DUNKIN COFFEE SALES COULD HURT MCDONALDS AND STARBUCKS

Story first appeared on WSJ.com.
Dunkin' Donuts runs on coffee, not doughnuts. As parent Dunkin' Brands prepares to go public and expand beyond its Northeastern roots, expect the coffee wars to heat up.
On Tuesday evening, the initial public offering of Dunkin’Brands Group Inc. was priced at $19 a share, raising $427.5 million. The franchise-centric company, which houses both the Dunkin' Donuts and Baskin-Robbins chains, plans to use the funds to pay down debt and move beyond its Northeastern roots. Though Dunkin' doesn't have the same level of brand recognition as McDonald's or Starbucks Corp., the company also hasn't penetrated the western U.S. or other parts of the country as deeply, giving it more opportunity to expand. And it's there that it hopes to give both rivals a run for their money among caffeine cravers.
Dunkin' Brands is owned by private-equity firms Bain Capital Partners LLC, Carlyle Group and Thomas H. Lee Partners, which bought it in 2006 for $2.4 billion. They will maintain a controlling interest; about 20% of the shares outstanding are being floated.
Like many companies in private-equity hands, Dunkin' carries a hefty debt load. In the first quarter, 75% of Dunkin's operating earnings were wiped away by interest payments. The load was made heavier after owners in November borrowed more to pay themselves a $500 million dividend. Even post-IPO, Dunkin' will carry about $1.5 billion of debt, according to the prospectus. But it also has more flexibility to expand since all of its stores are franchises.
A company once known for its commercials showcasing a sleepy baker waking up to make fresh doughnuts now advertises its coffee with "America Runs on Dunkin'" and "What Are You Drinkin'?" slogans. Its orange-and-pink signs feature a coffee cup next to its name. It sells more servings of hot regular coffee and iced coffee than any other fast-food chain in the U.S., including Starbucks, according to NPD market research data. In New England and New York, Dunkin' says it has 57% of the fast-food coffee market. Coffee and other drinks represent 60% of the Dunkin' Donuts chain's U.S. sales, according to the prospectus.
At McDonald's, which kicked off the coffee war three years ago when it began rolling out specialty coffees nationwide, about 6% of U.S. revenue now comes from coffee drinks.
Starbucks could lose customers to Dunkin' Donuts, but competition is likely to be more fierce between Dunkin' and McDonald's due to the two chains' similar pricing. As Dunkin' expands into more of McDonald's territory, the two chains are likely to engage in price wars. Stepped-up competition also may force Dunkin' to expand its menu beyond breakfast, the way Starbucks recently has with snacks and "bistro boxes" containing lunch items.
Dunkin' Donuts is a munchkin next to McDonald's, which has more than 14,000 restaurants in the U.S. and had $24 billion in 2010 revenue. By comparison, Dunkin Donuts products are sold in 6,800 locations in the U.S., including supermarkets as well as its coffee shops, and Dunkin' Brands' 2010 revenue totaled $577 million.
The doughnut chain plans to open as many as 250 more shops in the U.S. in the next two years. The company says in its prospectus that its expansion strategy has the potential, over approximately the next 20 years, to more than double their current U.S. footprint and reach a total of 15,000 points of distribution in the U.S., including grocery stores.
A Dunkin' spokeswoman declined to comment, citing a pre-IPO quiet period.
The Dunkin IPO is one of the most anticipated offerings of 2011. Dunkin' Donuts demonstrated the strength of its business model when it suffered only modest sales declines during the recession and recovered in 2010 with growth of 2.3%.
Dunkin' boasts in its prospectus that it had 45 consecutive quarters of positive comparable store-sales growth until the economic meltdown pulled it into negative territory in 2008 and 2009. Though same-store sales are in positive territory now, the level is below 3%—half the level seen in 2004 and 2005.
Its same-store sales growth also is lower than the 7% seen last year at Starbucks, which was hit harder in the recession and has fought to come back by closing under-performing stores, boosting the perks of its loyalty-card program and introducing new varieties of its Via instant coffee.

Starbucks Leaves Stores Unfixed as McDonald’s Perks Up

Bloomberg

Less is more at Starbucks Corp.

The Seattle-based coffee chain is betting it can increase sales by spending the same amount of money as usual, about $250 million a year, to renovate only about half the approximately 1,900 shops due for a facelift in 2011.

Emphasizing stores in precincts like Manhattan’s Soho district, and employing such eco-friendly touches as reclaimed furniture, will lift the whole brand, Arthur Rubinfeld, Starbucks’ global development chief, said in an interview.

Starbucks is trying to caffeinate sales growth, which may have topped 10 percent in the most recent quarter for the first time since March 2008, while paying investors dividends. The strategy risks alienating customers at the unimproved stores as McDonald’s Corp., now pushing its own coffee drinks, plans to pump $1.2 billion into restaurant renovations this year.

“I have concern over Starbucks setting expectations that don’t get fulfilled by a visit to a typical store,” Julius Dorsey, the president of the Cleveland-based management consultant Dorsey & Co., said in a telephone interview.

Starbucks, led by Chief Executive Officer Howard Schultz, is scheduled to announce its fourth quarter and full-year earnings today. Quarterly sales are projected to rise 14 percent, with adjusted earnings per share increasing 33 percent according to an average of analyst estimates compiled by Bloomberg. The company is also expected to announce a dividend of 13 cents a share, according to a Bloomberg forecast, the third in the company’s history.

