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Peet's Coffee & Tea (PEET) |
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WIKI ANALYSIS
Peet's Coffee & Tea (NASDAQ: PEET) is a specialty coffee roaster and marketer of fresh roasted whole bean coffee and tea. They sell Peet’s brand coffee through multiple channels of distribution, including grocery stores, home delivery, office, restaurant and foodservice accounts and Company-owned and operated stores in six states. In addition, they sell Godiva ® Chocolatier brand coffees in their grocery channel. They operate their business through two reportable segments: retail and specialty.[1]
As of January 3, 2010, the Company operated 192 retail stores in six states, through which the Company sells whole bean coffee, beverages and pastries, tea and other related items. Its stores are designed to facilitate the sale of fresh whole bean coffee and to encourage customer trial of its coffee through coffee beverages. Each store has a staff person at the bean counter to take orders and assist customers with questions on coffee origins and on home brewing.[2]
Business & Financial Metrics
The following graph depicts the Company’s total return to shareholders from January 1, 2006 through January 2, 2011, relative to the performance of the NASDAQ Composite Index, and the Standard & Poor’s Smallcap 600 Consumer Goods Sector, Packaged Foods & Meats Industry. All indices shown in the graph have been reset to a base of 100 as of January 1, 2006, assume an investment of $100 on that date and the reinvestment of dividends paid since that date, calculated on a monthly basis. Since becoming a public company, the Company has not paid cash dividends on its common stock.[1]
Over the past five years, Peet's Coffee & Tea, Inc. has consistently underperformed the S&P 600 SmallCap Packaged Foods & Meats by about $50. Similarly, Peet's underperformed against the NASDAQ Composite up until the end of 2008. From that point on, there has been marginal returns greater than the NASDAQ Composite.
Profitability
Looking at Peet's Return on Investor Capital, we see that compared to their competitors, they have remained quite constant over the last six years, with slight upward trend. In the past three years, Starbucks and Green Mountain have dropped their returns to match a similar level as Peet. Their other competitor, Farmer Bros. has demonstrated increasingly negative returns in the past three years.
Peet's financial leverage has remained consistent over the past five year and substantially smaller than all of their competitors. A lower leverage would possibly indicate a lower degree of overall risk for the company. The trend within the competitors, aside from Farmer Bros., seems to be a decreasing amount of leverage in the past three years.
Operating margin is a measurement of what proportion of a company's revenue is left over after paying for variable costs of production such as wages, raw materials, etc. A healthy operating margin is required for a company to be able to pay for its fixed costs, such as interest on debt.[3] Peet's Operating Margin has generally been lower than that of their competitors. (Farmer Bros. was not included in the graph as their poor financial performance highly skewed the graph.)
Efficiency
'Days Sales of Inventory (DSI) gives an idea of how long it takes a company to turn its inventory into sales.[4] Over the past six years, Peet's DSI has remained fairly stable, increasing from about 38 days to 41 days. This slight increase appears to be similar when comparing Peet to it's biggest competitors, Starbucks and Green Mountain. Peet and Starbucks remain fairly close in their DSI values. Up until the past two years, Starbucks has had slightly lower numbers, now they are slightly higher. Green Mountain has greatly increased their DSI in the past six years from 41 to over 78. Farmer Bros. has had DSI's well over 100 - indicating yet another reason for poor financial performance.
Days Sales Outstanding (DSO) measures the average number of days that a company takes to collect revenue after a sale has been made.[5] There has been a steady increase in DSO for Peet's Coffee & Tea over the past six years from about 10 days to 16. Starbucks has maintained a relatively steady DSO around 10 days. Green Mountain has kept their DSO around 33 to 35 days. Farmer Bros. has seen their DSO rise from the mid-20s to the mid-30s in the past two years.
