Los Angeles, Nov. 20 - While Starbucks Corp stacks its coffee shops with lunchtime salads, CDs and hot breakfast sandwiches, smaller rival Peet's Coffee & Tea Inc is concentrating on working its way into consumers' daily routines through their home coffee makers.
Emeryville, California-based Peet's hopes to carve out a niche for itself as the highest-quality bagged coffee at U.S. supermarkets, according to President and Chief Executive Patrick O'Dea. So far Peet's coffee is available in 5,200 grocery stores, including cities where it does not have any coffee shops. An additional 3,000 grocery locations will be added next year.
That still pales in comparison to the more than 46,000 U.S. locations where Starbucks' bagged coffee is sold, but O'Dea said there is plenty of room for both players given the rapid growth in demand for specialty coffee.
"It's a major growth vehicle for us," O'Dea said in a recent interview at the company's headquarters. "All of a sudden, the coffee people consume in their households is going to be more specialty coffee than mainstream coffee, and we want to take advantage of that."
Another advantage for Peet's is that selling bagged coffee is more profitable, and requires less capital, than opening and operating hundreds of retail stores, O'Dea added.
Peet's was founded in 1966 in Berkeley, California, by Alfred Peet, whom the company calls "the grandfather of specialty coffee." It pays high prices for beans and boasts that it monitors each batch as it roasts, rather than using a single recipe. It also takes unsold wares off store shelves in 90 days, faster than rivals, it says.
Most of Peet's stores are located in California, but the company last year expanded its grocery business beyond its Western roots to New England, even though its stores there are limited to a half-dozen units in Boston. O'Dea said he is pleased with the results, and based on that success plans to expand the grocery business to between 15 and 20 new markets in the Eastern United States next year.
In addition, the company has slowed down its store expansion. It plans to open 30 stores next year, the same number it has planned for this year. O'Dea also said the company is content to sacrifice bagged coffee sales at its coffee shops so it can ramp up sales at grocery stores.
"Their strategy has shifted toward more of a packaged food branded company," said Wedbush Morgan analyst Brian Moore, who has a "hold" rating on Peet's shares. Moore said he upgraded Peet's stock from "sell" earlier this month in part due to the quick expansion of its grocery business. Moore said he would like to see stronger openings for Peet's stores in order to give the stock a "buy" rating.
Peet's beans cost about 10 percent more than Starbucks', O'Dea said. The company also charges more for coffee in its stores, and O'Dea said its small, 175-store retail presence has helped insulate it somewhat from the spending downturn that has hampered customer traffic at Starbucks in recent months and sent Starbucks' once high-flying stock into a tailspin.
Starbucks shares have slid 35 percent in 2007, while Peet's shares have gained 6 percent in the same period. The Standard & Poor's Restaurants index, of which both stocks are components, is up 4 percent this year.
Unlike Starbucks and other retailers, Peet's doesn't report same-store sales, a key measure that tracks sales at stores open at least a year.
"If that's your only metric for performance, it makes you do things you don't want to do," O'Dea said, adding that Peet's would not be adding more food or selling CDs in its stores in a bid to enhance same-store sales, as Starbucks has done in recent years. "I don't think we have to turn to a breakfast sandwich or a ham sandwich. That would be inconsistent with what we want to be."