Expansion Brewing

There’s no shortage of stories about Starbucks moving into a neighborhood and putting a mom-and-pop shop out of business.

What’s harder to find is someone like coffee roaster Pedro Gavina, president of Vernon-based F. Gavina & Sons Inc., who thinks the Seattle-based giant has been good for his business.

Starbucks Corp.’s rapid expansion in the 1990s, while felling many smaller merchants, stirred a huge appetite for gourmet coffee among middle-class Americans. That has helped F. Gavina move its gourmet beans into more mainstream supermarkets across California and the West.

“They’ve created an awareness of quality coffee, and that’s good for everyone,” Gavina, a Cuban immigrant, said of Starbucks.

In Los Angeles-area grocery stores, F. Gavina’s Don Francisco brand has become the No. 1 whole bean coffee, largely on its consistent quality and somewhat cheaper price. The company has 37% of the area’s supermarket coffee bean sales, eclipsing Starbucks’ 29% share, according to Information Resources Inc.

F. Gavina’s ground coffee is ranked No. 3 locally, behind stalwarts Procter & Gamble Co.’s Folgers and Kraft Foods Inc.’s Maxwell House, but still one notch ahead of Starbucks, which is distributed to supermarkets by Kraft.

Now, buoyed by its local popularity, F. Gavina is planning to take on some of these coffee giants in supermarkets along the East Coast.

Analysts said that’s a risky move for a family-run company of 250 employees that rarely advertises, eschews rigid corporate structure and prides itself on being as responsive to a small Armenian bakery as it is to a large client such as Safeway Inc.

Taking on Starbucks in your backyard is one thing, analysts said, but competing with it and other nationally recognized supermarket brands such as Millstone along both coasts is quite another, especially for a company as small as F. Gavina.

“It’s the really strong brands that are gaining market share” in supermarkets, said Kristine Koerber, a beverage analyst with WR Hambrecht in San Francisco. “Companies really need to have a differentiated product,” she said.

Moreover, without its own coffee shops, like those of Peet’s Coffee & Tea Inc. and Starbucks, F. Gavina will need to do a lot more advertising, which could be costly, analysts said.

Although the company has enjoyed some heady economic times recently as wholesale coffee prices have dropped 80% from their peak in 1997, many of its larger competitors, such as Procter & Gamble and Kraft, have benefited even more. Those larger rivals have begun plowing profits into their faster-growing gourmet coffee brands.

Specialty coffee sales last year were estimated at $10.7 billion, up from $7.6 billion in 2000, with the bulk of the coffee being consumed at cafes and coffeehouses.

But sales to supermarkets have been growing quickly as well, as gourmet coffee has gone from an occasional indulgence to a staple in many households.

F. Gavina buys green coffee beans from around the world, roasts them and sells them to coffee shops, restaurants, hotels and supermarkets.

Its sales--almost $70 million last year--are just a fraction of rivals’ such as Torrance-based Farmer Bros. Co., which supplies restaurants, food-service accounts and Starbucks, but larger than many of the regional roasters.

The company is moving into a new 237,000-square-foot plant just blocks from its current location, which will allow it to double its roasting capacity to 20,000 pounds of beans an hour and take Don Francisco into new markets in the Northeast.

Although making such a big leap in production may be daunting, Gavina said, his family’s company must keep growing if it wants to hold on to business from big supermarket chains that have grown rapidly through acquisitions in recent years.

“They like to have a national program. You have to be active,” Gavina said. “You can’t fall asleep and say, ‘I’m comfortable here.’ ”

The company has been able to move into markets such as Nevada, Arizona, New York, New Mexico and Florida largely on the strength of big institutional clients such as McDonald’s Corp. and accounts with large supermarket chains.

Now, it is hoping to use some of its relationships to get a toehold in other markets on the East Coast.

“From the very beginning, they’ve worked harder than anybody else in the industry, and now they’re seeing real success because of it,” said James Lingle, president of Lingle Bros. Coffee, a rival roasting company in Bell Gardens. “They have been very clever in going after particular niches they could serve well and profitably.”

In the beginning, that meant F. Gavina had to peddle its signature espresso coffee to mom-and-pop businesses such as Italian restaurants, Caribbean markets, Armenian bakeries and Vietnamese noodle shops.

But over the years, the company’s product line has grown to dozens of coffees from South and Central America, Africa, Indonesia and Hawaii.

