when good coffee meant vacuum-packed percolator grind. For the preceding decade, national coffee brands had been debasing their product, incorporating an ever-higher proportion of cheap, tannic robusta coffee beans. Meanwhile, Arthur Peet, a Dutch immigrant with a passion for European-style dark roasts, had begun importing arabica coffee beans, which yield the strong, oily brews favored by Europeans, in the 1950s. Peet had grown up in the family’s coffee and tea business in Alkmaar, Holland. After World War II, he worked in the tea trade in Indonesia.

In the mid-1960s in San Francisco, Arthur Peet began brewing his own blend of dark roast beans, which he sold at his first retail store at Walnut and Vine Streets in North Berkeley. Although some dismissed his dark-roasted coffee as tasting “burnt,” the brew caught on with students, artists, writers, and musicians, and the outfit quickly became known as a small, premium purveyor of quality beans with a devoted group of followers, who accorded it cult-like status.

It would be five years before Peet’s opened its second store in Menlo Park and nine more before it opened its third outlet on Domingo Avenue in Berkeley in 1980. From the start, Peet’s emphasized quality over quantity and the roasting of fine beans rather than the creation of coffee shops. In fact, it deliberately focused on the sale of whole beans for home consumption and guaranteed delivery of its beans fresh from the roasting facility. It was as happy to have its customers order its coffee by mail and brew their own morning cup at home as to have them come in and buy a cup of ready-made. This commitment continued throughout the 1980s and 1990s. “I still consider us a specialty roaster more than a beverage bar,” Jerry Baldwin, who took over ownership of Peet’s from Arthur Peet in 1984, was quoted as saying in a 1999 San Francisco Chronicle. Peet’s coffee beans and teas were never vacuum-packed and were shipped within 24 hours of being roasted to order. In the store, coffee was made fresh every half hour, and no beans were allowed to stand for more than seven days.

Peet’s and Starbucks in the 1970s and 1980s

In 1984, the year espresso machines made their appearance, Jerry Baldwin bought Peet’s, adding it to a portfolio that included Caravali, a wholesale coffee brand, and a small Seattle chain known as Starbucks. Inspired by Peet’s, Baldwin and his two partners, Gordon Bowker and Zev Siegl, had pulled together $8,000 in cash and loans in 1971 to found Starbucks. That was when Baldwin first met Peet; in 1971, he and his partners traveled to Berkeley to learn about Peet’s coffee before Arthur Peet would sell it to them for use at Starbucks. When they returned to Seattle, they served Peet’s coffee for the next 18 months at their new store in the Pike Place Market. That store, designed to be more of a coffee and tea outlet than a cafe—just like Peet’s—did not at the time offer espresso or muffins, or even any place to sit down. Coffee was poured free into porcelain cups for tasting, and while the customer paused to drink, Baldwin and his staff bombarded him or her with information about coffee. Sales of fresh-roasted beans and teas exceeded the owners’ expectations that first year, totaling $49,000. In 1972, Starbucks opened its second store near the University of Washington, and a third store followed soon after.

In 1987, Baldwin sold off Starbucks, which then had only six stores, to Howard Schultz, a former Peet’s employee who had left Peet’s in 1986 to start his own coffee company, II Giornale. Baldwin’s reason for selling off Starbucks was that it would never be as good as Peet’s. The deal included a noncompete agreement, which expired in 1992, the year that Starbucks went public and began its astronomic expansion worldwide.

Peet’s expansion during the 1970s and 1980s was conservative by comparison. The company opened stores sporadically—one or two every year, all within northern California—and its marketing strategy was low-key. The decision to keep the company small and local was in part a conscious reflection of maintaining Alfred Peet’s tradition. Baldwin emphasized quality over quantity and word-of-mouth publicity, which supported the company’s message of quality with “a whisper rather than a shout.” But Baldwin himself favored a small approach to business, based upon his own early dislike of the bureaucratic world. A native of San Francisco, Baldwin started out his work life as a bellhop and doing inventory for clothing stores. After completing a stint in the army, he took time off and traveled to Hawaii, then went to work for Boeing in 1969 as a programmer for government contracts such as the Concorde. Eventually he left the corporate world to become an English teacher. However, while Baldwin admittedly did not like the corporate atmosphere for its bureaucracy, he acknowledged in a 1999 Boston Globe article that his time at Boeing gave him some idea of his capabilities.