Shares Doubled

Starbucks rose 57 cents to $29.67 at 9:30 a.m. New York time on the Nasdaq Stock Market. Before today the shares had advanced 26 percent this year. While that about matches the return for McDonald’s, shares of the world’s largest hamburger chain have more than doubled in five years while Starbucks declined 1.1 percent.

Starbucks refurbishes its stores after five years and then again after 10. Since 2008, the number of stores turning 5 and 10 has doubled and as many as 1,900, or about a quarter of the company’s 8,800 stores, are due for upgrades in 2011. The company has closed about 900 stores since 2008. It declined to say how many 5- or 10-year-old shops were among the closures.

Many of the coffee shops feature the same earth tones and blond wood Starbucks has used since the 1990s.

Rehabbing all of them would cost as much as $475 million. Like other restaurant chains, Starbucks has cut capital spending since the recession. In the past 12 months Starbucks spent about $450 million and used about half for renovations, according to company filings. It will renovate the same number of stores, about 1,000, again in the next year, Chief Financial Officer Troy Alstead said in a July conference call.

Reclaimed Materials

Starbucks hired architect Kambiz Hemati from BCBG Max Azria Group Inc., the Vernon, California-based fashion retailer, to design the new stores. They feature reclaimed materials, low- flow faucets and energy-efficient air conditioning. As the company gradually remodels the rest of its coffee makers, it will borrow from the flagship stores, Hemati said.

Every time Starbucks opens a new location, the company makes sure the media hears about it -- part of a campaign to burnish the overall brand. After a new store opened in Seattle three weeks ago, it was mentioned 357 times in traditional media outlets, according the news tracking firm Vocus. USA Today wrote a story, which began: “The Starbucks of the future arrived today.”

Starbucks Reins in Baristas

The Wall Street Journal

Starbucks Corp. is telling its harried baristas to slow down—which may result in longer lines.

 

 

 

Amid customer complaints that the Seattle-based coffee chain has reduced the fine art of coffee making to a mechanized process with all the romance of an assembly line, Starbucks baristas are being told to stop making multiple drinks at the same time and focus instead on no more than two drinks at a time—starting a second one while finishing the first, according to company documents reviewed recently by The Wall Street Journal.

Baristas are also supposed to steam milk for each drink rather than steaming an entire pitcher to be used for several beverages. Other instructions include rinsing pitchers after each use; staying at the espresso bar instead of moving around; and using only one espresso machine instead of two, according to the documents.

Starbucks says the changes—which it expects to roll out nationwide and across Canada by next month—are part of its ongoing effort to make stores operate more efficiently. But some baristas worry it will create longer lines.

The new methods have "doubled the amount of time it takes to make drinks in some cases," according to Erik Forman, a Starbucks barista in Bloomington, Minn., who says his store began making drinks under the new guidelines last week. Longer lines have resulted, says Mr. Forman, who is a member of the IWW Starbucks Workers Union.

Tyler Swain, a barista in Omaha, Neb., who is also a member of the union, worries how he will keep up with volume if he can only complete one drink at a time. "While I'm blending a frappuccino, it doesn't make sense to stand there and wait for the blender to finish running, because I could be making an iced tea at the same time," he says. His store has yet to adopt the changes.

"As with any new behavior, it will take time for baristas to become comfortable with the new method," said Starbucks spokeswoman Trina Smith.

Starbucks insists the new procedures will eventually hasten the way drinks are made and lead to fresher, hotter drinks. Steaming milk for individual drinks, for example, "ensures the quality of the beverage in taste, temperature and appearance," the company documents state, while focusing on just two drinks at a time "reduces possibility for errors."

When asked whether changes have created longer lines in the test markets, Starbucks spokeswoman Ms. Smith said she didn't have "that level of detail."

The documents acknowledge that customers ordering no-foam lattes may have to wait longer for their drinks, and instructs employees to "let the customer know their beverage will take a little longer and may be out of order due to the time it takes the milk to settle and the foam to rise to the top (approximately 60 seconds)."

Customers have indicated that the quality of espresso drinks at Starbucks is "average" and that the beverages are inconsistently prepared from barista to barista and from store to store, the documents say.

Over the last few years, Starbucks has been applying to the coffee counter the kind of "lean" manufacturing techniques car makers have long used as a way to streamline production, eliminate wasteful activity and speed up service. The company has deployed a "lean team" to study every move its baristas make in order to shave seconds off each order.

That team discovered that many stores kept beans below the counter, leading baristas to waste time bending over to scoop beans, so those stores ended up storing the beans in bins on the top of the counter. To boost the freshness of the coffee and to bring back some of the "theater" that had been lost, the baristas also started grinding beans for each batch of coffee, instead of grinding the day's beans in the morning.

Baristas say it can take anywhere from 30 seconds to a minute to make an espresso-based drink, depending on the complexity of the drink and the barista's skill. In the documents, Starbucks says one of the goals of the new drink-making method is to produce beverages "at a more consistent pace."

The company has made numerous changes to its business amid the economic downturn, including closing underperforming stores, trimming its number of bakery suppliers, boosting the perks of its loyalty-card program and introducing new varieties of its Via instant coffee. The cost-cutting and customer-improvement paid off in the company's last quarter.

Earnings at Starbucks rose 37% while revenue for the quarter ended June 27 increased to $2.61 billion from $2.4 billion in the year-earlier period. Sales at U.S. stores open at least a year rose 9% in the quarter thanks to more customer visits and higher average spending.

