Sun, Jun 05, 2005 - Page 12 News List

Peet's David challanges Starbuck's Goliath

A small Emeryville coffee seller carries on the spirit in which Starbucks was founded and many think it has lost

By Eric A. Taub  /  NY TIMES NEWS SERVICE , Emeryville, California

Testing coffee at Peet's Coffee and Tea's headquarters in Emeryville, California, are, from the left, Doug Welsh, James Reynolds and Eric Hashimoto. In the Bay Area, Peet's has long been the Apple Computer of coffee, serving a small but intense group of aficionados who are convinced that the company's coffee is superior to that produced by the industry giant from Seattle: Starbucks.

PHOTO: NY TIMES15

Doug Welsh picked up the first of 12 glasses of coffee. He noisily slurped a spoonful, savored it briefly, then immediately spit it out.

Welsh, the vice president for coffee at Peet's Coffee and Tea, a regional coffee retailer with its home here in the San Francisco Bay Area, was "cupping" -- testing samples of beans recently shipped from the Nairobi coffee auction.

Welsh readily concedes that most customers would never know the difference. But buying what Peet's considers an inferior bean, he said, "is not a road we want to go down."

In the Bay Area, Peet's has long been the Apple Computer of coffee, serving a small but intense group of aficionados who are convinced that the company's coffee is superior to that produced by the industry giant from Seattle: Starbucks.

Now Peet's, which also sells over the Internet and by mail order, has significantly stepped up its expansion plans. It is opening more retail stores in the west and introducing its brand to a number of specialty and high-end grocery stores across the US, hoping to entice a growing group of coffee iconoclasts.

"Peet's grew out of a passion for specialty coffee," said Kerri Goodman-Small, publisher of Hospitality News, a food service industry journal. "Starbucks focuses on consistency and a variety of beverages."

For all their differences in size and style, Peet's and Starbucks are linked by their past: the current director of Peet's, Gerald Baldwin, co-founded Starbucks before selling out to Howard Schultz, who built it into the ubiquitous brand of today.

Operating in Starbucks' very large shadow, Peet's is one of several small gourmet coffee retailers that are expanding from strong regional bases. These include Caribou Coffee from Minneapolis; Diedrich Coffee, based in Irvine, California; It's a Grind from Long Beach, California, and Tully's Coffee, with headquarters in Seattle.

The passion for Peet's extends to Ruth Reichl, the editor in chief of Gourmet magazine. "You only had to taste it once to see that, `Oh, this is coffee,'" said Reichl, who grew up in Berkeley but now lives in New York. Her old friends, she said, still bring her bags of Peet's whenever they visit from California.

Operating out of a brick warehouse in this industrial area south of Berkeley, Peet's is a debt-free company that has managed to achieve a steady rise in sales since it went public in 2001. This last quarter, revenue grew 23 percent from a year earlier, to $40 million, while earnings rose 34 percent, to US$2.4 million. In a stagnant market, its stock is up 3.3 percent since the beginning of the year. It closed Friday at US$29.80, up US$0.02 cents.

By comparison, revenue for Starbucks for the quarter ended in April reached US$1.5 billion, up 22 percent from the year-earlier period. Its net earnings for the period increased 27 percent, to US$101 million.

While Peet's has accelerated the opening of its retail stores, the company's business is built around selling beans, not drinks. Sales of whole beans account for 45 percent of Peet's retail revenue, compared with 5 percent at Starbucks.

Peet's retail stores, said Patrick J. O'Dea, the company's president, are "a fresh market for whole beans that happens to sell beverages."

"When our stores are strong," O'Dea said, "our Internet, mail order and grocery businesses go up within a five-mile radius of the outlet. We're agnostic about where people buy our product. Retailing is a means to an end, not the end in itself."

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