Accelerating Expansion in the Mid-1990s

Peet’s growth picked up somewhat in 1994 after the company received a $6 million private placement from the San Francisco investment firm Hambrecht & Quist. The money allowed Peet’s to open a 60,000-square-foot roastery in Emeryville, which had the capacity to supply 150 stores. Stores at this time and throughout the remainder of the 1990s averaged $1.2 million in sales annually. They cost about $350,000 to $400,000 to open, outfit, and decorate in the company’s coffee-inspired colors, but each was run autonomously by its manager and reflected the style of the neighborhood in which it was located.

By 1996, sales at Peet’s approximately 30 stores, which by then sold coffee, tea, scones, and muffins, and a variety of brewing accessories and equipment, totaled about $40 million. In comparison, Starbucks brought in $696.5 million from its more than 1,100 stores in the United States, Canada, Japan, and Singapore. The two regarded themselves as friendly competitors with distinct orientations. Then, in 1997, with the spread of coffee shops still on the rise, Peet’s caught the expansion bug. Plotting a national expansion that included opening 10 to 15 new stores annually until there were several hundred Peet’s across the country, Baldwin aimed to establish a national presence for his high-end company. “My goal is for Peet’s to stay independent,” he said in a 1999 New York Times article. “To do that, we’re forced to grow. Peet’s would be more vulnerable in a single market than in multiple markets.” Expansion would also protect Peet’s against a potential regional economic downturn.

New shops were planned to open primarily in cities where Peet’s mail-order business already had a solid following. Although 45 percent of Peet’s mail-order business came from southern California, Peet’s had a sizable clientele nationwide (an estimated $1 million in online sales alone in 1998), due in large part to the relocation of students and other Californians who missed their Peet’s brew. Some in the business world expressed concern that the conservative Peet’s could never catch up with Starbucks and faced a significant hurdle in finding affordable real estate in markets where the recent multitude of coffee and bagel chains had pushed prices up. Others expressed concerns about Baldwin’s tightly controlling management style and the fact that, even as the company prepared for expansion, two top executives had recently left the company, and it was without a president and chief executive. In 1997, Chris Mottern replaced Samuel Salkin as president and chief executive officer.

Retired Arthur Peet himself was of the opinion that the move to expand should have occurred in the early 1990s when Starbucks began its successful growth campaign. However, Baldwin remained optimistic about carving out a market as the number two coffee chain with what he deemed the best products and execution in the industry. Peet’s first growth move was to employ a Starbucks-type maneuver, opening its Pasadena store across from one of Starbucks’ busiest shops in 1997.

Company Perspectives:

Peet’s Coffee & Tea is a super-premium coffee roaster with a focus on delivering the freshest, deep roasted beans for home and office enjoyment. The company is dedicated to providing a personalized and superior experience for its customers to enjoy quality coffee, tea, and related products. Peet’s is a privately-held company committed to strategically growing its successful online, mail-order, and retail business products while maintaining a unique culture and focus on customer satisfaction.

But even as Peet’s looked to a national market, it remained insistent upon not becoming so large that individual stores lost their neighborhood feel or that the company replaced quality with consistency as some of its competitor chains had. Most employees were part-time, but all received benefits. In order to avoid problems with theft and poor performance, servers were interviewed twice, and all were offered stock options. Peet’s also remained committed to putting money back into the communities it served both at home and overseas. The company supported Coffee Kids, an international nonprofit organization dedicated to improving the life of children and families in coffee-growing communities, and sponsored an annual seven-day bike ride to raise funds for HIV- and AIDS-related medical care and public awareness. All stores upheld Peet’s longtime tradition of serving drinks free on Christmas and the anniversary of its opening, a day when employees donated their tips to a local nonprofit organization and Peet’s then matched the amount raised up to $1,000 per store. Customer loyalty was encouraged with programs such as “Peet’s Customer of the Week” promotion, the winner of which received complimentary coffee.