At the same time that Starbucks has been on the upswing, it has been grappling with rising costs for raw coffee beans. The coffee and espresso makers recently said it would raise prices on more complex drinks in response.

Nespresso Opens Stores as North American Sales Rise

Bloomberg

 

Nespresso sales in the U.S. and Canada have increased about 50 percent this year, helped by store openings and a new distribution agreement, said Frederic Levy, the head of Nestle’s Nespresso brand in those markets.

The coffee company is opening its 13th sales location in the region tomorrow with a “boutique” in New York’s Soho neighborhood, said Levy, who is president of Nespresso in North America. A shop within a Sur La Table store in Florida will follow next month.

“The new coffee culture is expanding” in the U.S., Levy said today in a telephone interview. “Word of mouth is very strong.”

Nespresso sales reached 2.77 billion Swiss francs ($2.76 billion) worldwide last year, with about 90 percent of the total from Europe. That’s almost 3 percent of Vevey, Switzerland-based Nestle’s revenue. First-half Nespresso sales increased more than 25 percent, Nestle said Aug. 11. The brand is growing even as U.S. consumers have cut spending, according to analysts.

“It may be super-premium, but any consumer can afford to buy the machines and the capsules,” said James Amoroso, a food industry consultant in Walchwil, Switzerland. “It is also a market that is still at the very beginning of its life cycle. Penetration in the U.S. must still be extremely low.”

Nespresso doesn’t plan price increases in the U.S. in 2010, Levy said, adding that the last boost was in early 2008. Futures contracts for Arabica coffee beans have been trading near the highest in almost 13 years.

Crate & Barrel stores began selling Nespresso machines in March, Levy said. The coffee makers range from $149 to $2,500 and the capsules average 55 cents each.

Single-serve machines are responsible for about 7 percent of the global coffee market, according to Nespresso. The brand plans to eventually have 20 to 30 boutiques in the U.S., Levy said.

Starbucks 3Q Profit Rises 37 Percent

Associated Press

Starbucks Corp.'s effort to rebuild itself is taking hold: The world's largest coffee chain said Wednesday that its third-quarter profit rose 37 percent as more customers visited its stores and spent more when they did.

The company sharply increased its dividend but offered a 2011 profit forecast in line with forecasts. And investors, hoping for a rosier outlook, sent shares down in electronic trading after hours.

But Wednesday's results were solid, including a 9 percent increase in the key performance measure of revenue in locations open at least a year.

For the three months that ended in late June, Starbucks earned $207.9 million, or 27 cents per share. That's compared with $151.5 million, or 20 cents per share, a year earlier, when it was stumbling under the weight of over-expansion.

Excluding one-time items, Starbucks earned 29 cents per share, meeting the average forecast of analysts surveyed by Thomson Reuters. Its revenue climbed nearly 9 percent to $2.61 billion, topping analysts' estimate of $2.55 billion.

CFO Troy Alstead said the company was both gaining new customers and getting more frequent visits from coffee lovers during the day as customers bought more of Starbucks' newly customizable Frappuccinos and its instant coffee, called Via.

"A lot of what we've done is bringing in new (customers) and people buying when they weren't before," he said. "It's really driving people back through the doors."

To reinvigorate its business, Starbucks closed hundreds of stores, cut scores of jobs and brought back founder Howard Schultz as CEO in its effort to rebound.

Now, it plans more measured growth and is working to relax its corporatized image by returning to its image as a place where people want to linger for hours sipping coffee. It plans to offer free, unlimited Wi-Fi in all company-run stores; it's letting customers tailor drinks even more, and it's opening stores with more community flavor. It's also focusing on expanding overseas and boosting sales of Starbucks-branded food that is sold in grocery stores.

During the third quarter, U.S. revenue climbed 7 percent, but operating income rose 55 percent to $290.8 million. Overseas revenue rose 15 percent while operation income for that business unit soared 65 percent to $56.8 million.

R.W. Baird analyst David Tarantino called the report "healthy" but said it might disappoint investors who hoped Starbucks would beat Wall Street forecasts.

The coffee maker boosted its forecast for fiscal 2010, saying it expects to earn $1.22 to $1.23 per share, excluding one-time items. It previously forecast adjusted net income of $1.19 to $1.22 per share. Analysts expect adjusted profit of $1.23 per share.

Morningstar analyst R.J. Hottovy said investors were likely hoping for a more robust forecast for fiscal 2011, when Starbucks estimates its adjusted profit will be $1.36 to $1.41 per share. Analysts expect $1.40 per share.

"A lot of people were fixated on fiscal year 2011, and that came in a little lighter than a lot of people were looking for," he said.

'Lingerie Lunchwagon' Serving up Controversy in Hawaii

Hawaii News Now

There are all types of lunchwagons for local plate lunches, shrimp and Hawaiian food. But there is one in Kalihi that is stirring up some controversy with its lattes served by ladies in lingerie. Is it legal to serve up espresso in nothing but a teddy, panties and a smile?

Looking to go to the wild side? Then head to the corner of Puuhale Road and Dillingham Boulevard. Just across from OCCC you'll find the Wild Bean Espresso truck.

"And to look at girls dressed so nice, why not?" said barista Natasha.

Why not, indeed. The coffee and smoothie truck hopes to improve your day with your beverage of choice all served up in lingerie.

"Yeah I feel comfortable. It's sexy" said Natasha.

