Los Angeles, Jul. 20 - Peet's Coffee & Tea Inc executives say the premium coffee seller is poised for growth as bigger rival Starbucks Corp pays the price for overbuilding cafes.
Peet's, which operates about 180 company-owned stores compared with Starbucks' almost 7,100, earns 72 percent of its operating profit from bagged coffee sales through grocery stores, home delivery and its food service and office businesses.
"We're a coffee company that happens to have retail stores, not a retailer that has coffee," Chief Executive Patrick O'Dea said in a recent interview at the company's San Francisco Bay Area headquarters.
This year, as Starbucks retrenches and closes stores, Peet's is opening just 25 company-owned stores and expanding into East Coast supermarkets in areas such as Boston, all of Florida, Washington, D.C., Baltimore and Pittsburgh.
The decision by Peet's to focus on grocery has helped insulate the company as consumers cut back on nice-to-have items -- such as $4 cafe drinks -- to pay for increasingly expensive must-haves such as groceries and gasoline.
In the most recent quarter, operating income at Peet's was up 63 percent on a 17 percent revenue gain. Starbucks' revenue was up 12 percent in its latest quarter, but operating income was down 26 percent.
While grocery sales remain robust, O'Dea said Peet's has seen softness at its retail coffee shops that last year contributed 66 percent of sales and 28 percent of profit.
"It's a pretty difficult environment," O'Dea said, adding that Peet's does not give same-store sales for its retail outlets. "If we did, we'd still be positive."
Seattle-based Starbucks blanketed the United States with capital-intensive stores during its growth spree and is now closing 600 underperforming outlets.
O'Dea said the closures should have no impact on Peet's since its stores are not located in the former real estate boom areas Starbucks favored over the last few years.
"They are not a mini Starbucks," Stifel Nicolaus analyst Steve West said, adding that Peet's was being unfairly punished by investors who have sent company shares down about 14 percent from a year ago, compared with Starbucks' 46 percent slide.
"They're really getting what I call guilt by association with Starbucks," West said.
COFFEE AT HOME
Starbucks -- which had 2007 sales of $9.4 billion compared with Peet's $250 million -- sells coffee in nearly every U.S. supermarket chain and has about 40 percent share in that segment through its partnership with Kraft Foods Inc.
Peet's and other specialty coffee sellers such as Seattle's Best Coffee, Procter & Gamble Co's Millstone and Green Mountain Coffee Roasters Inc, each trail Starbucks with single-digit percentage share at grocery.
Peet's was started in Berkeley, California, in 1966 by Alfred Peet, who mentored the founders of Starbucks and supplied beans during that company's early years.
Analysts said the company, which is obsessed with freshness and sells its hand-roasted coffee in bags as dark as roasted beans for $10 and up per pound, will probably never reach Starbucks' size and it does not need to to thrive.
"I think they can coexist," said Oppenheimer & Co analyst Matthew DiFrisco, who offered up Ben & Jerry's and Haagen-Dazs as high-end ice cream brands that built businesses in the shadows of Unilever Plc's Breyers. Unilever now owns Ben & Jerry's and General Mills bought Haagen-Dazs.
At the end of last year, home coffee brewers could find Peet's in about 5,800 grocery stores -- or about 22 percent of the country. The company had 7.5 percent share of the $800 million grocery specialty coffee business that Peet's expects to double in size by 2012.
Peet's projects that by the end of 2008, it will be selling coffee in 8,000 grocery stores.
But even if the company just maintains its 7.5 percent share in the category that is growing at about 15 percent per year, executives say Peet's grocery sales would double to $84 million by 2012.
During the six years of O'Dea's tenure as CEO, Peet's has built a $30 million roasting plant and beefed up management and support staff for the grocery business.
"Now we're just going to add sales on top of a relatively stable year-over-year cost structure," O'Dea said.
"We're done investing. We're going to take off like a rocket ship," he said, noting that if the company expands its grocery specialty coffee share to 15 percent from 7.5 percent, its grocery sales would grow to $140 million by 2012 from 2007's $42 million.
"Unfortunately, we're in an environment where nobody is investing in rocket ships or anything else," he said. "Yet, I sit here and think I've never felt better about our position."