Showing posts with label Peet's shareholder meeting. Show all posts
Showing posts with label Peet's shareholder meeting. Show all posts

Wednesday, June 9, 2010

Peet's Coffee Annual Shareholder Meeting (2010)


Peet's Coffee (PEET) held its 2010 annual shareholder meeting at an Emeryville, California hotel. Approximately 110 people attended. Shareholders were offered fruit, yogurt, juices, water, and, of course, Peet's coffee and tea. The company also gave shareholders a Peet's bag with a pound of coffee and a selection of tea bags.

After the formal portion of the meeting, CEO Patrick J. O'Dea handled the first presentation. Buttressed by Peet's excellent performance, Mr. O'Dea had more bounce in his step than in previous years. Mr. O’Dea mentioned that sales were up 7%, with the grocery business growing at 19% for the year. Grocery’s growth accelerated to 28% in the second half of 2009 and 39% in the first quarter of 2010. The retail business remained stable, and Peet's expanded profit margins +260 bps.

Food service and the office and home delivery businesses were increasing, but growth was slower when compared to other divisions. [Note: According to Peet's, these remain very important businesses, on their own and also as vehicles to introduce the brand to new audiences and build awareness to support grocery growth. This business was slow last year with the economy (8% sales growth), but rebounded to 27% in Q1 2010.]

Mr. O'Dea then turned the meeting over to Doug Welsh (VP of Coffee) and Laila Tarraf (VP of Human Resources). Mr. Welsh referred to Peet's being the "gold standard" of coffee. In an effort to maintain its "gold standard" after substantial growth, Peet's began re-evaluating its values. After much discussion, Peet's decided to focus on four core values: mastery, responsibility, curiosity, and prosperity.

For Peets, "mastery" means pursuing excellence in the craft with integrity. To promote high quality, Peet's holds barista competitions but does not compete in national or world competitions because it wants to focus on regular customers instead of judges. Peet's barista competition starts at the store level, then district managers nominate someone, after which the winners are sent to a central pool of judges, including Mr. Doug Welsh. After that round, baristas move on to a regional competition and then one last level of competition. Also, every single barista is re-qualified each year to ensure quality service.

Mr. Welsh showed several slides of espresso, explaining what a cup of espresso ought to look like. He said "blonding," or discoloration, was bad--"blonde is not more fun in espresso," he quipped. He also said that after sipping, the form and color should hold, not get mixed or discolored.

As for a good cappuccino (my favorite coffee drink), Mr. Welsh explained that it's not a good sign when the steamed milk process "sounds like a 747," because the temperature is probably too high, which creates a scalding taste. It's also not good for the foamed milk to look like "shaving cream"; instead, the foamed milk should be glossy, with the consistency of milk and ice cream.

He showed us several slides of cappuccinos, including a "white-out," where the top of the cup showed nothing but a huge mushroom cloud of foamed milk. Peet's grading assigns a white-out a zero score. An "acceptable" cappuccino looked good to me, but Mr. Welsh explained that it showed a dull sheen with already-burst milk bubbles. The ideal cup has a clear white/brown contrast between the milk and espresso, i.e., a brown ring on the outside that nurtures the foam in the middle. The best cappuccino would be "very bright white inside," contrasted with "a dark grain of espresso all around the cup." This configuration allows you to taste both steamed milk foam and espresso with every sip. In short, you want an "integrated" taste with each sip.

Ms. Taraff said that Peet's "curiosity" balances its "mastery." With 3,500 employees across the country, it's important to be consistent, and Peet's has a "Brew U" website where employees can take classes through development programs to maintain their edge and expertise.

Ms. Taraff turned the meeting back to Mr. Welsh, who talked about Peet's emphasis on "responsibility." Through various slides, he introduced Roberta Mata (a male), who is the leader of the "Dota Co-op" in Costa Rica. He said that Peet's feels an accountability to the co-op, not just to its end users, and the conditions at the co-op are some of the best in the coffee-growing world. The co-op has also won awards for its sustainable practices. More specifically, the co-op turns its pulp waste into methane. (Methane is a biogas fuel and functions as an energy source.)

Peet's long-term outlook can create excellent results. For example, during 2004 and 2008, there was a coffee crisis, and market prices for coffee went below production costs. In other words, it cost more to produce coffee beans than to sell it, meaning co-ops were not making money. Peet's recognized the problem and agreed on a three-year fixed rate for coffee that allowed Peet's to hedge its costs. When the market turned, the fixed-rate arrangement helped Peet's bottom line. Also, Peet's willingness to work with the co-op during the coffee crisis generated goodwill that helped Peet's in future negotiations.