Open for about six weeks it attracts primarily male customers. None would talk to us on camera, but some say they stopped because they saw it passing by. Others say it's a great way to start the day.

"It was crazy already. I've been here for three hours. But it's really crazy for all of us."

On the menu all kinds of smoothies with sexy names, but this reporter decided to try something a little more traditional, a white chocolate mocha latte. So how does it taste at the Wild Bean Espresso? Not too bad. You can't really complain about the coffee itself. But there have been complaints about the clothes.

"This is right up in your face!" said Utufaasili McDermott.

McDermott is the mother of eight and has attended St. Anthony's Church for years.

"Do you have to wear that? Do you have to wear a thong and see through clothing so people can buy your coffee?"

McDermott believes the Wild Bean should be moved elsewhere, not two blocks away from Puuhale Elementary and a block from St. Anthony's Church and School.

"Is this the appropriate place to have your business? Where you know school will be starting soon and it's highly congested with children?" said McDermott.

Whether it's appropriate is debatable.

"Who wears a teddy in broad daylight? I don't wear a teddy in broad daylight."

As far as its legality, the State Department of Health says they don't judge on the morality of the establishment. As long as their clothes are clean and not interfering with the products they are making, or causing any safety hazards while working with hot coffee makers, they are permitted to operate.

Chicagoan Takes Title as World's Best Barista

Chicago Sun-Times

Four years ago, Michael Phillips was packing coffee bags in Chicago's Intelligentsia Coffee & Tea production facility and thinking he wanted a career as a coffee roaster. Today, he's the world champion coffee barista -- an honor bestowed on him late last month at the 11th annual world barista championships in London.

Back home now in Chicago, his victory still surprises him.

"I really didn't think my chances were that good because the competition from countries like Denmark and Ireland was strong," said the new world champ. He first began to develop an interest in good coffee while in college in Michigan's Upper Peninsula and later in Minneapolis, where he moved after college and developed a serious love affair with espresso machines.

Phillips bested baristas from 52 other countries to win the 2010 world title and become the first American to take home the trophy.

Phillips isn't new to the world specialty coffee-making stage. He was the U.S. barista champion for the last two years running, and he wound up third in the world competition in Atlanta last year.

This time around, Phillips wowed a panel of international judges with a carefully choreographed 15-minute coffee-making finale set to music of his own choosing, which even included a couple of peppy ABBA songs.

"I like music that puts me in a positive frame of mind," explained Phillips, who was required to prepare a cappuccino and an espresso for each judge, plus a specialty drink he created that was actually three different coffee concoctions made using beans processed in three different ways with three different taste profiles. The specialty drink that helped Phillips win the world title doesn't have a name because he prefers not to name his coffee drinks.

Phillips had to overcome one big obstacle he hadn't counted on to claim the 2010 world barista title. Shortly after he won the U.S. title a second time in April, he broke his pinkie finger playing kickball and was in an arm cast up to his elbow for 1½ months. After the cast was removed, Phillips spent most of the short time left before the world championships just getting his fingers back in working order and learning a new job at Intelligentsia, where he is the assistant director of education who manages trainers at the company's coffee maker bars here and in Los Angeles.

So what's next for the world's best maker of specialty coffee drinks?

"I have a job I love," said Phillips, "but I'm also going to be traveling a lot as a coffee ambassador and learning from some of the best people in the business."

Starbucks Targets Regular Joes with Second Coffee Brand

The Wall Street Journal

Firm to Offer Second Coffee Brand—Its Seattle's Best—in Fast-Food Outlets, Supermarkets, Machines

SEATTLE—In a counterattack against its lower-priced fast-food rivals, Starbucks Corp. plans to roll out a second coffee brand.

By autumn, Seattle's Best Coffee—a former competitor Starbucks acquired seven years ago—will be sold in about 30,000 fast-food outlets, supermarkets and coffee houses, the company said. Currently, Seattle's Best coffee and coffee beans are sold in the chain's own shops inside nearly 500 Borders bookstores, as well as in about 2,500 supermarkets.

Eventually, Starbucks said, the brand will also be sold in convenience stores, drive-through kiosks, coffee carts, vending machines and mobile trucks. The company has already reached deals to sell Seattle's Best at Burger King and Subway restaurants and at AMC Entertainment Inc. movie theaters.

The new push by Starbucks is a response to the invasion of the specialty-coffee market by McDonald's Corp., Dunkin' Donuts and other fast-food chains, which offer espresso-based drinks at lower prices than Starbucks.

Especially during the recession, the incursion appeared to hurt Starbucks, which suffered a decline in same-store sales and closed hundreds of stores. In recent years, as McDonald's produced big sales gains inside existing stores, Starbucks has struggled to expand beyond a limited menu and a largely morning clientele.

In a presentation last week to the Starbucks board, executives unveiled a new logo for Seattle's Best, along with a new motto: "Great Coffee Everywhere." The motto reflects the Starbucks theory that the success of McDonald's and others in selling coffee has created a fresh opportunity to sell a mass-market brand.

In the past three years, the percentage of Americans drinking premium coffee has jumped to 35% from 29%, says Tom Ehlers, a veteran Starbucks executive who is now vice president of retail for the Seattle's Best unit. "Regular people have found their way to great coffee."

Mr. Ehlers likened the Seattle's Best venture to Old Navy, the Gap Inc. discount chain that now rivals the Gap chain in size.