Its customer base has expanded to include McDonald’s stores in the West and Costco Wholesale Corp. stores in Southern California. Even restaurateur Wolfgang Puck is a customer.

The company also has moved into a lucrative niche of providing special blends and flavored coffee to its larger competitors, such as Farmer Bros. and Sara Lee Corp.’s Chock Full O’ Nuts.

Covering the Bases

“The hallmark of Gavina is its diversification,” said Mike Ferguson of the Specialty Coffee Assn., a trade group based in Long Beach. “There are very few businesses to which they are not prepared to cater.”

The company supplies its customers from its roasting plant in Vernon, a sprawling maze of older warehouses filled wall to wall with huge roasters, grinding equipment, machines that coat coffee beans with flavoring and a packaging line.

Its Internet order department is composed of a couple of hairnet-clad women working at a table with packaging materials and a shelf stacked with F. Gavina’s goods.

The company’s top managers and sales staff moved to the new plant in May. Its roasting operations are scheduled to move by year’s end.

In this glossy new facility, the lobby is bigger than the management offices at the old plant. And its glassed-in cupping room, where Gavina and one of the company’s top managers sample the green coffee beans the company buys from around the world, takes center stage.

The Gavinas’ roots in the coffee business go back to the late 19th century, when Pedro’s grandfather and his brother started a coffee plantation, Hacienda Buenos Aires, in the mountains of southern Cuba.

Pedro, his sister, Leonor, and brothers Jose and Francisco, also known as “Paco,” grew up on the plantation but left with their father, Francisco, in 1960 after Fidel Castro seized the property.

The family went from Spain to Florida and then California, where it saved enough to buy some old coffee roasting equipment from Farmer Bros. The brothers sold coffee during the day and worked nights as bartenders or waiters to pay the bills.

By 1970, they were able to sell enough espresso to small businesses--mostly ethnic markets and restaurants--to make coffee roasting a full-time business. Leonor worked in the office while her older brothers made sales calls, peddling a product then unfamiliar to many in the food business.

“You would say cappuccino or espresso and they would just look at you,” Leonor Gavina-Valls recalled. “It was just unheard of at that time.”

In the mid-1980s, the company began moving into the specialty coffee business, selling beans to the coffeehouses springing up in the San Fernando Valley.

It was about this time that the elder Francisco’s children took charge of the company. The four siblings share ownership.

Leonor handles marketing, Jose is in charge of sales, Pedro is president and oversees coffee bean sourcing and sampling and Paco, the eldest and a civil engineer, is operations manager in charge of the plant.

The second generation’s mark on the business was the creation of the Don Francisco line of gourmet coffee for supermarkets in the mid-1980s. The brand makes up about 40% of the company’s business and will account for much of its growth.

With gourmet beans pushing out cheaper, light-roast coffee, the siblings see an opportunity to get Don Francisco into markets all along the East Coast--from Florida, where it already sells its coffee, to Maryland and eventually Boston and Philadelphia.

Supermarket chains like carrying gourmet coffee because customers are willing to pay more for it and because aficionados tend to drink more coffee. But analyst Koerber said the supermarket coffee aisle is getting more competitive.

Companies such as Procter & Gamble and Kraft have begun cutting corners, using lower-quality robusta instead of arabica beans in their old-line ground coffees, and have invested more of their resources in faster-selling gourmet lines that compete with F. Gavina.

Changes Needed

Small-business experts said that if a company like F. Gavina is going to compete with much larger firms, it will need to be managed less like a family enterprise and more like a corporation, with a more rigid structure, regular meetings and a bigger investment in advertising and branding.

Now, most of its advertising is word-of-mouth, meetings are handled on the fly and only recently have Leonor, Pedro and other top managers begun using e-mail regularly to communicate with employees.

As the company aims to double production in the next few years and move into new areas, it eventually will bring in a professional manager, Pedro said. The family also plans to give top managers a chance to buy stock in the company, because much of the third generation is still too young or has little interest in managing the company.

Despite these challenges, many believe that F. Gavina can handle this kind of growth and compete with the nation’s large roasters.

“Their quality is good. Their price is reasonable,” said Beatriz Porto of Porto’s Bakery in Glendale, an F. Gavina customer. And, she said, “they know what they’re doing. [Coffee] is not a fad with them.”

Of course, as an independent operator, Porto said, she’s a little biased.

“I hate Starbucks,” she said with a chuckle.