Mr. Welsh also talked about "prosperity," another one of Peet's values. He said that farmers working for TNS (TechnoServe: http://www.technoserve.org/) that sold to Peet's earned a 60% higher price than semi-washed (home-washed) coffee. Mr. Welsh proved that growers were better off upgrading from low level production (home-washed coffee) to Peet's higher standards.

CEO O'Dea punctuated the end of the meeting by saying, "That's your company," and we moved to the Q&A session. Unfortunately, there was no one walking around with a microphone, so many people, including myself, couldn't hear most of the questions. I've done the best I can to provide an accurate review of the questions and answers.

A shareholder asked if Peet's uses "E-Verify." No one seemed familiar with the system, which is used to check a potential employee's eligibility for work. (It's basically something designed to catch undocumented workers.) The system is relatively new and has major flaws, so most states don't use it. (Arizona employers are required to use it; California employers are not.)

Someone else said that his local store didn't carry Guatemala San Sebastian. The CEO said all stores offered all of Peet's coffee selections, and he would check up on the particular retail store.

In response to another question, the CEO indicated that most major grocery stores carry Peet's coffee beans, but Wal-mart (WMT) does not carry Peet's coffee beans. He also said that the "quality of service is the most important thing in retail [i.e., Peet's stores]," so he would not want Peet's retail store employees to have the same aggressive sales personality as its grocery store sellers. (One of the reasons I like going to Peet's is because of its outstanding employees.)

Another person asked whether baristas receive profit-sharing incentives. Peet's pointed out that all employees who are managers and above receive RSUs and all employees may participate in its ESPP, which allows employees to buy shares at a discount. Also, Peet's wages are significantly above minimum wage, which reduce turnover. Moreover, Peet's has the "best health insurance program by far"--after working 500 total hours, a Peet's employee need only work 21 hours a week or more to be eligible for Peet's health care program.

Someone asked whether Peet's would be expanding internationally. "Not in the next twelve months," because growth opportunities exist domestically.

Another shareholder asked, "What happened to Diedrich Coffee?" Peet's had made an offer to buy the company, but the acquisition did not pan out. The CEO said that Diedrich had a "license to produce K-cups," but the licensor was also interested and willing to pay more for the company. (K-cups allow users to easily make single cup servings of coffee.) Peet's CEO said he believes the single cup market will grow, especially in homes. (By the way, Peet's received an 8 1/2 million dollars break-up fee--not bad for a failed deal, huh?)

Peet's has closed stores about six or seven times because the location didn't work out. For example, in some sites, anticipated housing or commercial construction never occurred.

Someone asked about quality assurance, and Peet's CEO responded, "We're not perfect," so they rely on customer feedback. Peet's has customer feedback cards at various stores and also uses mystery shopper programs to check on its customer service.

I asked why Peet's didn't offer more Colombian coffees. The best coffee I've ever had has been from Colombia, and then from Costa Rica. Mr. Welsh said that Colombia was having serious coffee production problems and was four million bags short of production. (Four million bags is significant--a single "bag" is sixty kilograms, or 132 pounds.) Colombia had suffered from bad weather and a tree renovation program that caused the country to use much of its land for trees, limiting the land that could be used for coffee production. Although Colombia is the world's third largest producer of coffee, the supply of Colombian coffee had shrunk considerably, causing prices to skyrocket. Mr. Welsh indicated that "now is not the time" to buy Colombian coffee beans.

Someone asked whether Peet's had a poison pill provision. Peet's does not have such a provision, making takeovers/buyouts easier.

Another shareholder asked when Peet's would issue a dividend. The CEO said that Peet's can still find ways to grow the company and use cash to enhance value; therefore, it currently preferred stock buybacks to dividends.

As I've said before, Peet's consistently delivers a great annual meeting, so if you get a chance to go, you should take it. I am pleased to be a Peet's customer and shareholder.

Disclosure: I own an insignificant number of Peet's shares.

Thursday, June 11, 2009

Peet's Annual Shareholder Meeting (2009)



Peet's Coffee & Tea Inc. (PEET) held its annual shareholder meeting at an Emeryville hotel on May 20, 2009. The small hotel conference room was filled to capacity. Peet’s offered shareholders Peet's drip coffee, juices, fruit, pastries, and yogurt. Shareholders also received a reuseable Peet’s bag containing coffee beans and a box of tea.