The new strategy carries risks. Starbucks owns and operates its coffee shops. But despite the challenge of maintaining quality control, it will seek to expand the Seattle's Best coffee-house chain through franchisees operating stores as large as 1,400 square feet and as small as 200 square feet.

Associating Starbucks with a product sold from vending machines could also damage the brand's upscale image. And it could cannibalize Starbucks customers. "I've always preferred Seattle's Best to Starbucks, which tastes burnt to me," says John Joyce, a Chicago construction contractor.

But Seattle's Best is intended to appeal to just this sort of Starbucks critic. For those who find Starbucks coffee too strong-tasting, Seattle's Best is promoting the "smoothness" of its blend in ads and promotions. For those turned off by the prices and ambiance at Starbucks stores, Seattle's Best is touted as "unpretentious."

And Starbucks says its risks are small because it has barely 4% of the U.S. market for brewed coffee, and Seattle's Best's potential rests with consumers of mass-market brands. "The people who always drank a cup of Joe still want just a cup of Joe," Mr. Ehlers says. "But nowadays they want it to be good."

David Palmer, an analyst who follows Starbucks for UBS Securities, believes the strategy makes sense. He notes that no national coffee brand can be found across the U.S. convenience-store industry, which operates more than 100,000 outlets. By contrast, McDonald's has about 30,000 restaurants in the U.S.

Pricing will vary widely. Like Coca-Cola, which can cost $5 a serving at a swanky resort restaurant or a dollar in a vending machine, the price of Seattle's Best will depend on where it's sold. In grocery stores, Seattle's Best beans will cost consumers less than Starbucks-brand beans but more than conventional brands, Starbucks executives say.

Seattle's Best helped pioneer the specialty coffee-house concept when it opened its first store in Seattle 40 years ago. But like other coffee-house chains, Seattle's Best failed to keep pace with Starbucks, which quickly grew into the industry's largest player. When Starbucks acquired it in 2003, Seattle's Best had about 50 stores and a sizable supermarket presence, particularly in flavored beans, a lucrative category that Starbucks never entered.

Perhaps the most radical feature of the Starbucks strategy calls for selling Seattle's Best from vending machines. Vending-machine coffee has long been regarded as a last resort, often found in factory cafeterias miles from the nearest fresh brew. But Seattle's Best engineers have developed a coffee-making machine that Starbucks predicts will improve that image.

Critics predicted trouble when Starbucks entered the maligned instant-coffee market last year, executives note. "In the early days of Via, there were many disbelievers," says Michelle Gass, who worked on the Via launch. She is now president of Seattle's Best.

Business In Afghanistan: Reviving Old Pastimes

BBC News

Residents of Kandahar have been taking part in a chess tournament in an attempt to revive one of the city's former cultural pastimes.

Under the Taliban, chess was forbidden, but the city's older residents hope this tournament will reintroduce the game to a younger generation.

The event was held at the Kandahar Coffee Shop which also hosts other cultural activities. While the java brews on coffee and espresso makers, the battles are waged on table top chess sets.

Kandahar is a key battleground for the Taliban insurgency in Afghanistan.

But Rahim Akrami, a local journalist in the city who watched the tournament, says it is important for younger people to rediscover this once forbidden activity.

"The tournament re-introduced the game to Kandahar since it has been forgotten for the last eight or so years," he told the BBC's World Today programme.

'Enlightening' tournament

Aman Ullah, a member of the Kandahar Students Organisation, was one of those playing in the tournament.

Although he was knocked out in the second round, he is happy that the tournament is taking place.

"It is very important for us to have something recreational to do that enlightens the mind and is fun as well," he told the BBC World Service.

"There are people who do not know that chess exists in this world which is amazing to me.

"Now there are people who are asking questions about the game and who want to learn, so I see it as a very positive change for Kandahar, and for the game as well."

Of the 30 players entered, 10 were eliminated after the first round, and then six players became members of a new Kandahar chess team.

'Battle with minds'

The Kandahar Coffee Shop is a place where young people meet to drink coffee and use the internet.

A poster saying: 'It's better to battle with minds than fists and bullets' lines the wall.

Mohammed Naseem, the owner of the Kandahar coffee shop, says he wants to provide a place for young people in the city, and he would rather see wars fought with chess sets than with guns.

"I am trying to create an atmosphere where the youth can hang out and learn something," he says.

"The Kandahar Coffee Shop is the only one in the south west region of its kind...it has various activities including a snooker club, chess club, youth club and a culture club.

We have a separate area for women in the coffee shop where they can come and enjoy a burger and go on the internet.

We are trying to show the world that this kind of thing can be done."

Peet's Coffee Raises Offer for Diedrich

Wall Street Journal

Peet's Coffee & Tea Inc. raised its offer for Diedrich Coffee Inc. to $32 a share in cash and stock, or $265 million, after rival Green Mountain Coffee Roasters Inc. proposed buying the company for $30 a share.

Diedrich stock soared 27% to $32.95 in morning trading Monday, indicating investors think bidding on the company may go higher.

The Green Mountain offer was first announced Monday by Peet and Diedrich in separate releases. Diedrich said its board is reviewing both proposals.

Earlier this month, Peet's agreed to pay $26 a share for Diedrich, in a deal that would allow Peet's to enter the rapidly growing market for single-cup packets used in coffee and espresso makers.

In the new proposal, Peet's would pay a combination of $19.80 a share in cash and 0.321 share of Peet's for each share of Diedrich common stock. Green Mountain's offer is all cash.

