Diedrich Coffee Hopes to Stir Pot With a New CEO

Diedrich Coffee Inc., which is facing huge losses from its Gloria Jean’s coffee store unit, hired turnaround expert and 30-year restaurant industry veteran J. Michael Jenkins to head the Irvine coffeehouse chain.

Jenkins, who has headed such companies as Boston Chicken Inc. and T.G.I. Fridays, succeeds Timothy Ryan, 60, who is retiring as chief executive officer after nearly three years.

The top-level shift comes as Diedrich struggles with a unit that the Irvine chain acquired as part of an ambitious expansion strategy aimed at positioning the company as the nation’s second largest operator of specialty coffee shops.

Diedrich has built its business to 360 coffeehouses in 38 states, but remains far behind Seattle-based industry behemoth Starbucks Inc., which has more than 3,000 stores.

Diedrich said in June that it planned to record substantial losses for the fourth quarter and the fiscal year, largely from the Gloria Jean’s unit. Last month, the president of Gloria Jean’s resigned. He has not yet been replaced.

Analysts say coffee chains have struggled as they’ve attempted to expand because investors generally have been reluctant to pour money into a market so dominated by Starbucks.

And the competition only figures to intensify. Next year, McDonald’s Corp. is planning to begin testing its specialty coffee concept, McCafe, in the U.S.

Still, analysts praised the selection of Jenkins, 53, whom they said is well-known for getting companies moving in the right direction. He will assume the posts of president and chief executive on Wednesday.

“He has significant amount of operating experience, and I believe that’s one of the things they need the most,” said Hal Sieling, a Carlsbad restaurant industry consultant.

Ryan’s departure was planned and not related to the company’s disappointing performance, Chief Financial Officer Matt McGuinness said.

Neither Ryan nor Jenkins could be reached for comment.

Ryan had emerged from retirement in 1997 to take the job as a favor to Diedrich Chairman John Martin, McGuinness said. When Ryan’s contract expired last year, the company’s board asked him to stay on until a replacement was found, he said.

The company, troubled by growing pains three years ago, had hired Martin, former chairman of Taco Bell Corp. He brought aboard Ryan, a marketing whiz and former executive at Taco Bell and Sizzler USA.

Under their leadership, the company has pushed its expansion, snapping up Coffee People, a chain twice its size. Coffee People operated Gloria Jean’s mall-based coffee shops.

While the deal established Diedrich as the No. 2 specialty coffeehouse operator, it also created financial headaches.

Last month Diedrich said it expected to record noncash charges of $15 million to $18 million for the fourth quarter from closing 39 poorly performing Gloria Jean’s stores. Many of the Gloria Jean’s stores were in lackluster shopping centers or in malls where rents had mushroomed. In recent years, coffee drinkers have increasingly gravitated to free-standing coffeehouses, rather than mall-based shops.

Gloria Jean’s Poses Problems

Further, Ryan saw as a target market Generation Y patrons, who favor coffeehouses that come with some social atmosphere, which Diedrich offers. Gloria Jean’s was focused on an older clientele and devoted more space to products as kitchen and gift items. He said it was important to reorient the stores to higher-margin coffee and beverage sales.

At the time it warned of the losses, Diedrich also said it was in technical violation of its bank lending agreements although it had made all loan payments. The company declined to comment Monday on whether it is now current on loan payments.

Meanwhile, Diedrich has continued to sign franchise agreements, part of its plan to add 1,200 to 1,500 coffeehouses globally over the next five to seven years. In a statement released Monday, Jenkins said Diedrich has a “significant opportunity for domestic and international growth.”

Thus far, Wall Street has not been impressed with the company’s strategy. Diedrich’s stock has lost more than half of its value so far this year. The shares closed Monday at $1.88, up 13 cents, in Nasdaq trading.

Starbucks, by contrast, has increased in value by nearly 65% this year. Starbucks shares closed at $39.94, up 81 cents.

In fiscal 1999, Diedrich lost about $2.6 million, or 43 cents a share, including a provision of $3.9 million for store closing and restructuring. Sales totaled $22.6 million. Starbucks earned $101.2 million last year on sales of nearly $1.7 billion.

Jenkins presided over the reorganization of Boston Chicken and its sale to McDonald’s in May. He has also held the top job at El Chico Restaurants, Vicorp Restaurants and Metromedia Steakhouses, which operated the Bonanza and Ponderosa chains.

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Ground Down

Diedrich Coffee’s stock has slumped this year as the Irvine company struggles with a poorly performing unit. Daily closing prices:

Monday’s closing stock price: $1.88 a share

Source: Bloomberg News