Days Payable Outstanding (DPO) shows how long it takes for a company to pay its creditors.[6] From 2005 to 2008, it appears that Peet's has maintained a DPO similar to that of Starbucks. Unfortunately, data for 2009 and 2010 was unavailable for Peet's so we will have to assume that they maintained their similar comparison with Starbucks, which had a dramatic rise in DPO to around 25 days in 2009. Green Mountain has seen a DPO rise from 33 in 2005, a peak at 53 in 2007, and a slight decrease to 42 in 2010. Farmer Bros. maintained a DPO around 26 from 2006 to 2008 and then a dramatic rise to almost 50 in 2009 and 2010.
Cash Conversion Cycle (CCC) is a metric that expresses the length of time, in days, that it takes for a company to convert resource inputs into cash flows. The cash conversion cycle attempts to measure the amount of time each net input dollar is tied up in the production and sales process before it is converted into cash through sales to customers. This metric looks at the amount of time needed to sell inventory, the amount of time needed to collect receivables and the length of time the company is afforded to pay its bills without incurring penalties.[7] Because DPO could not be calculated for Peet in 2009 or 2010 we can only truly talk about the results from 2005 to 2008 and possibly assume a similar relationship to Starbucks in 2009 and 2010. That being said, during 2005 to 2008, Peet's Coffee & Tea did share a similar CCC around 30 days, with Starbucks generally being slightly less than Peet. In 2009 and 2010 there was a slight increase in CCC for Starbucks, which could have carried through to Peet given it's increase to 37 days in 2008. Green Mountain has maintained a CCC higher than both companies, increasing from 41 days in 2005 to 71 days in 2010. Farmer Bros., has had CCC's in the high 100s, however, in 2008 they began to decrease to their lowest level, 96, in 2010. While an improvement in recent years, this still indicates their poor performance relative to their competitors.
Overall, Peet's Coffee & Tea appears to be quite efficient, and certainly close to their biggest rival, Starbucks Corporation. Green Mountain Coffee Roasters Inc. remains competitive, although appears not to be quite as efficient as Peet and Starbucks. Farmer Bros. Co. poor efficiencies clearly places significant stress on the business, to the point where it is often pointless to compare Peet to it.
Business Segment[1]
Retail stores, which consist of the company owned retail stores. Specialty, which consist of Peet’s and Godiva branded sales to grocery stores, and Peet’s sales to foodservice and office accounts, and home delivery customers.
Retail Store
Retail stores comprised 61.4% of net revenue for the fiscal years 2010 which is the largest proportion of Peet’s business. Until beginning of 2011, company operated 192 retail stores in six states through which sell whole bean coffee, beverages and pastries, tea, and other related items, and expand to 103 licensed store. Peet’s stores are designed to facilitate the sale of fresh whole bean coffee and to encourage customer trial of the coffee through coffee beverages. In the retail segment, net sales increased 2% compared with 2009. Net revenue increased primarily as a result of increased sales from stores operating for over one year.In 2010, retail represents over 60% of PEET’S sales, but Consumer drives 60% of profits.
Specialty
- Grocery comprised 22.9% of net revenue for the fiscal years 2010. Peet’s coffee and tea sell its products through a network of grocery stores, mass merchandisers and club stores, including Safeway, Stop & Shop, Ralph’s, Kroger, Publix, Whole Foods Market, Target and Walmart. To support these sales, Peet’s have developed a direct store delivery (DSD) selling and merchandising system. Peet's DSD system is a major competitive advantage in grocery aisle.In addition to Peet’s brand, in 2009, grocery store began selling Godiva brand coffees to establish a competitive position in the flavored coffee segment, mass merchandisers and drug stores. Growth rate in grocery is 21.8%, which is the fastest growing component. The growth in net revenue in grocery was due to increased share in existing markets, new grocery stores added during the year and the introduction of Godiva coffee in the fourth quarter of 2009.