"We are confident that the Diedrich board will find our revised proposal to be superior for Diedrich's shareholders," Peet's Chief Executive Patrick O'Dea said Monday.

"We believe our offer provides Diedrich shareholders with a substantial all-cash premium as well as greater value and greater certainty than the cash and stock proposal from Peet's," said Green Mountain CEO Lawrence J. Blanford said Monday. Green Mountain would finance its bid with cash on hand and existing bank lines of credit.

Fast-Food Coffee Gaining Ground During Recession
AP Story Posted at Forbes

A Stifel Nicolaus & Co. analyst said Friday fast-food and other quick-service operators will likely continue to take customers away from specialty coffee retailers as consumers search for more affordable options.

Analyst Steve West said in a note to investors that Peet's Coffee & Tea Inc., Dunkin' Donuts and McDonald's Corp. could be big winners in the "coffee wars" through 2009.

"Just as Starbucks is trying to turn around its U.S. business ... McDonald's is rolling out McCafe, arguably one its largest national initiatives in company history," he said.

McDonald's has now added new espresso-based drinks to more than half of its U.S. restaurants. The drinks are slightly cheaper than those at Starbucks Corp., which has struggled lately with slow U.S. same-store sales, or sales at stores open at least a year.

To boost sales and profits, Starbucks has been cutting jobs, closing under-performing stores and offering customers more deals.

West also said he expects more consumers will brew their coffee at home using espresso coffee makers and other inexpensive home appliances - a trend that could help Peet's and the privately owned Dunkin' chain.

West noted that in February, both Dunkin' and Peet's saw sales grow in their grocery business while Starbucks Corp. reported a "significant decline" in year-over-year sales for the month.

Starbucks Seeks More Frugal Image
As Originally Posted to The Wall Street Journal

SEATTLE -- Starbucks Corp. Chief Executive Howard Schultz said the coffee chain would combat the notion that its drinks are expensive, as he outlined plans to weather an economic downturn.

At the company's annual investors meeting Wednesday in Seattle, Mr. Schultz railed against the notion that Starbucks -- where the menu includes beverages that can cost upwards of $4 -- is "the poster child for excess," pointing out that half of the beverages Starbucks sells cost less than $3.

"Starbucks has got to demonstrate to our customers and the marketplace that we can still be a premium brand and create a premium experience and at the same time create a platform for value," said Mr. Schultz.

He also said new efforts such as the company's Via instant coffee and its $3.95 pairings of breakfast sandwiches with drinks have received a good response.

Mr. Schultz spoke to a nearly packed auditorium in an event markedly more subdued than those in previous years that often included a big musical act and baristas on stage. Most of the efforts Mr. Schultz discussed had been previously announced, compared with past years when he used the meeting to introduce big new ideas.

After years of rapid growth, Starbucks is now focused on cutting costs, making its operations more efficient and introducing new products that might help increase sales at its existing outlets. Mr. Schultz said the company needs to adapt to a shift in behavior that has customers coming to its stores less frequently and brewing coffee at home.

He indicated the company will use more television advertising after years of using very little. He didn't address whether Starbucks's planned campaign is in response to plans by McDonald's Corp. to start advertising its new line of espresso drinks this year, but he said "it is not true that customers are going to fast-food restaurants" instead of buying their coffee at Starbucks.

The company also plans to reintroduce a promotion from last summer that offers some drinks for $2 to patrons who had made a purchase at a store that morning.

During questions from investors, one Starbucks executive said the company is working on a single-cup solution to be able to quickly brew decaffeinated coffee after recently taking decaf out of the regular afternoon brewing rotation at many outlets.

Bosses: Keep a Happy Brood With Well-Brewed Java

The economic meltdown is on everyone's mind these days. Employers are cutting corners and eliminating frills. Restaurants and catering services nationwide reported a significant year-on-year drop-off in private office parties during the 2008-2009 holiday season, and more employers are paying attention to how much they are spending on plastic-ware, paper plates, and other more expensive office perks.

But just because you're becoming more budget-conscious around the office, that's no reason to skimp on the most traditional office-perk of all: a piping hot cuppa Joe. If your employees are coffee drinkers, they look forward to that first cup every morning. Coffee wakes them up and keeps them alert during that late afternoon slump time. And if they don't get their morning coffee - well, let's just say you don't want a mutiny on your hands from a group of cranky Spork-wielding java addicts (Those things can put an eye out). Seen from this perspective, coffee is money well spent and brings good ROI.

In fact, if anything, you may want to trim those other costs and sink a little extra into improving your office coffee experience. Those lunchtime trips to professional coffee establishments are expensive, and your employees are becoming more cost-conscious just like you are.

Take a look at your current coffee maker -- you know, that black thing on the corner of the counter in the staff lounge sitting in a pile of grounds and bread crumbs and covered with little brown stains, replete with Pyrex decanter whose insides are filmed with an un-scrubbable layer of what we think is limestone. Bite the bullet and get some new brewing equipment. It is a relatively low-cost investment (Remember the ROI? Remember the Sporks?). We recommend going for not only a new coffee maker, but in order to replace your workers' expensive coffee-bar habits consider a professional espresso coffee maker as well.

Just remember this -- holiday parties come once a season, but coffee is all-year-long. We think a little extra in this department will help you maintain your image as a big spender despite the fact that we just ran out of Sporks.

