Thursday, July 28, 2011 at 4:31PM This was the cappuccino that the artist at Case Study made me today. It was so beautiful I wanted to share it with you.
Made with lots of care
The espresso was a single-origin from the Duromina region of Ethiopia. It was ‘juicy’ (citrusy), and even with the milk, the acidity came through. Overall, quite nice.
Wednesday, July 27, 2011 at 3:58PM Today, in case you missed it, Dunkin’ Donuts (DD) held its initial public offering (IPO) on Nasdaq. By all accounts, it was a successful IPO. The stock was originally supposed to be priced at $16-$18 per share, but the day before the sale, the owners raised the target price to $19 because they sensed there would be more demand for the stock than originally believed.
The sellers were right. On the first day of trading, Dunkin’s price jumped nearly 50%, closing at $27.85 per share. It was a good day for the owners.
I don’t want to dwell too much on the stock’s price or where it might be going, though that would be an interesting discussion (Forbes has a somewhat pessimistic take here). What I do want to talk about is a small part of the Forbes article that caught my eye:
“The members of the consortium recently paid themselves $500 million in a special dividend, which ended up as debt on the company's books, so the IPO proceeds will essentially go to pay for that little kicker.”
The ‘consortium’ consists of three private equity firms: Bain Capital (Mitt Romney’s former company), the Carlyle Group and Thomas H. Lee Partners. They had previously purchased Dunkin’ in a leveraged buyout (LBO), meaning they borrowed a lot of money (~$2.4 billion) to buy the company.
Leveraged buyouts are nothing new—they are what private equity firms do. The firms borrow huge sums of money to buy a company that has a lot of cash or saleable assets, with the idea that they can dispose of the non-performing assets and make the company more profitable. The buyout firm is supposed to improve the operations of the company to make it more profitable and attractive to future buyers. They come in, turn the company around, and sell it after a few years for a big profit.
At least that’s how it is supposed to work.
Often, however, when the private equity firms buy a company, they saddle the company with huge amounts of debt, making it harder for the company to be profitable. Dunkin’ Donuts’ LBO is a typical example—the debt used to purchase the company ended up on the company’s balance sheet, and payments on the debt have been dragging down DD’s earnings. The money raised in today’s IPO was being used to pay down the debt.
This might lead you to ask, if Dunkin’ already had a lot of debt, why would the owners pay themselves a “special dividend” that only increases that debt? The short answer: because they can. As owners of a company, they have the right to do just about whatever they want to with the company’s assets, so paying themselves this kind of dividend is common. The investors get paid, regardless of whether or not the buyout actually improves the long-term health of the company.
In order to make the LBO successful, the new owners ratchet up pressure on managers and employees, pushing for higher productivity and profitability. The push to make higher profits often leads to cuts in salaries and benefits, store closures and layoffs.
The private equity firms argue that they are just squeezing inefficiencies out of the system. They fail to advertise that these “inefficiencies” are often peoples’ jobs, pensions and by extension, their lives. Just ask the people who worked for the Chicago Tribune. The beneficiaries of the LBOs are the investors, not the system.
Here’s the bottom line: Billionaires can play games with other people’s money and lives in a way that the rest of us can only dream about.
Whether we like it or not, that’s how it is, and I don’t see it changing anytime soon. To tell you the truth, I can’t decide whether to rail against the system or try to start my own private equity fund. Maybe I’ll just start the prep work for a successful Caffeinated PDX IPO. . . How does the year 2020 sound?
Thoughts?
Sunday, July 24, 2011 at 6:33PM I recently met with Jim Roberts, owner of Jim & Patty’s Coffee on Northeast Fremont, to hear the story of his friendly neighborhood café and its quirky sense of humor. I also wanted to learn about the history of Coffee People, a Portland coffee company founded by Roberts and his wife Patty. Coffee People, like Stumptown today, was once the beloved local brand trying to expand nationally. During our interview, Roberts shared the long history of Coffee People, and also gave me some insight into some of the challenges associated with trying to grow a company into a national brand.