- Home Delivery was responsible for 5.1% of net revenue for the fiscal years 2010. Its home delivery channel offers the customers the ability to have fresh-roasted coffee and hand-packed tea shipped directly from the company’s roastery to the door and a wider selection of coffees and teas than available in the retail stores or at the grocery store partners. Peet’s coffee and tea offers home delivery services on the website, peets.com. Net revenue in the home delivery channel did not grow due to the grocery business expanding in the eastern U.S.
- Foodservice and Office contributed 10.6% of net revenue for the fiscal years 2010. In the foodservice and office business, the staff of sales and account managers who make sales calls to potential accounts and conduct quality audits at the existing accounts. Additionally, established relationships with foodservice and office distributors to expand the account base in select markets and channels. These distributors have their own sales and account management resources. Peet’s have two models for servicing the foodservice accounts and distributing our products: “We Proudly Brew” (“WPB”) accounts and licensing accounts. Foodservice and office net revenue increased 16.8% over the prior year primarily due to increased office coffee distribution, the 10 new licensed partner locations opened during the year and 71 additional “We Proudly Brew” accounts that serve Peet’s coffee in their own branded locations.
Property's[1]
Peet’s headquarters is located in Emeryville, California. The main office building is used for general corporate overhead and a call center for the home delivery sector of their business. The building is approximately 60,000 square feet and the lease extends through October 2015, with the possibility of two five-year extension beyond 2015. In 2008 Peet's converted this facility from its roasting plant into what it is now as its office space and headquarters.
In December 2006, a building was purchased that has approximately 460,000 square feet of land with a 138,000 square foot building on site in Alameda, California. The plan for this facility was to replace the headquarters as the roasting and distribution center for Peet's. The purchase price of this facility was $18.6 million. The needed changes to become the roasting site were made, and the facility was at full production capability by May 2007. So Peet's has one facility in California to provide all of its distributions around the country, which for now is not a problem considering that 87% of their stores are located in California. Further expansion in the future would lead Peet's to have to open more distributions centers around the nation to meet demand.
In terms of recent expansion Peet's opened 2 new stores in 2010, but also had to close 2 stores due to the expiration of leases. All retail locations are company-owned and operated in leased locations. Their stores are typically located in urban neighborhoods, suburban shopping centers such as malls and grocerys stores, and in high-traffic areas.
Geographical Breakdown
| Locations | Number |
|---|---|
| Northern California | 126 |
| Southern California | 41 |
| Illinois | 2 |
| Oregon | 8 |
| Massachusetts | 5 |
| Washington | 7 |
| Colorado | 3 |
Management
Management Philosophies and Strategies
Marketing the Product
To understand the board of directors philosophies for the company, an understanding of management's direction for the company is needed[9]. :
The What: In the coffee industry, Peet's believes there are two types of coffee: specialty and traditional. Peet's has a very specialized niche in the high quality, high price (or premium) segment. They believe that the niche they have carved out is essential to their image as a company. They do not plan to expand in to the traditional market because management believes that the company is: " . . . highly dependent on consumer demand for specialty coffee, a shift in consumer preferences away from specialty coffee would harm our business more than if we had more diversified product offerings".
The Who: But not only does Peet's have a type of coffee that they sell, they also have an age demogrpahic whom they specifically market to. According to Peet's, the 18-24 demographic drinks almost twice as much coffee as its age demogrpahic opposite, 60+.
The Where: Peet's has had a very extensive plan for where they are going to market their product. From 2004-2006, the company had a rapid expansion away from catalogue sales and began the resurrection of physically licensed retail stores across California (and a few other states). After a few years of building, Peet's took a few years to let the expenses from Property, Plant, and Equipment be controlled. In the past couple years, however, Peet's is putting an emphasis on selling their premium coffee in grocery stores. According to Peet's data: sales of specialty coffee increased 16% and the sales of traditional coffee decreased 3%.
