17 July 2008 - The US coffee industry is valued at USD 27 billion and speciality coffee accounts for about USD 11-12 billion of that figure.
Speciality coffee is a fast-moving segment. According to industry data, only 27% of US adults drank speciality coffee on a weekly basis. In 2007, that amount grew to 37%.
Of course, the success of Starbucks has enabled speciality coffee to become more mainstream. However, one US coffee producer claims to be in an even more superior quality coffee segment called “premium”.
Emeryville, California-headquartered Peet’s Coffee & Tea Inc., is especially known for its strong, dark-roasted coffee.
In a presentation at an investor conference last week, Tom Cawley, Chief Financial Officer of Peet’s, argued that his company positions itself in a different category to its competitors as it relies on its quality sourcing of coffee, its artisan roasting and its fresh delivery. According to the CFO, it takes Peet’s only 7 to 14 days to get the roasted coffee to the shop shelf.
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Retail Stores
Like Starbucks or other coffee chains, Peet’s has its own retail outlets. The company currently operates 179 retail locations within the US, mostly in California. |
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Cawley said that the average mature Peet’s outlet manages USD 1.3 million in sales from a 1,700 sq ft store. This is a significantly good performance as the average mature McDonalds restaurant manages USD 2.2 million, whereas Burger King achieves USD 1.2 million, Starbucks USD 1 million, and Pizza Hut USD 0.8 million, according to data presented by the CFO. |
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Of the USD 1.3 million recorded by the mature Peet’s coffee bar, sales of beverages and pastries account for USD 0.8 to 0.9 million and whole bean sales represent USD 0.4 to 0.5 million. What’s more it takes Peet’s stores about 4 years to become mature.
Peet’s intends to develop its store growth and expects to have 191 locations by the end of 2008. Last year alone, the company invested USD 16 million in retail support infrastructure and is now ready to leverage this investment.
To compliment its retail stores, Peet’s also serves coffee in rather strategic locations such as airports kiosks, malls. The company had 32 licence locations in 2007 and expects to have 67 this year.
Grocery
However, the company’s main focus is the expansion in the grocery sector, which, for Cawley, has a lot of opportunities.
Peet’s retail locations may represent 66% of the company’s sales, but only 28% of the firm’s operating profit. The rest of Peet’s business, including the grocery market, accounts for 72% of the operating profit.
Coffee in US grocery stores, excluding mass merchants like Wal-Mart, represents a USD 2.9 billion business. And speciality coffee accounts for about USD 0.8 billion. However, it is growing at an average 15% each year. Traditional coffee, meanwhile, may have the lion’s share of the grocery market, but is declining by 0.3% annually on average. Speciality coffee is expected to hit USD 1.6 billion by 2012.
Cawley believes that Peet’s has an advantage in this segment as it has conceived its own “grocery store direct delivery” and has its own delivery vehicles and staff. The CFO also claims that Peet’s is the only company to have set up its own displays in groceries.
Industry data shows that the grocery delivery system has enabled Peet’s to occupy a 45.9% market share in the San Francisco Bay area (Alameda, Contra Costa, Marin, Napa, San Francisco, San Mateo, Santa Clara, Solano, and Sonoma counties) for the past 12 weeks. Competitors are far behind with Starbucks at 25.9%, Seattle’s Best with 4.3% and Dunkin’ at 2%.
Nationwide, Peet’s was the number 2 speciality coffee company in 2007 with a 7.5% share, despite having its coffee available in only 22% of the possible locations in the country). Starbucks took first place with 39.5%, Seattle’s Best was third with 7.4%, Millstone was fourth with 6.4% and Green Mountain Coffee fifth at 2.6%.
In 2007, Peet’s was present in 5,800 grocery stores nationwide. The company expects to be in approximately 8,000 in 2008. Recently, Peet’s introduced its coffee to groceries in Baltimore, the Washington area and in Florida.
Peet’s expects to keep its 7.5% share in 2012 when the market could reach USD 1.6 billion in value, added Cawley.
“We could probably double the business just with the category growth. But we think, by tripling our distribution, and by moving to 60-70% of the country, we could be creating a USD 140-220 million business”, commented the CFO.
Coffee-Making Machines?
One segment, in which Peet’s is currently not operating in, is the coffee machine business and singe-serving brewing systems.
Last month, citing data presented by Green Mountain Coffee’s CEO, Larry Blanford, FLEXNEWS reported that there are about 90 million coffee brewers in US homes and approximately 18.5 million brewers are sold each year. Meanwhile, there are about 4 million brewers in hotel rooms and about 2.6 million in offices across the US.
Tom Cawley, during his presentation said that Peet’s has no immediate plans to enter this category, but did not rule out the eventuality of it happening. The CFO added that he didn’t view Green Mountain Coffee as a competitor. Instead, he stressed that Peet’s has a good relationship with the Vermont coffee company.
“We’ve always been open about going into single cup. We’ve been working for years trying to make machines that can make a good cup of coffee. We are not against it. If we go into it we would make sure it would be in a way that would be representative of what Peet’s stands for. There are no plans at the moment”.
Growing Sales of Peet’s “Affordable” Coffee
Peet’s is expected to report its financial performance for the second quarter of 2008 on 31 July 2008. But, for the first quarter (the 13 weeks ended 30 March 2008), its net revenue increased 17% to USD 67.1 million from the USD 57.5 million recorded in Q1 2007. The increase in revenue followed the 18.4% growth for the full 2007 financial year when annual net revenue amounted to USD 249.4 million, up from the USD 210.5 million reported a year earlier.
A concluding slide shown by Cawley highlighted the fact that Peet’s has been on a 20% growth path for the last 4 years.
Moreover, in 2007, Peet's opened a roasting plant in Alameda, California, which replaced the former facility in Emeryville. It is understood that the Alameda plant will provide enough roasting capacity to allow Peet's to continue growing its annual sales.
Cawley expects the growth to go on even with the current financial issues in the US and the noticed drop in consumer spending.
He argues that there is cup value in speciality coffee. The average price for Peet’s coffee is $10.99 per lb, which comes to about 27 cents per cup – a better deal than the $4 latte.
Peet’s also buys its coffee 8 to 9 months in advance, enabling the company to manage price inflation. Cawley added that the company has already purchased a third of its coffee for next year.
“It is still an affordable luxury for people even in difficult times”, says the CFO.