New Brew Crew

Diedrich Coffee Inc., looking to return to profitability after a year of severe growing pains, said Tuesday that former Taco Bell Chairman John Martin will become its chairman and invest $1 million in the 37-store chain.

Martin also is bringing aboard former Sizzler USA and Taco Bell executive Tim Ryan as Diedrich’s chief executive, a position that has been vacant since March. Martin said he and Ryan will spend the next several months smoothing out Diedrich’s operations, and developing an expansion plan.

“Basically, we want to build on what is a good concept: a warm and friendly coffee shop with warm and friendly people,” Martin said Tuesday. “We’ve got the potential for an awful lot of reach through franchising, licensing, co-branding and wholesaling.”

Investors cheered the news, bidding up Diedrich’s stock by 19%, or 63 cents a share, to $3.88.

“Two experienced veterans like Martin and Ryan are going to point them in the right direction,” said Hans Schroeder of Torrey Pines Securities in La Jolla. “Their wealth of experience is quite a find.”

Martin’s biggest challenge will be to expand in a heavily competitive and fragmented industry where only one chain--Seattle-based Starbucks Inc.--has managed to make a mark.

In Starbucks, “you’re competing with a company that is very sophisticated at finding real estate, finding and training good people, and marketing its brand,” said Jean-Michel Valette, who follows Starbucks at Hambrecht & Quist, a San Francisco investment firm. The hiring of Martin and Ryan is “a necessary first step if you’re going to dream the big dream,” he said.

*

Diedrich, Orange County’s oldest and best-known coffee chain, was founded in 1972 by German immigrant and coffee connoisseur Carl Diedrich. The company grew to 37 stores in three states before going public in September 1996, raising $12.9 million in a stock offering.

Through acquisitions, the chain added another 11 stores before a series of blunders--a poorly executed expansion outside California and an aborted deal to buy a San Diego coffee chain--halted its momentum. In addition, the company’s chief executive, Steven Lupinacci, resigned abruptly in March.

Diedrich has lost money for three straight quarters and has seen its stock plunge 60% the past 10 months, from a high of $9.50 in mid-January.

“When you grow as quickly as this company did, you miss a lot of the details,” Martin said.

Ryan declined to predict when Diedrich will return to profitability. The company is scheduled to report third-quarter results in early December.

Martin was approached about six months ago by Paul Heeschen, a Newport Beach investor who is Diedrich’s largest shareholder with a 27% stake.

“We have a tremendous brand name and a remarkable following by customers,” Heeschen said Tuesday. “Now, we have to reposition the company with a management team that will allow it to prosper.”

Martin’s $1-million investment, when added to 50,000 shares he already owns, gives him a 7% stake in the company.

Ryan, 57, replaces interim CEO Lawrence Goelman, who also was the company’s chairman. Goelman will continue as a director.

Ryan retired last December as president of Sizzler USA after guiding the company through a Chapter 11 bankruptcy reorganization. At Taco Bell, he was senior vice president of marketing under Martin and was a key player in the chain’s revolutionary move to whack prices for some menu items to under $1.

He also helped oversee the long-running and successful “Run for the Border” advertising campaign, and the expansion into nontraditional restaurant sites such as carts and kiosks.

Ryan’s 23-year restaurant career includes stints as senior vice president of PepsiCo’s casual-dining unit, executive president of Florida-based Olive Garden Restaurants, and president of San Francisco-based Magic Pan Restaurants.

Martin Diedrich, son of the founder, will remain with the company in his role as vice chairman and “chief coffee officer.” Kerry Coin will continue as chief operating officer.

For Martin, the investment in Diedrich is his second big deal in as many weeks. Last week, he announced the formation of Pacific Restaurant Adventures with Orange County restaurateur David Wilhelm. The Newport Beach company owns Chimayo Grill in Newport Beach and plans to open eight to 10 upscale restaurants over the next two years.

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

New Brew

Diedrich Coffee has selected two former Taco Bell executives to revive the company’s flagging financial fortunes:

John Martin

Position: Chairman, major investor

Education: Bachelor of arts, Middlebury College (Vermont)

Residence: Irvine

Background: President/CEO, Taco Bell, 1982-96; appointed chairman/CEO of PepsiCo’s casual dining operations, 1996 (PepsiCo is Taco Bell parent)

Boards: Good Guys Inc., Chevy’s Mexican Restaurants, Newriders Inc., Williams Sonoma and FMAC (subsidiary of Imperial Credit Corp.)

Tim Ryan

Position: President/CEO

Education: Bachelor of arts in economics, Georgetown University

Residence: Newport Beach

Background: Senior vice president of marketing and development, Taco Bell, 1988-93; senior vice president, PepsiCo casual dining division, 1993-95; president, Sizzler USA, 1995-96

Board: Daughters of Charity Foundation, Western U.S.; Monterey Pasta; Marketing Sciences Institute

Stock Swoons

Diedrich stock opened on Nasdaq Sept. 12, 1996, at $9.50 and reached its high, $11.13, in less than a month. But losses caused the price to plummet. Monthly closing stock prices and Tuesday’s close:

1996

Sept. $10.38

1997

Tuesday’s close: $3.88

Profit Problems

Although sales have maintained pace, Diedrich has lost money for three consecutive quarters. Sales (in millions) and net income (in thousands):

Sales

Fiscal 1997 1st qtr. $4.3

Fiscal 1998

2nd qtr. 5.8

Net Income

Fiscal 1997

1st qtr. 107

Fiscal 1998

2nd qtr. -698

Source: Diedrich Coffee, Bloomberg News; Researched by JANICE L. JONES / Los Angeles Times