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California and the West

Diedrich to Sell Cafes to Rival

Starbucks agrees to buy 40 outlets, allowing the Irvine company to focus on its fast-growing wholesale business.

September 15, 2006|Jerry Hirsch | Times Staff Writer

Longtime Orange County fixture Diedrich Coffee Inc. said Thursday that it would sell its company-owned stores to Starbucks Corp. to focus on wholesaling coffee to restaurant chains, specialty stores and offices.

The Irvine-based company will get $13.5 million for 40 Diedrich and Coffee People cafes. Most of the Diedrich outlets are in Orange and Los Angeles counties, and the Coffee People stores are in the Portland, Ore., area.

For The Record
Los Angeles Times Tuesday September 19, 2006 Home Edition Main News Part A Page 2 National Desk 0 inches; 29 words Type of Material: Correction
Diedrich Coffee: A Business section article Friday about Diedrich Coffee Inc.'s sale of company-owned stores to Starbucks Corp. said founder Carl Diedrich died in 1981. He died in 2001.

Starbucks plans to convert the coffeehouses to its own brand, but the Diedrich name won't disappear at the retail level. Diedrich will continue to franchise and supply coffeehouses under its Gloria Jean's and Diedrich Coffee brands.

Diedrich Chief Executive Steve Coffey said the company's wholesale business was growing at a 50% rate and accounted for nearly 80% of its coffee sales. Restaurant customers include Marie Callender's, Ruby's and Islands locations in California.

"We are well positioned to be a strong competitor with the potential for greater growth and profitability in the future," Coffey said in a statement.

Before the news, Diedrich's shares rose 95 cents, or 23%, to close at $5.05. The company has not issued a financial statement since its third fiscal quarter, which ended in March, when it posted a loss of $1.7 million on $14 million in revenue.

Despite many growth initiatives, Diedrich has always been a small player in an industry dominated by Starbucks.

Diedrich began operations in California in 1972 as an importer of roasted coffee grown on a family-owned plantation in Guatemala. Carl Diedrich, who died at age 86 in 1981, opened the first Diedrich store in Newport Beach almost 25 years ago. His family developed the business into a chain that went public in 1996.

In 1999 the company hired former Taco Bell executive John Martin to run the business. Martin embarked on a buying spree, snapping up such chains as Coffee Plantation, Coffee People and Gloria Jean's Coffees. Those acquisitions boosted Diedrich's retail outlets to nearly 400, the majority of which were franchised.

But the company was unable to manage such a large network and has steadily lost money and shrunk. It has 153 Diedrich and Gloria Jean's franchises now.

Martin Diedrich, one of Carl's sons, left the company two years ago and now operates Kean Coffee, a cafe and roasting house in Newport Beach.

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