By 1999, Peet’s had close to 50 stores, had expanded into the Chicago and Portland, Oregon, areas, and was set to enter the Boston market where heavy mail-order business had indicated the area was ripe for a new coffee establishment. “We believe that limited and selective additions of new store sites, rather than broad scale site development, will better support our brand position,” the company said in an article online. Boston coffee drinkers has been introduced to Peet’s in 1995 when Au Bon Pain began to serve Peet’s coffee in its stores. Peet’s discontinued supplying Au Bon Pain with its coffee in 1998 because, according to Peet’s, coffee was kept on the burners too long. Starbucks, which had opened its first store in Boston in 1994, and bought out the Coffee Connection, a Boston institution, in 1995, welcomed the addition of Peet’s. “It elevates awareness of coffee in the market, and that tends to be a positive thing,” said Donna Peterson, Starbucks’s marketing manager for the New England region, in a 1999 Boston Globe article. Plans for the Boston market called for stores with a cafe atmosphere, including laptop plug-ins, and for a lighter roast to accommodate East Coast taste in coffee.

Peet’s also adopted a more aggressive approach toward marketing its coffee on the West Coast in 1999. It partnered with Host Marriott to establish Peet’s kiosks at the San Francisco International Airport. “The opening of these kiosks represents a wonderful opportunity to introduce Peet’s to visitors to the Bay Area and to help build brand awareness in markets like Los Angeles and Chicago,” Baldwin was quoted as saying in a 1999 company newswire. Other moves to update the company included providing high-speed Internet access for linking its 56 stores with corporate headquarters. In 2000, Peet’s contracted with an online advertising agency to launch an interactive promotional campaign designed to raise coffee drinkers’ awareness of the importance of freshness in quality coffee. This campaign led immediately to a significant increase in online revenue.

With Americans buying 450 million cups of coffee a day and spending $18 billion a year at the start of the 21st century, and coffee houses becoming the boardrooms of the nation, Peet’s arranged for its January 2001 IPO of 3.3 million shares of common stock. The sale would lower Baldwin’s share of the company from 31 percent to about 15 percent. Some thought it a bad time for an offering. In fact, Peet’s posted a net loss of $2.5 million on total revenue of $39.2 million for the first six months of 2000, compared to a net gain of $100,000 on revenue of $31.2 million for the first six months of 1999. However, Baldwin insisted that Peet’s would be able to ride the wave of coffee enthusiasm created by rival Starbucks and others. As Baldwin saw it, Peet’s timing was perfect. Peet’s would step in with its better product and reap the rewards of selling to an already educated public ready to graduate to super-premium coffee.

Principal Competitors

Caribou Coffee Company, Inc.; Coffee People; Diedrich Coffee; Gevalia; Green Mountain Coffee, Inc.; Seattle’s Best Coffee; Starbucks Corporation.

Key Dates:

1966:: Arthur Peet opens the first Peet’s store in North Berkeley.
1971:: Peet’s opens its second store in Menlo Park; Jerry Baldwin and partners open the first Starbucks outlet in Seattle’s Pike Place Market, selling Peet’s coffee.
1975:: Peet’s opens a third store in Berkeley.
1984:: Baldwin’s group buys Peet’s Coffee & Tea.
1987:: Peet’s owners sell the Starbucks chain to Howard Schultz.
1994:: Peet’s opens a 60,000-square-foot roastery in Emeryville.
1995:: Peet’s opens its first store outside the Bay Area; Peet’s begins to supply Au Bon Pain bakery cafes with coffee.
1997:: Peet’s opens its first store outside northern California; Chris Mottern replaces Salkin as president and chief executive officer.
1999:: Peet’s enters the Boston market; first Chicago store opens.
2001:: Shares of Peet’s rise 17 percent on first day of NASDAQ trading.