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Toronto Firm to Acquire Diedrich Coffee : Merger: The O.C. chain will be combined with smaller Arizona-based Coffee Plantation. More stores are planned.

October 27, 1994|JOHN O'DELL | TIMES STAFF WRITER

COSTA MESA — As part of a push into the Southwest, Canada's largest chain of gourmet coffeehouses agreed Wednesday to acquire Orange County's Diedrich Coffee.

Second Cup Ltd., a Toronto-area franchiser of 200 Canadian coffeehouses, said it will pay an estimated $5.5 million in cash and stock to merge Diedrich with its first U.S. acquisition: the five-store Coffee Plantation chain that serves the Phoenix area.

Diedrich was founded by Carl Diedrich, a German-born Guatemala coffee grower who came to the United States in 1972. The company opened its first coffeehouse that same year in Costa Mesa to augment its gourmet coffee bean retailing business.

Diedrich expanded into gourmet coffee shops in the mid-1980s and has added seven stores since then. Its latest shop, which opened earlier this month, is an espresso bar in the lobby of Children's Hospital of Orange County.

Michael Bregman, Second Cup's chairman and chief executive officer, said the combined Diedrich-Coffee Plantation operation expects to open about a dozen more stores in California, Texas and Arizona by June and at least 20 more in the southwestern United States by mid-1996. The stores will keep the Diedrich and Coffee Plantation names.

The deal with Diedrich, expected to close next month, keeps Second Cup firmly in place as North America's second-largest gourmet coffee chain behind Seattle-based Starbucks Coffee Inc., which has nearly 450 stores across the United States and in some Canadian markets, including Toronto.

Increasingly in the past five years, both aging baby boomers and their twentysomething offspring have begun frequenting so-called coffee bars for both the specially blended beverages and the ambience. The increasing popularity of gourmet coffeehouses, in fact, has turned the industry into one of the fastest growing in the nation.

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Publicly traded Starbucks, for example, will sell about $200 million worth of coffee drinks, coffee beans and accouterments this year, up from $165 million in its fiscal 1993. The company began selling its stock to the public in June, 1992, at $10.75 a share. In Wednesday's trading on the Nasdaq market, the stock closed at $25 a share, up 62 1/2 cents.

Second Cup reported revenue of $64.5 million for its latest fiscal year. The 18-year-old company's stock, traded on the Toronto Stock Exchange, has been selling recently in a range of $5.25 to $5.50 a share.

There will be about 10,000 gourmet coffeehouses in the United States by 1999, according to projections by the Specialty Coffee Assn. of America, a trade group. That is up astronomically from only 200 in 1989.

Starbucks officials would not comment Wednesday on Second Cup's strategy to expand in the United States.

Bregman, however, said his company doesn't consider Starbucks' presence in most major U.S. markets to be a significant challenge.

"This is an immature industry, and the competition comes from a lot of small operations. And, frankly, it has been rare so far for the presence of a competitor nearby to affect our sales," he said.

"There is a huge potential for growth as coffee drinkers become more discriminating," he said. "And as the market becomes more and more crowded, the prize will go to those who keep their customers completely satisfied. And you don't have to be a giant chain to do that."

Bregman said Second Cup views the U.S. Southwest as "a tremendous opportunity for us to grow."

The company will continue using the Diedrich and Coffee Plantation names outside Canada to capitalize on the two chains' reputations, he said, given that Second Cup is an unfamiliar name to most U.S. consumers.

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Diedrich's eight stores are all in Orange County, and the family-owned company is reputed to be one of the most profitable coffeehouse operators in the area. Its annual sales, however, are modest compared to those of giant Starbucks: They have yet to top $10 million.

The typical Diedrich store is about 1,500 square feet and features a wide menu of coffee drinks. The coffee is brewed from beans roasted by the company in machines built by an Idaho firm owned by a member of the Diedrich family.

Diedrich also sells coffee makers, espresso machines and other equipment.

The five Coffee Plantation stores are larger, including two super shops of more than 3,500 square feet that bring in more than $2 million in annual revenue each. Bregman said the stores, which seat up to 300 at a time, have the highest volumes in the industry.

Both chains are also beginning to experiment with smaller stores suited for airports, office lobbies and other places where space is at a premium.

Steven Lupinacci, chief executive of Diedrich, said the merger of the two companies will enable them to share management expertise as they expand. He said Diedrich will continue operating its stores under its own name and will function as a separate company with headquarters in Orange County.

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