Counting on Beans

Doug Welsh hunches over a glass, takes a great slurp and then jets dark brown liquid into a brass spittoon.

Welsh grows animated about what he is tasting: coffee grown at 6,000 feet in the remote Colombian province of Choco, a region previously unknown as a source of fine java.

“It’s rare to find beans like these from a new area,” said Welsh, the coffee czar for Peet’s Coffee & Tea Inc.

High-quality beans and a manually controlled roasting system have set Peet’s apart from rivals in the sprawling premium coffee business, according to coffee reviewers.

Now, Peet’s -- the company credited with kindling the nation’s gourmet coffee fervor when Dutch immigrant Alfred Peet opened his first store 40 years ago in Berkeley -- is brewing a plan for rapid growth. That has some wondering whether Peet’s can maintain a culture of quality that has created legions of passionate “Peetniks” from Beverly Hills to Baghdad.

“If they put growth ahead of quality, that would be bad,” said Robert France, who frequently makes a 25-mile round trip from his home in Chula Vista to a store in the Hillcrest section of San Diego to purchase a cappuccino and some beans to brew at home.

Maintaining “artisan” quality while growing quickly has proved difficult for others, said Kenneth Davids, an industry consultant and editor of the online Coffee Review. . Davids points to Starbucks, where, he contends, roasting skill has deteriorated since Alfred Peet taught the chain’s founders how to process beans.

Irvine-based Diedrich Coffee Inc. also had a reputation as a small-scale, high-quality chain but foundered on ambitious growth plans.

For decades, Peet’s has grown at barely a slow drip. But its expansion accelerated after the company sold shares to the public in 2001. That year, just two Peet’s stores opened. Ten debuted in 2003 and 17 the following year. Last year, the company opened 20 stores, and it expects to launch as many as 28 in 2006.

The chain, which currently has 116 stores, can grow “in the 20% range for as far as the eye can see,” said Chief Executive Patrick O’Dea, adding that it’s his job “not to mess it up.”

Yet even such a torrid pace would only match the rate at which the industry is growing domestically, analysts said.

Americans spent more than $11 billion in 2005 on premium coffee. About 56% of adults in America drink coffee daily, but fewer than 1 in 5 consume the high-end coffee sold by Peet’s, Starbucks, Coffee Bean & Tea Leaf and the other chains, according to the National Coffee Assn.

With just $175 million in 2005 sales, Peet’s would seem to be a bit player in the industry, but in fact the company has played an integral role in shaping the nation’s taste in coffee.

Alfred Peet developed the dark or deep style of roasting coffee, which preserves “a tremendous amount of sweetness and character,” Davids said. Starbucks adopted and popularized the style, which Americans now associate with premium coffee, as it grew to 8,000 domestic stores.

But if not for Peet’s, Starbucks might never have gotten off the grounds.

Peet served as the Seattle-based chain’s wet nurse, training its founders and supplying it with coffee until Starbucks grew too big. At that point, Peet helped Starbucks purchase a secondhand roaster and taught the owners how to use it.

“Without Peet, we would have gone nowhere,” said Jerry Baldwin, a Starbucks co-founder and a Peet’s director who once served as its chief executive.

On a recent trip to the original Peet’s store on Vine Street in Berkeley, Baldwin recalled his first visit 36 years ago, when he and two business partners sifted through investment ideas, including producing films about ethnic music.

“There’s still no tables inside or sign on the building. The roaster was right there,” Baldwin said, pointing to the middle of the shop.

Even back in 1970, the coffee cognoscenti viewed Alfred Peet’s tiny corner store near the UC Berkeley campus as the West Coast’s caffeine mecca.

Baldwin and his partners were won over and used Peet’s as the model for their new venture, which opened the next year in rain-drenched Seattle. The partners mulled over whether to call the Seattle store Steamers or Customs House but settled on Starbucks, thinking that their shop needed an easily pronounced name, like Peet’s.

Baldwin’s partnership purchased Peet’s for $4 million in 1984, five years after Alfred Peet retired. In 1987, when one of the partners wanted to cash out, Baldwin kept Peet’s and sold Starbucks for $3.8 million to a group headed by Howard Schultz, a former Starbucks marketing director who had quit to open his own coffeehouse.

Schultz put Starbucks on the fast track, taking the company from eight stores in the Seattle metropolis to 11,000 worldwide currently. His stake in the company is now worth more than $1.1 billion.

Baldwin, whose stake in Peet’s is worth about $10 million, said he didn’t regret the move.

“This is the coffee source,” Baldwin said as he greeted customers from behind the counter of the original store.

Forty years after its birth, Peet’s still does coffee better than most competitors, primarily because its people still roast beans by hand, modulating the heat and brewing a sample from each batch to taste it, Davids said. Rivals either use computer-managed roasting formulas or overcook the beans, he said.