Gowing Better Decaf

From Madagascar to Costa Rica, farmers, scientists and multinational companies have been racing to deliver an elusive product -- a gourmet coffee bean that's naturally low in caffeine.

Coffee companies have been spending millions of dollars identifying, breeding and, in some cases, genetically manipulating promising coffee varietals. They've rooted through seed banks, assembled teams of agronomists and tasted countless cups of coffee, all in pursuit of what some people call the industry's holy grail, a bean that produces a great-tasting cup of "low-caf."

Italian roaster Illycaffè introduced Idillyum, its low-caffeine bean, in Italy in early October and plans to offer limited quantities in the United States starting Monday. The UCC Ueshima Coffee Co., one of Japan's biggest roasters, has begun selling limited supplies of its low-caf Bourbon Pointu beans in Japan for about $300 a pound. Brazilian grower Daterra Coffee is selling its Opus I Exotic at a handful of coffee shops around the U.S. as well as to several wholesalers. And the Costa Rica-based Doka Estate, which is owned by the Vargas coffee family, plans to start exporting its own low-caf beans next year for roasting and taste tests, with commercial sales expected to begin in the U.S. in 2011. The company's clients include American chains such as Caribou Coffee and Peet's Coffee & Tea. Peets makes tea such as Black Tea, Tea Gifts, Green Tea, Decaf Tea, Herbal Tea and Chai Tea.

We organized a blind tasting of coffee made from three new naturally low-caffeine beans: Daterra's Opus I Exotic; UCC Ueshima's Bourbon Pointu; and Illy's Idillyum espresso. For comparison, we also included a full-caffeine coffee, Intelligentsia's Los Inmortales, as well as the decaf house blend from Stumptown Coffee Roasters, based in Portland, Ore. , in the tasting.

Our tasters were Dan Griffin, of New York coffee consultancy Tamp Tamp; Kevin Mahan, managing partner of Gramercy Tavern in New York; Oren Bloostein, owner of New York specialty coffee roaster and retailer Oren's Daily Roast; and Steve Colten, a coffee merchant and former president of the Specialty Coffee Association of America.

The new low-cafs were in for a challenge. All four panelists said that as a rule they prefer drinking regular coffee. Mr. Griffin says he routinely tells his café clients not to serve decaf at all. "I drink coffee for the complexity, for the sweetness, for the beauty of the flavor," he says. "With the decaf, it's just not there."

To minimize some of the variables that could affect the quality and taste, we had four of the coffees roasted on the same day, though this was done by four different roasters, and prepared the same way: the beans were ground before the tasting and steep-brewed. The fifth coffee, Illy's Idillyum espresso, had been roasted at an earlier date and was packaged in a pre-ground espresso pod. It was prepared in the Illy coffee maker for which it was designed.

Here are the results, obtained after much slurping and spitting.

Bourbon Pointu

All four tasters chose UCC Ueshima's low-caffeine coffee as the best cup, although their enthusiasm for it varied. Mr. Colten dubbed it "fabulous," praising its body and maintenance of flavor from hot to lukewarm. Mr. Mahan detected a note of canned pineapple but liked the coffee's acidity. Mr. Griffin thought the coffee was "out of balance" but said, "if this is a decaf, they did a pretty good job." Mr. Bloostein faulted the coffee for having "little complexity" but said it had the best acidity.

Opus I Exotic

Daterra's decaf got the least favorable ratings. Mr. Bloostein noted a "soapy" aroma and a slightly nutty and sour taste. Mr. Colten said it was inconsistent as it cooled and deemed it a "very ordinary" coffee -- "certainly not a specialty." Mr. Mahan tasted notes of seaweed and spinach as the coffee cooled, and said the aroma reminded him of a bowl of Chex cereal. Mr. Griffin called the coffee "not balanced" and "kind of flat." But after learning its provenance, both he and Mr. Colten said they had tasted it before and that it had made a decent cup of coffee.

Idillyum

Illy's decaf received mixed reviews. Mr. Mahan thought it was a little bitter, but added, "If that's a decaf espresso, I'd have it for sure." Messrs. Bloostein and Griffin said the coffee lacked complexity, and Mr. Bloostein found an unappealing raw note as it cooled. Mr. Colten says he rarely drinks espresso but that he liked the Idillyum. "There was a lot of clarity all the way through," he said.

Coffee companies have been looking for ways to perk up the $2 billion decaf business, which has remained flat in recent years. A bean that is naturally low in caffeine but produces complex, flavorful coffee "would be a huge innovation," says Geoff Watts, green-coffee buyer for the Chicago-based specialty roaster Intelligentsia Coffee.

Decaf coffee has long been considered inferior to regular, something that coffee experts attribute to the decaffeination process itself. Typically, coffee beans are steamed open and then soaked in a chemical solution like ethyl acetate, which draws out the caffeine but also flushes away some of the fats and oils that give coffee its aroma and taste. Some decaffeinators use water processing to remove caffeine.

The new beans have more caffeine than most decaffeinated beans, but up to 50% less caffeine than regular Arabica beans, the type used to make specialty coffees. The low-caf beans are a glossy brown and, to the untrained eye, virtually indistinguishable from other coffee beans in both appearance and smell.

Some are getting high marks from top buyers in the industry. Lindsey Bolger, coffee director for Green Mountain Coffee Roasters, calls the Doka Estate coffee one of the best she's tasted in her 20-year career. "It was sweet, clean and juicy," she recalls of a tasting in Costa Rica last spring. "It was a refreshing coffee, and I never describe coffee as being refreshing."