The How: Peet's intention in the next ten years is to expand the product nationally. One of the ways they plan on achieving this goal by increasing their involvement in grocery stores. In increasing instances the company is buying floor space in grocery stores to further market their product. Another way Peet's plan to expand is through strategic leasing of non-licensed locations. This is viewed as essential when promoting brand recognition. Peet's also is seeking on increasing the number of contracts with third party distributors to further their supply chain across the country.
Business Strategy
Peet's business strategy emphasizes expansion through multiple channels of distribution. Their ability to implement this business strategy depends on their ability to[10]
- market products on a national scale and over the Internet
- enter into distribution and other strategic arrangements with third-party retailers and other potential distributors of Peet's coffee
- increase brand recognition on a national scale
- effectively compete in emerging markets where consumers purchase their coffee
- identify and lease strategic locations suitable for new stores
- manage growth in administrative overhead and distribution costs likely to result from the planned expansion of retail and non-retail distribution channels
Management Philosophies[11]
Peet's entire business strategy revolves around the core philosophy: " . . . to build the leading super-premium brand share in every major consumer segment". It is from there that they derive their consumer growth strategies which complement their mission statement. These strategies are:
- Existing market share growth
- Geographic and channel expansion
- Expand new products and enter new segments
Board of Directors[12]
Patrick J. O’Dea : Chief Executive Officer
Total Compensation: $597,951.00
Patrick J. O’Dea, 49, has served as our Chief Executive Officer and President and as a director since May 2002. From 1997 to 2001, he was Chief Executive Officer of Archway/Mother’s Cookies and Mother’s Cake and Cookie Company, a baked goods company. From 1995 to 1997, Mr. O’Dea was the Vice President and General Manager of the Specialty Cheese Division of Stella Foods, a preserved food company. From 1984 to 1995, he was with The Procter & Gamble Company, a global consumer products company, where he marketed several of the company’s snack and beverage brands.
Thomas P. Cawley: Chief Financial Officer
Total Compensation: $ 427,200.00
Thomas P. Cawley has served as Chief Financial Officer since July 2003. From 2000 to 2003, he was at Gap, Inc. serving as Chief Financial Officer, Gap Brand. From 1986 to 2000, Mr. Cawley was at PepsiCo/Yum Brands most recently as Chief Financial Officer of Pizza Hut. Previous to 1986, Mr. Cawley was with The Quaker Oats Company and General Foods.
Shawn Conway - Vice President
Total Compensation: $ 379,813.00
Shawn Conway has served as Vice President, Chief Supply Chain Officer since he joined the Company in January 2010. In March 2011, he was elected as an Executive Officer of the Company. From 2002 to 2010, he was at SKYY Spirits, an alcoholic beverages producer and the North American subsidiary of Gruppo Campari, most recently as Senior Vice President of Operations. Prior to SKYY Spirits Mr. Conway served in numerous senior finance and operations roles including Chief Financial Officer of Gateway Learning Corporation, General Manager of New Ventures at Dreyer's Grand Ice Cream, as well as various roles within the Clorox Company.
Kay L. Bogeajis - Vice President, Divisional
Total Compensation: $ 343,514.00
Kay L. Bogeajis has served as Vice President, Retail Operations since she joined the Company in October 2007. From January 2003 to October 2007, Ms. Bogeajis served as Vice President, Western Operations for Taco Bell Corporation, a Yum! Brands, Inc. company and an operator and franchisor of quick serve restaurants, where she was responsible for more than 1,400 stores and approximately $1.4 billion in system-wide sales. From 2001 to 2003, she was Vice President Systemwide Operations for Taco Bell. Previously, she held prominent retail operations and sales positions with Taco Bell, Frito-Lay, Inc., a PepsiCo company, and Burger King Corporation.