Jim and Patty Roberts
Starting out in the ‘70s
Sitting down to talk with Jim Roberts, you get the sense you are talking with someone who has seen just about everything during his time in business, someone who has had successes and failures but who has also managed to keep things in perspective.
The Roberts, who have been married for 41 years, started out selling coffee in Eugene in 1973. At the time, Jim was attending the University of Oregon, and in order to raise money for school, they began to sell coffee at Eugene’s Saturday Market.
In those days, the Roberts bought their coffee from a little company called Coffee Bean Coffee Company, also located in Eugene. Jeff Ferguson, who Jim called the “coffee pioneer of Oregon,” founded the small coffee roaster.
“When Jeff started, he had a little counter, 150 square feet and a roaster. He stood behind the counter and sold his coffee out of a jar. I loved the coffee, so it was what we bought and sold at Saturday Market.”
Over the years, Coffee Bean ended up becoming the huge Portland roaster known as Coffee Bean International (CBI). At the time, though, Coffee Bean Coffee was just a small company struggling to survive. It expanded from Eugene into the Portland market, but in 1976, the company went through bankruptcy.
Seeing an opportunity, Jim and Patty bought Coffee Bean’s Portland store, moved to Portland and changed the name of the store from Coffee Bean to Coffee Man. They picked the new name mostly for economic reasons.
“The B-E was easy to change into an M and wouldn’t cost us much, so we called it Coffee Man.”
The birth of Coffee People
The couple eventually sold Coffee Man to a relative and moved to the Oregon Coast. After a few years of roasting coffee there the Roberts moved back to Portland in 1983 and started a new café in Portland called Coffee People. Over the next decade and a half, Coffee People would take them on a roller coaster ride of successes and failures. It would grow from just Jim and Patty selling coffee behind the counter in their lone café, to 48 stores in cities across the country—reaching as far east as Chicago and as far south as Phoenix.
Early on, though, this growth did not look likely. In 1985, just two years after starting Coffee People, the Roberts found themselves without any money, credit, or coffee beans.
“One Monday morning I saw no reason to open,” Jim said, “we didn't have anything to sell and we couldn't buy any more, so I went to CBI and told [Ferguson] that I was done, that we couldn’t do it anymore.”
At the time he met with Ferguson, Roberts owed CBI $4,000. Ferguson and his business partner, Gary Talboy, offered to buy Coffee People for $4,400. Lacking a better offer, Roberts accepted.
“They owned all of it, for $4,400,” he said.
As soon as Jim accepted the offer, Ferguson and Talboy turned around and offered Roberts a job managing Coffee People.
Jim accepted that offer too, and he and Patty began running Coffee People with the idea that they could someday buy back half of it. For five years, the couple ran the company but did not own any of it.
“Everyone thought we owned it, but we didn't. We put our picture on the logo for job security. I figured if our picture was on it, they would have a hard time firing us,” he said with a chuckle. “They didn't object, so there we were, the public face of this company we didn't own.”
The picture on today's Jim & Patty's sign is the same one that went on the original Coffee People sign
In 1991, just five years later, Coffee People was valued at $2.6 million. The Roberts made a deal with Ferguson to buy half of it, using the earnings of the company to fund the purchase.
Expansion and Sale
In the mid-1990s, with the economy looking good and Starbucks on the rise, Coffee People prepared to expand nationally.
“Many people thought that there would be a second to Starbucks somewhere—a Burger King to their McDonald’s,” said Roberts.
To fund the expansion, Coffee People started taking small, private offerings, using the money to build new stores. Roberts knew what they were getting into when they accepted the outside investments.
“The proposition is simple. You want to own some of a big company or all of a little company. If you want to see the company meet all its goals, you need that money, but if you lose control, it may not be the same company as before.”
In 1996, with sights set even higher, Coffee People held its initial public offering on Nasdaq. The owners sold about half the company for $9 million. Expectations for growth were high, but it quickly became obvious that things were not going as planned.
“By the second quarter of '96, we found that our expansion was not succeeding. We'd opened all of these stores across the U.S. but they weren't ramping up fast enough. They were losing money and our opportunity to raise more capital was gone. All we could do was seek a buyer.”