Inside the Peet’s 103,000-square-foot roasting plant and headquarters in nearby Emeryville, John Weaver stands next to what looks like a giant drum-shaped clothes dryer. Large blades turn 800 pounds of Peet’s House Blend beans, allowing the batch to roast evenly as the heat climbs to 400 degrees.

About a dozen times through the 12-minute cycle, Weaver opens a small door and pulls out a scoop.

The master roaster uses nearly every sense to judge when the beans are done. He watches as their color turns from green to brown. He listens to the accelerating pops that come from the roaster as gases and steam escape. He sniffs for caramelizing sugars in the fruit.

“I am always making small adjustments,” Weaver said.

When the coffee is ready, Weaver opens the roaster’s door and thousands of steaming, crackling chocolate-brown beans cascade onto the cooling turntable. A wave of heat, accompanied by a slight burnt caramel aroma, sweeps across the floor.

Later, Weaver will move to the tasting room, where he will brew a cup to sample how the batch turned out.

“It all comes down to purchasing the right beans,” said coffee consultant Willem Boot of Mill Valley, Calif. “And Peet’s focuses on getting very high-quality beans from growers.”

That’s the job of Welsh, the coffee chief, and his international network of brokers. Only 380,000 pounds of the Choco beans are available, a small proportion of what Peet’s sells annually. But Welsh is tempted to take the entire crop.

At the Emeryville plant, Peet’s roasts 35,000 to 55,000 pounds of coffee a week, which isn’t enough to sustain Peet’s growth. To handle its expected bean boom, Peet’s next year will open a $25-million, 135,000-square-foot coffee roasting and distribution facility a few miles away in Alameda.

Peet’s financial results have been as hopped up as a double espresso. In 2005, Peet’s net income grew 22% to $10.7 million. Sales rose 20% to $175.2 million.

However, the Peet’s stock has declined 7.3% over the last year. But even after that drop, the market value of the company that started as a Berkeley storefront stands at $403 million.

Much of the growth has come with the general upswing in the specialty coffee industry, said Anton Brenner, an analyst with Roth Capital Partners in Newport Beach. But Peet’s also benefits from being a roaster and seller of beans rather than solely an operator of coffee restaurants, he said.

Its beans are sold in more than 4,000 grocery stores, a number that grows monthly. Peet’s lucrative direct-to-consumer home shipping service, which cuts store overhead and the expense of distributing to grocers, accounts for about 10% of the business.

A typical Peet’s store takes in $1.3 million annually. About $600,000 comes from the sale of whole beans and related items. The remainder comes from beverages, pastries and other treats.

“They have captured part of the take-home market -- people who are turning away from commodity coffee,” Brenner said. “Once you have tasted Peet’s, you don’t want to go back to Folgers.”

Yet not every coffee expert is confident of Peet’s future.

Boot and other consultants and coffee judges say that Peet’s dark roast style is popular for now but could lose ground because of changing tastes.

“There’s a growing consumer awareness that dark roast kills off flavor by caramelizing the sugars and burning off the oils in the beans,” said Mark Prince, senior editor of CoffeeGeek.com.

Lighter, fruitier roasts have won the last four World Barista Championships -- an international tasting contest -- and are a trend in the United States, Prince said.

There would be no reason Peet’s couldn’t adapt by changing its roasting style, but it would be a wrenching change. “Dark roast is a philosophy since the inception of the company,” Prince said. And although Alfred Peet hung up his roaster scoop decades ago, the culture that he fostered lives on.

Peet’s is growing primarily through word of mouth, relying on its cadre of die-hard coffee lovers to promote the company to friends and relatives. It does virtually no advertising.

And though 100 of its stores -- more than 4 of every 5 -- are in California, this network has international reach.

Craig Hendricks starts his day with Peet’s, a morning that arrives 11 hours earlier than in the coffee company’s home territory. Hendricks is a civilian intelligence advisor to U.S. military forces in Baghdad. He carried Peet’s as a National Guardsman in the Balkans. In an e-mail from Iraq, Hendricks described “the fragrant aroma gently rising in the steam from my little press pot.” Peet’s, he said, has become a daily reminder of his family and friends at home in San Diego.

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Largest coffeehouse chains in the United States by number of stores, first quarter 2006

Starbucks: 8,000

Caribou Coffee: 322

Tim Horton’s: 292

Coffee Bean & Tea Leaf : 213

Coffee Beanery: 200

Seattle’s Best*: 160

Peet’s Coffee: 112

Tully’s: 100

Dunn Bros. Coffee: 85

Port City Java: 55

*Subsidiary of Starbucks

Source: Datamonitor