Jean-Michel Valette - Chairman of the Board/Director
Total Compensation: Not Available
Jean-Michel Valette, 50, has served as Chairman of our Board of Directors since January 2004 and a director since July 2001. Mr. Valette has been an independent advisor to branded consumer companies since May 2000. Mr. Valette also served as Chairman of The Robert Mondavi Winery, a California producer of fine wines, from April 2005 to October 2006 and as its President and Managing Director in 2004 and 2005. From 1998 to 2000, Mr. Valette was President and Chief Executive Officer of Franciscan Estates. Mr. Valette has served as a director of Select Comfort Corporation since 1994 and The Boston Beer Company, Inc. since 2003.
Industry
Porter's Five Force
Rivalry
High
Industry rivalry force created by competition between specialty coffee retailers is very empowered. The growth of the industry has become slowly, but the competitors within the industry have increased. The specialty coffee category is highly competitive and fragmented among various distribution channels. The major distribution channels of Peets coffee and tea are coffeehouses and grocery stores. Peet’s coffee and tea compete against the large scale specialty coffee company, such as Starbucks, as well as some large companies in the food industry who entered with specialty coffee segment such as Dunkin Donuts and McDonald. In addition, its indirect competitors are the mainstream brands such as Maxwell House, Folgers. These competitors either come from large companies or even the small single-unit independently owned coffeehouses are compete for the same categories of customers and resources.[1] Besides, high competitive rivalry is also caused by low switching costs. The customers can freely switch from one coffee brand to the other even if some companies can create customer loyalty. Moreover, high level of competition also on account of low levels of product differentiation. Usually, customers can hardly tell the differences between brands, many coffeehouses or coffee retailers have similar menus or products.
Threat of New Entrants
Medium/Low
Peet’s coffee and tea have many distribution channels. The outside specialty coffee companies have difficulties accessing to these distribution channels, as well as selecting as high quality products as Peet’s. However, Peet’s most retail stores locate in California, Colorado, Illinois, Massachusetts, Oregon and Washington States. [1]Even though it has already occupied most favorable locations in large metropolitan area in their current locations. Peet’s still lose many customers outside of these states. New Entrants have opportunities to expand their business, but still have to face the large competitors such as Starbucks. Additionally, current competitors have more mature technology and experience involved in specialty coffee production which increases the barriers to new entrants.
Threat of Substitute
Medium/Low
Caffeinated drinks are primarily coffee, tea, soft drinks and energy drinks. Since Peet’s coffee and tea focuses its business on retailing coffee and tea, the main substitute products pose a potential threat to the specialty coffee industry are caffeinated soft drinks and energy drink, which offered by the company such as Pepsi and Coca-Cola. However, coffee has gradually gained the consumer preference over soft drinks because health concerns associated with carbonated soft drinks. New evidence also shows that coffee is relative health alternative. Therefore, these substitute products poses a little threats to coffee industry.
Buyer Power
Medium
The primary buyer in the specialty coffee industry remain individual consumers, who have trouble purchasing large volumes to the total sales. Loss of these individual buyers does not pose any significant effects on Peet’s business. The price is still important to Peet’s, and yet once the costumer loyalty has already been built up, individual consumers are willing to pay extra cents for good quality of Peet’s coffee. Therefore, buyers are less sensitive to price fluctuations, and give the providers in the industry more control power over pricing that will decrease the bargaining power of buyers. On the other hand, the expansion of the specialty coffee industry created a wider array of competitors who offered high quality specialty coffee. This made it much harder for the players in the specialty coffee industry to differentiate themselves through the quality and turned that into the industry standard. In addition to the increasing quality standardization, which specialty coffee has undergone, the buyers face no switching costs, and have an enormous selection of retailers from whom they can buy. [13]
