Another Cup of Coffee? : Peet’s Arrival Signals There’s Still Room in the Southland Market

The soothing music, the warm wood paneling, the sleek black chairs, the smell of Italian roast--it feels like Starbucks.

But it is Peet’s Coffee & Tea, a Northern California specialty coffee roaster that spun off Starbucks in 1987 when the Seattle chain consisted of only six stores. Now Peet’s has caught the expansion bug, opening a cafe in January in Pasadena, its first south of Santa Cruz.

In doing so, Peet’s is borrowing tactics from Starbucks, now a nationwide chain of more than 1,000 stores. Peet’s opened its Lake Avenue shop across from one of Starbucks’ busiest stores--a familiar Starbucks maneuver.

But Peet’s Chairman Jerry Baldwin doesn’t expect to badly damage his rival.

“We are a flea compared to them,” he said.

Peet’s nonetheless is stealing some customers from Starbucks. Katharine Kane, a self-described coffee addict, has switched.

“The taste is less bitter,” said Kane, 23, as she sipped from a Peet’s cup one recent morning.

Peet’s arrival in Pasadena indicates that the spread of coffee shops isn’t abating. Though some local companies have withdrawn from the business--Baskin-Robbins, for example, has sold its Caffe Classico stores--industry representatives contend there is room for growth. Ted Lingel, director of the Specialty Coffee Assn., a trade group in Long Beach, believes the Southern California market hasn’t realized even half its potential.

The Irvine-based Diedrich Coffee chain has mushroomed to 48 shops from 11 a year ago, with 17 of the new stores in Southern California. The company announced plans this week to buy six coffeehouses in San Diego and to open them in several Home Savings branches. Coffee Bean & Tea Leaf, based in Camarillo, is preparing to open two shops in the region, bringing its total to 30.

Even so, the Pasadena neighborhood chosen by Peet’s must be near the saturation point. Besides a Starbucks, it has a Winchell’s, an Arco minimart and two supermarkets that sell coffee.

The challenge is for Peet’s to differentiate itself from the competitors. Baldwin argues that the distinction lies in how Peet’s chooses and prepares its beans. He said Peet’s beans are roasted by trained professionals whereas Starbucks also uses computerized equipment. Another difference, according to Baldwin: Peet’s ships its beans fresh, tossing unused inventory after seven days. Starbucks uses vacuum-sealed bags.

Do these details matter? Colombian coffee from Starbucks and Peet’s were both rated excellent in the October 1994 issue of Consumer Reports.

Starbucks had no comment on Baldwin’s remarks.

What Peet’s appears to have going for it is a reputation that has spread beyond Berkeley, where Dutch immigrant Alfred Peet founded the company in 1966. Baldwin, who acquired the company with partners in 1984, said 45% of Peet’s mail-order business comes from Southern California. Many of those customers are former Bay Area residents and UC Berkeley graduates who had hung out at Peet’s.

In Pasadena, Peet’s is working the Cal connection. In January, Peet’s invited hundreds of grads for free coffee and pastries during a pre-opening celebration. Among the attendees was Los Angeles County Superior Court Judge Lance Ito, who used a Peet’s mug on the bench during the O.J. Simpson trial.

The company is also working its mailing list, luring 6,000 Pasadena-area mail-order customers to the store with freebies.

“I cheered when I saw their banner” outside the Lake Avenue shop, said Victoria Boone, a Pasadena resident who has ordered Peet’s through the mail for a decade.

The history of Peet’s and Starbucks is intertwined.

Inspired by Peet’s, Baldwin and two partners founded Seattle-based Starbucks in 1971. Starbucks originally sold Peet’s beans.

When Peet’s was put up for sale in 1983, Baldwin snatched it, becoming president of both companies. Four years later, he decided to sell one of the businesses.

“I don’t think I spent 90 seconds thinking about it,” Baldwin said. “Peet’s had better coffee sources. It was simply better.”

On many levels, Peet’s and Starbucks are similar. Part-time employees, who make up the work forces at both companies, receive full benefits. Turnover is relatively low. In addition, employees at both companies may become shareholders. Though Peet’s is privately held, Baldwin said employees own about 8% of the stock.

The 31 Peet’s stores sell scones and muffins and a range of coffee accessories and equipment--as do Starbucks stores.

The chains part ways on flavored coffees, which nationally account for 30% of premium coffee sales. Peet’s doesn’t add syrups to drinks, arguing that sugar masks the flavor of its coffee. But some coffee fans miss their jigger of almond or vanilla.

“That’s a big negative,” coffee drinker Kane said. “If Peet’s doesn’t change, I’m going to have to go across the street for my shot of flavor.”