Full Steam Ahead : Irvine’s Diedrich Coffee Is Expected to Go Public to Fund New Locations

Family-owned Diedrich Coffee, which said it spurned a buyer two years ago for fear of growing too fast, has itself embarked on an aggressive expansion drive and is expected to go public soon to grow even more.

The company, which carefully built and nurtured eight Orange County coffee shops over 23 years, added 22 new locations as far away as Denver and Houston in the past two years.

Steven A. Lupinacci, the company’s chief executive, acknowledged that Diedrich has committed itself to rapid expansion, but he wouldn’t comment on the initial public offering or the company’s plans.

Diedrich executives are close to choosing an underwriter and are expected to file a $20-million offering with the Securities and Exchange Commission within the next few weeks, said one investment banker who is on the company’s list of potential underwriters.

The funds raised will be used to pay off debts from recent acquisitions and to open more shops, said the banker, who did not want to be identified.

By expanding quickly, industry analysts say, Diedrich would secure a high-profile place among the other regional purveyors of gourmet coffees, which rely on fresh-roasted and fancy foam-filled drinks like cappuccino.

While the gourmet coffee industry boasts some 5,600 coffeehouses nationwide, only a few--including Starbucks Corp. in Seattle and Second Cup Ltd. in Toronto, which operates Coffee Plantation shops in the United States--are publicly held.

The taste for lattes and cappuccinos is strong and still growing, particularly among college students and aging baby boomers willing to spend $1.50 or more for a cup of coffee.

“There’s a lot of growth and a lot of people who have not yet traded up to gourmet coffee,” said Diane Daggatt, an analyst with Dain Bosworth Inc. in Seattle.

Diedrich’s sudden urgency to expand could tax its training sessions. Managers routinely immerse new employees in the family history--the Diedrichs have roasted and imported beans since 1912--and teach them to project the same family atmosphere in the stores. Only then do the managers train the recruits on the espresso machines.

Founded by German-born Carl Diedrich, the company eventually bought plantations in Guatemala and, in 1972, opened its first U.S. store in Costa Mesa.

The red, green and gold logo on Diedrich mugs, tiles and other merchandise is a family crest granted in the Gothic ages, according to a company brochure.

In 1994, the company reached a tentative agreement to be acquired by Second Cup, which planned to operate it as a subsidiary apart from its Coffee Plantation chain.

But the cash-and-stock deal fell apart at the last minute. Second Cup, which wanted to add 32 Diedrich shops in California and the Southwest by mid-1996, said it withdrew after deciding that the purchase wouldn’t be in the best interest of its shareholders.

Lupinacci said at the time, however, that Diedrich executives backed away from the deal for fear of expanding too rapidly and of having too little say in operations.

The episode, nevertheless, served as a wake-up call to a company that was growing so slowly that it risked being overtaken by rivals.

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Diedrich began opening new stores in Orange County and expanded to San Diego and Los Angeles counties as well. In February, the company bought 12 stores in Houston and Denver from Brothers Gourmet Coffees Inc. in Boca Raton, Fla. Its 31st store will open this month in Irvine.

One investment banker who turned down a chance to underwrite Diedrich’s initial public offering questioned whether it can keep up the quality of its product with such rapid growth.

“What they’ve done in Orange County is impressive,” said the analyst, who asked to remain anonymous. “They’re very good coffee people. But can they replicate what they’ve done in Orange County? That’s the question.”

Other analysts think the company can. They believe that Diedrich is well-positioned to compete with giant Starbucks, which itself grew from a small Seattle coffee shop into the nation’s biggest chain.

“Starbucks is bound and determined to be everywhere they can be, but there will always be room to compete,” said investment banker Lloyd Greif of Greif & Co. in Los Angeles.

. “They have strong growth prospects if they manage it right,” he said.

Starbucks raised the profile of all coffeehouses with an avalanche of publicity and promotion that introduced more consumers to gourmet coffee. “Starbucks has been doing very well, and the valuation there is high,” Daggatt said. “It would support other coffee companies going public.”

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Daggatt figures that gourmet coffee retailers--appealing to customers with an array of coffees from regions around the world and with specialty teas as well--soon will increase their $2-billion share of the country’s $7-billion coffee industry by 50% or more.

Diedrich probably would grab a bigger chunk of the market by acquiring some of the existing 5,600 shops nationwide, rather than opening new locations, analysts said.

“It’s not a cheap way to go,” Greif said, but the advantage of a public company is that “it gives you two ways to go--cash and stock”--to pay for an acquisition.

Though Diedrich and others may grow through acquisition, an industry trade group based in Long Beach believes such consolidation simply will spur growth. The Specialty Coffee Assn. of America estimates that Americans will have their choice of 10,000 gourmet coffeehouses by 1999, up from 200 in 1989.

“True expansion is not so much capital-driven as people-driven,” said Ted Lingle, the trade group’s executive director. “The trick is not only to raise the capital but to find, hire and train qualified people.”

Diedrich and other growing gourmet coffee companies have to ensure that each new shop produces the same high-quality cup of coffee.

“Part of Diedrich’s success is maintaining its quality,” Lingle said. “That will be the challenge in the long term.”

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Eyeing a Bigger Cup

Diedrich Coffee, riding the tide of high-grade coffee consumption, is expected to go public to pay for previous acquisitions and to finance continued growth. Here’s a look at the company and the coffee rage:

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Diedrich Coffee at a Glance

Headquarters: Irvine

Founded: 1972 (as U.S. company) by Carl Diedrich

Chief executive officer: Steven A. Lupinacci

Stores in 1994: 8

Stores now: 30

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Bean Boom

Retail sales of high-quality coffee have exploded since 1979, more than tripling. And the projected number of specialty coffee retailers, which amounted to only 200 coffeehouses, coffee bars and carts in 1989, is expected to grow to 10,000 nationwide by 1999:

Coffee Sales

(in millions)

1979: $763

1989: 1,500

1999*: 3,000

Retailer Growth

1999*: 10,000

* Projection

Sources: Diedrich Coffee, Specialty Coffee Assn. of America; Researched by JANICE L. JONES/Los Angeles Times