Peet’s shareholder meetings are fun to attend for several reasons. First, although Peet’s is a publicly-traded company, it doesn’t act like most major corporations. Its meetings are less formal, and Peet’s executives seem more receptive to questions and comments than other companies. Second, Peet’s talks about what it is doing to find and develop coffee beans, which usually results in interesting stories involving international travel. Third, it is hard to walk out of a meeting unhappy when Peet’s provides good food, great coffee, and several complimentary items.

CEO and President Patrick J. O’Dea started the meeting with a brief slideshow presentation. He explained that recent economic events have caused American consumers to experience a 30% evaporation of wealth. He mentioned several retailers that had filed for bankruptcy (Circuit City, Levitz, Sharper Image, Linens ’n Things, and Mervyn’s) and indicated these retailers may have expanded too quickly. He talked about an “embarrassment of riches” and how consumers were avoiding conspicuous consumption. Despite these troubling events, however, Peet’s managed to grow sales by 14%.

Peet’s continues to use ERP (enterprise resource planning) to attack inefficiencies and cut costs. CEO O’Dea mentioned that executives had agreed to a management salary freeze for 2009, while increasing salaries for hourly workers. Peet’s commitment to its rank-and-file employees may explain why almost every Peet’s employee I’ve met has provided great customer service. (My local store, run by Store Manager Ian Batra, is particularly good at going the extra mile to make customers happy.)

Peet’s continues to expand by using targeted advertising, such as direct mail and email. Peet’s most recent advertising efforts involve a partnership with San Francisco’s de Young Museum. Peet's also has a promotion that provides a free medium iced drink after you buy five iced drinks. (Make sure you get the card--the promotion ends on August 31, 2009.)

CEO O'Dea explained that Peet’s has multiple channels to sell its products, including retail stores; home delivery; food services; office; and grocery stores. Peet’s coffee is currently sold in over 3,500 grocery stores. While Starbucks relied heavily on expanding its own stores to grow sales, Peet’s grew at a more measured pace and has focused more on grocery store alliances to sell its coffee beans. Peet’s strategy has paid off. Opening fewer stores and selling coffee beans through already-established grocery stores has allowed Peet’s to shift overhead onto third parties and lower its operating costs.

CEO O’Dea then turned the meeting over to coffee buyer Doug Welsh. I am a big fan of Mr. Welsh. Mr. Welsh naturally exudes sincerity and diligence, which is particularly helpful when dealing with international operations and finding reliable business partners. Mr. Welsh talked about how Peet’s finds its coffee beans and what it is doing to maintain quality and sustainability. He showed some pictures (unfortunately, only a few) of himself and buyer Shirin Moayyad in Africa tasting coffee. He explained how he judges coffee beans, using a five point scale:

5 is Peet’s Quality.
4 is Other high grade speciality.
3 is Good quality.
2 is Problematic but saleable.
1 is Defective.

He also explained how Peet’s helps communities create better living conditions. For example, in his never-ending quest for the best coffee beans, Mr. Welsh visited some places where “backyard growers” were smashing coffee beans on rocks, a highly inefficient process. (Mr. Welsh said these people were literally “between a rock and a hard place.”) After Peet’s became involved, it showed the residents how to buy and use various micro-mills to improve coffee production and quality. After residents establish a cooperative and pool money to purchase a micro-mill, production and profits increase. With increased profits, small villages are then able to provide basic health care to their residents and improve their quality of life. (Say what you want about globalization, but I love it for precisely this reason–when it’s done right, everyone benefits.)

Mr. Welsh made some other comments before turning the meeting back to CEO O’Dea. Mr. Welsh indicated he was looking forward to the “New Africa” blend. He said that for logistical reasons, Latin America exports more coffee beans than Eastern Africa. He said that Peet’s tends to pay more than the Fair Trade Certified guaranteed minimum living wage. (Lest you think Peet’s executives are purely altruistic, Mr. Welsh reminded everyone that the ultimate goal was to get the best coffee beans: “Any dime we spend to make the world a better place is your dime. We’re very conscious of that.”)

Mr. O’Dea then opened the meeting to questions. Before I go into the Q&A, I want to make one comment. Peet’s didn’t have a portable microphone. As a result, many questions were difficult to hear. Peet’s might want to bring a portable microphone to its annual meetings to make questions easier to understand. While the CEO repeated most of the questions, it would be better to hear questions directly from the person asking them.

The first question was about free Wi-Fi. CEO O’Dea said that Peet’s offered free Wi-Fi in most of its stores to attract customers.