Coffee People entered into a reverse merger with Second Cup, the number one coffee chain in Canada at that time. Second Cup was looking to expand into the US, so it bought Coffee People and Gloria Jean’s, another American coffee retailer. Second Cup struggled to incorporate its new acquisitions, however, and about a year later sold them to Diedrich Coffee.
The California-based Diedrich did not have much success with Coffee People either. Instead of re-branding the cafés under its own name, Diedrich kept the Coffee People name. However, customers could sense that the cafés were no longer run like the original Coffee People. In 1998, Roberts left Coffee People, saying that that he “no longer recognized the company.”
A Texas adventure
After leaving Coffee People, Roberts moved to Texas to go to seminary. He was planning to become a minister, but after a short time decided it was not his calling.
The thing that did stick with him from his time in seminary was a love of Texas barbecue. Tired of The Lone Star State, the Roberts moved back to Portland and opened a barbecue restaurant. The restaurant was mortally wounded when 9/11 struck, pushing the US deeper into a recession. The restaurant went bankrupt, costing the Roberts everything they had left from the Coffee People days. They moved to a small apartment in Tigard and tried to start over.
Back in the coffee business
After four years being out of coffee, the Roberts’ non-compete agreement with Diedrich expired, allowing them to get back into the coffee business. In November 2002, Jim and Patty opened up a new shop on Fremont, under the moniker of Jim & Patty's Coffee, which is a beloved neighborhood cafe today. The whole family is involved in the business. Patty is “the boss,” the couple’s daughter is the baker, and both of their sons work in the café.
Jim & Patty’s carries on many of the traditions that started with the original Coffee People. The café has a familiar feel, with plenty of Portland “weird” thrown in for good measure. The quirkiness extends itself to the café’s famed sour cream coffee cakes, which carry names like the “Naughty Supermodel Marionberry” and “Give PEACH a Chance.”
“People still see us as Coffee People. And we basically run it as if it were a Coffee People. Somebody called us a 'post-hippie' phenomenon. We have tie-dye here and there. It's our niche.”
Roberts believes that Jim & Patty’s coffee is of a higher quality than his earlier enterprises. He says that the café’s coffee quality has improved, and he attributes this to its relationship with Stumptown, which roasts coffee for Jim & Patty’s and also trains the café’s baristas.
“The quality of coffee today at Jim & Patty's, because of Stumptown, is much better. We're brewing to much higher standards than we ever did at Coffee People.”
In addition to Stumptown coffee, Jim & Patty’s sells a coffee from Caravan that is a throwback to the 1990s (dark, with an edge to it), as well as the Black Tiger blend, which was Coffee People's most famous brew, and still roasted by the company. The high-caffeine blend (that includes Robusta beans) is anything but subtle. Roberts described the Black Tiger this way:
“It's like country music or thrasher rock. It's not Mozart, but my customers love it. There's sort of a Black Tiger subculture here that comes in and 'drinks the tiger' because they can't get it anywhere else.”
While I was there, I tried a shot of the Black Tiger. I can only say that those who drink the Black Tiger are far tougher than me. It is about the earthiest (think peat moss in a cup) coffee I have ever had. Most of the Portland cafés cringe at the thought of selling anything with Robusta in it, but not Roberts.
“We're kind of outlaws for doing it [selling the Black Tiger], but that's why we're not part of the “Third Wave.” We've always tried to have the attitude to give the customers what they want, so if they want the Black Tiger, we’ll give it to them.”
Bonding with the neighborhood through tragedy
In addition to the ups and downs that the coffee business has brought them, the Roberts have also dealt with some personal difficulties. One of the Roberts' sons, who was a barista at Jim & Patty’s, committed suicide in 2006. As a result they planned to close the shop for a while, since no one felt like working. In an effort to support the family, people from the Beaumont neighborhood came to the Roberts and told them they wanted to run the café for them while they were grieving.