Experiencing something "new and good is rare," says Doug Welsh, Peet's vice president of coffee, who attended the same tasting.

Most of the coffee cultivated commercially today is made up of two primary species. Robusta, a hardy bean that grows largely in a narrow band around the Equator and has about 3% caffeine by weight, is used in lower-tier coffees sold at most convenience and grocery stores. Arabica, typically grown in higher-altitude regions near the Equator, has about half as much caffeine and is used in the lattes, mocha grandes and double espressos sold at chains like Starbucks and Dunkin' Donuts.

Illy was one of the first companies to embark on a serious quest to develop a flavorful, low-caf coffee bean. In 1989, Andrea Illy, 44, the third generation of Illys to head the 75-year-old Italian roaster, learned that an American coffee company was preparing to toss its research collection of some 185,000 coffee plants and acquired it. The collection included about 20,000 plants of a low-caffeine Arabica varietal called Laurina. The delicate varietal is known to produce high-quality beans but is also low-yielding and sensitive to disease and pests (caffeine is a natural pesticide).

Mr. Illy assembled a team of nine agronomists and technicians, who spent the next five years identifying Laurina plants in the collection on which to build a low-caffeine bean. They narrowed in on 15 "mother plants" based on characteristics such as productivity and coffee quality.

"It's like a funnel. You start from many and you reduce, reduce, reduce," Mr. Illy says.

The results of the earliest field tests in Brazil were so abysmal, however, that Mr. Illy considered scrapping the project. "There was a lot of mortality," he says.

By the time Illy began conducting more successful field tests of the plant in the rich volcanic soil of El Salvador in 2000, several companies had already begun assembling low-caf teams of their own, and others were soon to follow.

Like the llly crew, some were honing in on the Laurina plant, easily identified by its distinctive Christmas-tree shape. The Doka Estate began to experiment with the plant in Costa Rica in 2002, after Edgardo Alpizar, a member of the Vargas family doing his graduate studies in agronomy, stumbled upon a lone Laurina tree near the site of his field work in San Jose. He planted 80 seeds of the plant on the slope of a volcano on his family's coffee estate. At an elevation of more than 5,000 feet, he observed, low yields and disease did not seem to be a problem. He kept increasing his production.

That same year, UCC Ueshima teamed up with a French agricultural research group and a local cooperative of growers in Réunion, a French island off the coast of Madagascar, and began cultivating Bourbon Pointu trees, an Arabica varietal that some agronomists say is the same as the Laurina.

Meanwhile, Brazil's Daterra Coffee was hybridizing a descendant of a low-caffeine varietal from Ethiopia that had been stored at a Brazilian university's germaplasm bank. In Hawaii, a private research company called Integrated Coffee Technologies was trying to figure out how to turn off a gene in the caffeine pathway that would inhibit its expression in the bean.

Companies including Starbucks and Dunkin' Donuts say they are not working on similar efforts. (A spokesperson for Kraft, which owns Maxwell House, declined to comment.) Stan Frankenthaler, executive chef and director of culinary development for Dunkin' Brands, says he is watching the development of the low-caf beans with great interest, although he has yet to taste the new varietals. He questions whether caffeine levels will be low enough to appeal to decaf drinkers and wonders how good the coffee will taste.

"When you're hybridizing for an over-expression of one attribute, the question becomes: Do I affect any other attributes within this variety? Is there any loss? Are there any other gains?"

Stephen Leach, the global buyer for coffee importer and exporter Maranatha, says it remains to be seen whether growers can keep their caffeine levels stable, since it can take years for the characteristics of a new agricultural product to stabilize.

Caffeine is one of the most widely consumed drugs in the world, and it's a profitable, if controversial one. A significant part of the profit many decaffeinators make comes from sales of the caffeine they extract from coffee beans and sell to soda and pharmaceutical companies, according to Frank Dennis, chief executive of Swiss Water Decaffeinated Coffee Co., a Canadian company that does not resell caffeine.

That coffee contains caffeine, which many consumers say heightens their sense of alertness and well-being, may account for the fact that demand for coffee has remained relatively consistent, despite price fluctuations.

Research also suggests that there's a natural, optimal level for caffeine or similar stimulants in the bloodstream, and that people regulate that level by adjusting how much they consume. Some coffee makers say a great-tasting, lower-caffeine coffee could result in bigger profits, in part because caffeine-seekers might be inclined to drink more of it. "If you have lower-caffeine content with higher pleasure, you might be able to repeat your little luxury several times a day," Mr. Illy says.

The Illy team is currently working on details of the American launch of their low-caf line. But recently, high above Manhattan in Illycaffè's New York headquarters on Madison Avenue, all attention was focused for a moment on the coffee. The low buzz of an espresso machine had just fallen silent, and Mr. Illy poured a cup of Idillyum. It looked similar to any well-made espresso, with a thick layer of foam and a burnished caramel color. And the taste? Strong and acidic, at least to someone used to sweet, milky coffee.

To Mr. Illy, who ticked off notes of jasmine and chocolate, the cup was the fruition of nearly 20 years of research. "Coffee can be about experiencing incredible flavor and taste, which is inspiring the emotion, or it can be about the caffeine kick," he said. "We hate that, because you can get your caffeine kick with a pill, with a lousy coffee, with anything."

Mr. Illy lifted his cup of coffee into the air and inspected it. "For us, the lower the caffeine content, the better."