A shareholder asked about options, referring specifically to page 11 of the proxy statement. The shareholder complained that Peet’s had shortened the vesting time period for certain options from seven years to four years. This change appeared to diminish the link between long term share performance and executive compensation, he said. CEO O’Dea disagreed and later mentioned that 75% of his individual net worth was linked to Peet’s stock.

A shareholder asked whether Peet’s would expand operations in airports and other outlet-type facilities (e.g., BART stations). CEO O’Dea said that Peet’s is always searching for good locations. Later, in response to a related question, CEO O’Dea said that Peet’s had no plans to enter the franchising business but had 70 licensed stores. (A “licensed” store is a store that Peet’s does not own but allows the operator to use the Peet’s brand name and products. Persons serving coffee in those non-Peet’s-owned outlets participate in a Peet’s training program.)

A shareholder asked about what Peet’s was doing to improve brand recognition and sales growth on the East Coast. CEO O’Dea talked about targeted advertising.

Someone asked how many stores Peet’s planned on opening in 2009. (I apologize, but my notes are not definitive on the response, so I cannot provide an answer. In case you are interested, my notes indicate, “10 stores (reduced #) – open in ‘09. 58 –> 200 stores.”)

Someone asked about a Consumer Reports taste test that rated "Eight O’Clock" coffee as the best-tasting coffee. Mr. Welsh said that the survey was flawed for several reasons, which drew some laughter. Mr. Welsh opined that the persons who participated in the taste test probably grew up tasting less strong coffee.

Someone asked whether Peet’s would enter the chocolate business. CEO O’Dea said no, but a partnership might be possible.

Someone asked about diversity, pointing out that the Board wasn’t diverse. CEO O’Dea said that diversity was a continuing process and an important factor. He said that Peet’s had done well in a UC Davis leadership survey when compared to other corporations. He also said that half of the executive team reporting to him were female.

Someone asked what Peet’s did to choose the best tea. A Peet’s employee said that he had inherited many good relationships with tea suppliers. CEO O’Dea said that Peet’s was now selling cold tea in select grocery stores. (I’ve tried these teas–my favorite is the Snow Leopard Tea with Honey.)

A shareholder mentioned that Peet’s was very helpful when it came to composting and that Peet's gave away expired beans for composting.

Someone asked how Peet’s finds high quality coffee. Mr. Welsh said that too-rapid growth leads to reduced standards (a little dig at a certain Seattle-based competitor), and Peet’s slower growth allowed it to focus more on finding high-quality coffee beans.

A shareholder asked if any Peet’s stores had not done as well as expected. CEO O’Dea mentioned that Peet’s had closed the Westminster store due to its poor location/visibility.

I asked Peet’s to publish more information, perhaps on Facebook, about Doug Welsh’s and Shirin Moayyad’s travels. I said I really enjoyed seeing the pictures from the coffee buyers’ international trips, and I regretted that Peet’s only showed a few of them at its meeting. I said Peet’s ought to consider publishing a “coffee table” book with pictures from different countries and, with permission, the people its buyers meet and work with.

I also asked a question about food sales in Peet’s retail stores. It turns out that Peet’s makes 60% of its retail store profits from drinks and 40% from food sales. If I heard the CEO right, the margins Peet’s gets on its food items must be incredible. (Try the vegan chocolate chip cookie–it’s delicious.)

A few tips for Peet’s customers:

1. If you are staying inside the store, order a large drink in a “for here” cup. The “for here” glass cup seems larger than the “to-go” cup. You get more coffee and you also help the environment.

2. It costs Peet’s about 7 cents for a hot coffee “to-go” cup, but about 15 cents for a cold coffee “to-go” cup. As a shareholder, you should buy a Peet’s tumbler, because you get a discount each time you use it, and Peet’s also saves money. Of course, you also help the environment by reducing waste.

3. When ordering a frozen drink (e.g., a frappe), order it “extra bold.” If you don’t order it “extra bold,” your drink won’t have espresso–just regular coffee. [Update: it's actually double-strength coffee, but as I said, no espresso.]

I look forward to attending next year’s meeting and hearing more about Mr. Welsh’s travels. In the meantime, I will be buying lots of Peet's coffee. Although the economy isn't doing very well, and I will earn much less money this year, I cannot bear to give up my one luxury--a Peet's cappuccino.

Note: the pictures above are of myself, Doug Welsh, and Shirin Moayyad, and the food trays after the meeting was over.

Note: a review of Peet's 2008 meeting is here.

Disclosure: I own an insignificant number of Peet’s (PEET) shares.