“Some of the people came out to our apartment in Tigard and said ‘Jim, we'd like to run the store for you,’” Roberts told me. “They asked for the keys and did their best to run the store. People baked things at home and brought them in, made coffee and stood behind the counters. They covered the place with flowers.”
The gesture really cemented the Roberts' commitment to the neighborhood, where they now live. It sounded like they would be there for a while.
“The neighborhood has just treated us like family. We're in a great spot.”
Lessons learned
I asked Jim if there were any lessons that had stuck with him from his years at Coffee People. He brought up the challenges of trying to grow the business into a national chain.
“It's a battle between the experts and accountants trained at a university and the instinctual entrepreneurs who understand an area, and have insight into what the customers want,” he explained. “I'm not saying that the MBAs don't [understand], but Coffee People got invaded by lots of people who knew nothing about the industry.”
At one point, Coffee People hired a CEO who had run other very successful food companies. The new CEO made some decisions that seemed counterintuitive to Roberts. One particularly telling episode happened when the company hired a research firm to help decide which cities Coffee People should expand into.
“I knew we were in trouble, when after paying $25,000 for this study, we were told that Portland was number 38 on the list of cities where Coffee People could be successful. Vicksburg, Mississippi, was number 37 on the list. If you've ever been to Vicksburg [a rural town with a metro population of less than 50,000 people] you'd know that there's something wrong with that. I knew that if that was wrong, the whole thing was probably wrong.”
Although these kinds of problems eventually led to Coffee People’s downfall, Roberts does not foresee the same things happening to Stumptown.* He believes that the situations between Coffee People and Stumptown are very different.
“Stumptown is a more substantial company than Coffee People ever was. We had a lot more stores, but Duane is an international coffee leader and has created a revolution in coffee across the country.”
Easing into retirement
During the interview, Roberts announced that it was his last day at the café.
“The boss took me off the schedule,” he said. “I’m done.”
Though he is done working a regular schedule at the cafe, he said he would probably substitute from time to time.
Any other plans?
“I'm not sure. I'll think of something. I've always wanted to start some other little type of business, just for the fun of it. Starting businesses and trying to make them work is what I enjoy doing.”
When I asked Patty what she thought about his retirement, she said that Jim would still be around.
Jim nodded, knowing it was probably true. With the contented smile of someone who is happy where he is at, he said “I’m going to come down here and just enjoy drinking coffee.”
After hearing about his life in coffee, it is hard to imagine Jim Roberts doing anything but welcoming people into his café and sharing a cup of coffee with them.
*When the recent news of Stumptown’s equity sale to TSG broke, there was a fair amount of chatter around the Portland area about what would happen to one of Portland’s most beloved coffee roasters. Fans of the company’s anti-corporate, rebel-hipster ethos and high-quality coffee worried that once the new owners got hold of the company, the Stumptown experience would change. Their fears were reasonable, as the interests of fast growth and maintaining the same quality are often not aligned.
Friday, July 22, 2011 at 4:32PM July 22, 2011 Links
One more week done, one more weekend arrived. Must be time for links. But first, on Sunday, I’ll be publishing a feature on Jim Roberts and the story of Coffee People. Coffee People was a Portland coffee company who tried to go national in the 1990s, but didn’t succeed like its owners had hoped. Be sure to check back Sunday evening for the story.
The filmmaker who directed and produced “Hot Coffee,” Susan Saladoff (from Ashland, Oregon) did an interview with the Connecticut Law Tribune. If you care about the civil justice system or about tort reform, it sounds like you should watch the film. link
UK-based Costa Coffee is not letting Starbucks go unchallenged in the Chinese market, recently announcing it plans to open more than 100 new stores in the world’s most populous country. link
Truth in coffee advertising? Australians make me laugh. link
Speaking of Australia, some of its cafés are soon going to have milk on tap, at least for the baristas. In an effort to reduce the need for plastic milk jugs, a Sydney coffee company has come up with a new way to transport and supply milk to where the cafés need it. link
If you have questions about cold coffee and/or iced tea, The New York Times’ Harold McGee probably has an answer. link
Barista Magazine’s Sarah Allen just got back from a trip to Brazil, where she was traveling with a group of super-skilled baristas, including Portland’s (and Coava’s) Sam Purvis. link
Two researchers from the Global Coffee Quality Research Initiative are using mapping systems to help develop the Rwandan coffee industry. link
Starbucks CEO Howard Schultz has made it back into the ranks of the billionaire club with the recent increases in Starbucks’ stock price. Now maybe he can afford to bring the Sonics back to Seattle. link
Monday, July 18, 2011 at 8:25PM After starting out with a shot of Heart’s Brazil Daterra espresso this morning, I went back to try some of the café’s iced coffee (‘tis the season, after all—despite the rain).