Supplier Power
Medium
As the coffee industry grows, more companies and fast food restaurants that have wide-array of products, are demanding as much coffee bean as the coffee retailer from the farmers. The specialty coffee retailer becomes less important to its suppliers since the farms are less constrained by the specialty coffee industry with other customers to supply. Besides, as the fierce competitive in the industry, many specialty coffee retailers need their distinguishing products with superior quality. Peets coffee and tea purchase only high-quality Arabica coffee beans, which are considered superior to beans traded in the commodity market. [1]For those companies that produce high quality products can be more successful than their competitors. Therefore, coffee bean’s supply becomes a determinative input for the company, such as Peets coffee and tea, which increase the bargaining power of suppliers. Peets coffee and tea built a long term and stable relationships with coffee supplier. As a result of the company’s good reputation that has been built over 40 years, the coffee beans’ suppliers may not give up the contracts with Peets coffee and tea. By creating switching costs for coffee supplier, if they choose to supply their products to other different companies. As a matter of that, Peets has diminished their ability to switch one buyer to another, which decrease their bargaining power.[13]
Competition
Retail
Specialty
- Starbucks (SBUX)
- Dunkin' Donuts
- Seattle's Best - subsidiary of Starbucks
- Green Mountain Coffee Roasters (GMCR)
- Farmer Brothers Company (FARM)
- Coffee Holding (JVA)
SWOT Analysis
Strengths
- Vertical Integration, allowing Peet's to control all aspects of the supply chain from raw materials, production, and shipping.
- Loyal customer base who call themselves peetniks, which come from their niche market of specialty coffee drinkers.
- Peets has no long-term debt so expansion efforts are paid through cash and marketable securities.
- A wide product line of coffee, beverages, tea and pastries .
- Differentiating its coffees from others, in a very competitive coffee retail market.
- Value of the Peet’s experience.
- Strong emphasis on social responsibility which attracts customers who share a similar position in social responsibility.
Weaknesses
- Of Peets 192 retail stores 162 of them are located in California, which has the highest levels of unemployment in the country.
- The specialty coffee market is highly competitive with Starbucks controlling the biggest market share.
- Peet's only has one roasting facility so if something were to happen that stopped or slowed production, the entire supply chain could be affected.
- Relatively unknown brand name compared to major national coffee chains like Starbucks and Dunkin Donuts.
- Much smaller financial and marketing resources than main competitors.
Opportunities
- Forecasters show strong growth in the gourmet coffee industry through 2012.
- Peet's has large growth opportunity in all segments of their business especially in the grocery store sector and geographical expansion across the U.S. considering they are in only 6 states.
- Talks of Peet's Acquire Diedrich (DDRX) would be a large addition to the specialty revenue segment, because DDRX’s entire business is in the wholesale industry.
- Replace Starbucks as the premium specialty coffee provider.
Threats
- They are extremely dependent on a single product, specialty coffee. A decrease in demand for specialty coffee could hurt Peet's significantly.
- Peet's could be affected by volatile bean prices, increasing their cost of goods sold for.
- Peets doesn't have a patent on their roasting methods, so competitors could steal there process and Peet's signature flavor. This could be detrimental to Peet’s competitive position and market share.
- Another threat facing Peet's as most consumer businesses is an economic downturn that would lower demand for luxury items such as expensive coffee.
- Also Peet's would be affected if major coffee company's started to producing their own premium coffee in the wholesale channel.
References
- ↑ 1.0 1.1 1.2 1.3 1.4 1.5 1.6 Peet's Coffee & Tea 2010 10-K
- ↑ Peet's Coffee & Tea, Inc., Google Finance
- ↑ "Operating Margin" - Investopedia
- ↑ "Days of Sales Inventory" - Investopedia
- ↑ "Days Sales Outstanding" - Investopedia
- ↑ "Days Payable Outstanding" - Investopedia
- ↑ "Cash Conversion Cycle" - Investopedia
- ↑ 8.0 8.1 Peet's Coffee & Tea - Investor Presentation
- ↑ "Demographics"
- ↑ "Annual Report"
- ↑ "Philosophies"
- ↑ "Daily Finance"
- ↑ 13.0 13.1 Starbucks a strategy analysis
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