Heart uses a cold-brew process to make its iced coffee, and today’s offering was from the Kochere region of Ethiopia. Normally when you order a cold-brew, the barista takes some of the coffee concentrate and cuts it with water and ice to make it the right strength for sipping. I find that as the ice melts, you lose some of the rich chocolate notes and taste more of the acidity on the margins. For some time now, I have been planning to try the concentrate without mixing it to see if the drink holds its flavors better, and today seemed like a good time to do it.
Apparently, drinking cold brew straight up is not very common, because the barista had a hard time understanding what I was ordering. Granted, I asked for it in a clumsy manner, since there is no actual name for what I wanted to try. With a little persistence, though, we made it to the same page, and he gave me a glass of the potent concoction.
Short but strong
You would expect a drink that is normally diluted by half to be quite strong, and it was. Inhaling deeply over the glass of mahogany liquid, I could smell a sweetness similar to blackstrap molasses. The richness of the drink came through in its aroma.
When coffee brewed this way hits your tongue, the first impression it gives you is that it is going to be sour or bitter, but then it mellows out quickly into a mouthful of silkiness. The Ethiopian coffee had hints of bittersweet chocolate and pink grapefruit, with a body that lingered, filling my entire mouth with a pleasant satisfaction.
Drinking iced coffee this way is a little like drinking a shot of whiskey—strong up front, with a mellow finish. If you can figure out how to order one, you will probably want to drink it slow. It is a concentrate, so the caffeine per ounce must be pretty high.
As an everyday drink, a cold-brew “neat” might be a little strong (knock-you-on-your-a$$ strong, really). I wouldn’t order it every time I decide to drink a cold-brewed coffee, but I do foresee ordering it from time to time when I am looking for something a little different.
Saturday, July 16, 2011 at 10:45AM The next time you drink a cup of hot coffee, be sure to take a couple nice long whiffs and enjoy the coffee’s aroma. New research shows that people who drink hot coffee and tea may be less likely to carry strains of antibiotic-resistant Staphylococcus aureus, a “superbug” that hangs out in some people’s noses. One theory for why this would be is that when people drink hot coffee, some of the volatile compounds coming off the surface of the coffee act as antimicrobial agents. link
Andrew Cohen of The Atlantic gives an in-depth review of the HBO documentary “Hot Coffee,” which covers the famous McDonald’s case where a woman from New Mexico was awarded $2.7 million in punitive damages after she spilled her McDonald’s coffee, causing serious leg burns. The review includes a more in-depth discussion of tort reform that does not always make it to the media. link
I didn’t know what a “serial coffee offender” or a “smoko” was until I read the following article. Guess I need to spend more time in Australia. link
Unionized Starbucks employees in Chile are on strike, the first strike in the company’s history. link
A Taiwanese company is incorporating recycled coffee grounds into a new fabric. The coffee reportedly helps control odors and makes the fabric dry more quickly. link
Mashable has a great article about coffee shop etiquette. It’s especially appropriate for those who spend very much time working or studying in cafés. link
Dunkin’ Donuts is going to IPO soon, but (thankfully) it doesn’t sound like the company is going to use the money to expand the number of stores across the country. The money will instead be used to pay down debt. link
As usual, the big green apron is in the news a lot this week. Starbucks released some new ‘bistro’ food options (at least in Chicago), split its international division into two regions and announced that it has signed an agreement with a Chinese coffee company to create a joint venture to process and export coffee grown in the Yunnan region.
Friday, July 15, 2011 at 9:30PM [Background: Seven-Eleven just opened up a new store in my neighborhood, a neighborhood that desperately needed another convenience store. When they tore down the long-since-abandoned Arby’s restaurant that used to sit there, I was hopeful that someone was going to put a good café in there. My hopes were dashed when I learned they were putting in a new 7-Eleven. There was already a Plaid Pantry two blocks down the street, so why our neighborhood needed another place where people could get lots of cheap sugar, salt, fat and alcohol was beyond me.]
This morning as I walked toward the bus stop, I glanced up the street and did a double take. In the distance, I saw what appeared to be several people decked out in brightly-colored costumes, dancing around on a street corner.
Keep Portland weird, I thought.
However, as I walked closer to the intersection, my amusement turned to disbelief and then to dismay. The four brightly-costumed people dancing around on the corner waving at cars were kids about ten years old. Each one was dressed up as a different 7-Eleven product. One was dressed up as a Big Gulp, another as a hot dog, another as a bag of potato chips and the fourth was wearing a Slurpee outfit. Perfect. All they were missing was a can of Bud Light, and they would have covered the five main convenience store food groups (but I suppose that would be crossing the line).
Watching the kids wave at the cars, I could feel the ink in my pen start to heat up in anticipation of this article. What kind of company uses little kids to advertise unhealthy food? Aren’t there laws about marketing to kids, or at least using kids to market? Didn’t marketing campaigns like that go out of style when they forced Joe Camel and his phallic face out of cigarette ads?
But not everything is black and white. The reason the kids were out on the street advertising for 7-Eleven was that they were having a party in the parking lot to raise money for the local community center. Still, can’t there be a better way to fund a community center than by partnering with 7-Eleven to push unhealthy food?
It’s no secret that obesity is a problem in America. According to the Center for Disease Control, two-thirds of American adults are either overweight or obese. Two-thirds. Twenty percent of kids ages 6-19 are obese.
This obesity is no joke. It lowers our quality of life, makes us less active (a vicious cycle) and leads to increased rates of diabetes and cardiovascular diseases. In the US, we spend nearly $150 billion each year on obesity-related health care costs. Yet we think it’s just fine to let kids eat junk food on a regular basis, and we apparently allow kids to advertise chips, sodas and hot dogs, implicitly endorsing an unhealthy diet.
The sad thing is that these high-calorie foods that are front and center at convenience stores are some families’ best option to get the calories they need. That should tell you that we have some problems with getting good food to people, either because it is too far away from where they live or because people can’t afford to buy it. I wish that the problem could be magically fixed with tax cuts, but that doesn’t seem to be the case.
One of the best lines from the movie Tombstone is when Wyatt Earp, played by Kurt Russell, explains to Doc Holliday (Val Kilmer) how gambling is an honest business and doesn’t harm the gamblers. After all, he says, “It’s not like anyone is holding a gun to their heads now, is it?”
To which Holliday smirks and replies, “That’s what I love about Wyatt. He can talk himself into anything.”
The convenience store is like Earp’s gambling enterprise. We have talked ourselves into believing that the people who sell unhealthy foods bear none of the responsibility for the consequences when people eat them. It’s all the fault of the people buying the bad food, or so the theory goes. This is intentionally misleading—any economic transaction involves more than one party, and companies spend millions billions each year to make us buy their stuff, whether it is good for us or not.
If you eat junk food from time to time, it’s certainly not the end of the world either. I am not a junk food prohibitionist. I admit to eating it once in a while. I’ve been to the new 7-Eleven once, to get a Slurpee when the store was giving them out for free. I’m not quite ready to call for government intervention either. But when I see kids out on a street corner dressed up as junk food, I question the wisdom of the people who put them up to it. I can’t help but wonder what is going to happen to this country, because all I can see is a future full of overweight kids and adults with an array of health problems with no one taking responsibility for what people eat. If we claim to give a damn about the next generation, we can, and should, do better.
