Thursday, March 17, 2011

Rumors of a Takeover - Peet's Days Numbered ??

Reports surfaced over the last couple of days that Peet's Coffee Company had entered into "talks" with Starbuck's Coffee over a possible takeover by the behemoth Seattle chain. Starbuck's, as is common knowledge, was started by people who had gotten their wings working for Peet's in its earlier days.

Starbuck's is a classic expansive franchise machine, increasing its reach and domination over the coffee market, since it was sold (by its original founders, who had come back and bought Peet's, to continue to run it as a high quality business) in 1984 to another partner, Howard Schultz, who proceeded to run it like any aggressive international corporation, setting aside quality and judicious scale in favor of high profile promotion. Starbuck's stellar performance year over year has been phenomenal, attacking markets throughout the country, and around the world.

It's true that the idea of marketing high-quality coffee is still a relatively new idea in many places. In Europe, quality coffee traditions go back a long ways, but in America in the 20th Century, mass marketing and distribution of cheap, low-quality pre-ground coffee beans had been the norm, until the European model was brought to America beginning in the 1960's. There are still people who would regard a cup of Starbuck's coffee as a culinary treat, not realizing how close that product is to the Hills Brothers crank-case oil their parents and grandparents had drunk decades before.

Peet's insistence upon acquisition of the best quality beans, their meticulous roasting procedures, and their dedication to freshness (an absolute necessity for flavor), was characteristic of a small, customized, controlled operation. That kind of intense devotion to product quality is difficult to achieve at higher and higher levels of scale. The further from the source the beans must be shipped, and the larger the production facility, the more difficult it is to maintain that quality.

In addition, as corporations grow, their attentions shift from quality to marketing. In order to feed the ambition for expansion, short-cuts and "economies of scale" are employed to increase profit margins. If you can sell inferior product with a higher promotional budget, it's more efficient than simply trying to hold the line on product quality--especially if the customers you're serving don't know the difference. With a product like coffee, it's easy to fool customers into thinking that what they're consuming is high class, if you're the only game in town.

As Bay Area residents for nearly our whole adult lives, we've seen boutique coffee retailers come and go, but Peet's has always maintained a level of taste and professionalism that set them apart. Over that time, as regular Peet's customers, we've had periods of preference in which we drank their French, Columbian, Major Dickason, and nowadays Garuda named beans for over 40 years. When Starbuck's began to move into our market, I tried it several times to see what all the excitement was about. It didn't take me long to realize that Starbuck's Coffee was inferior--always quite bitter, usually over-boiled and/or continuously heated (or "re-heated") over the business day. Unlike Peet's, Starbuck's emphasized "mixed" drinks, or sweet concoctions designed to conceal the bitter brew under mountains of sugar, dairy products, chocolate, vanilla, caramel, cinnamon and nutmeg, even selling milkshakes. Along the way, Starbuck's has created a clientele base which now thinks of coffee primarily as a fluid staple (like milk) upon which variations are invented. Many, if not most, Starbuck's customers now regard real rich coffee taste as too intense and pure. In other words, they've been weaned away from true coffee flavor, to a degree that they've become inured to bad, cheap coffee, and now prefer it. This is the corporate officer's dream--selling cheap, inferior goods at premium prices to people who can't tell the difference, and are brand faithful!

Those of us who still value the quality of product regard with apprehension this rumored takeover. Starbuck's is a growth-oriented operation. Its customers are generally dupes who lack discrimination, who "have no taste" in the classic, generic sense of that term. It would be a tragedy to Peet's loyal customers, to have this excellently run business consolidated into Starbuck's large, faceless corporate operation. Starbuck's doesn't have the customers' best interests in mind; they want to knock off one of their chief rivals, and squeeze out its guts, and eat it alive. In America, capitalism is no longer about competition, but domination and consolidation, economies of scale, and power. If Peet's goes down, it might take another generation before we saw a new start-up to take its place. Or it might never happen at all. We could see a return to the days of Folger's and Hills Brothers canned crud. It's not a pleasant prospect.


Addendum: 3/30/11

Last night, Howard Schultz was interviewed by Charlie Rose [3/29/11]. Mr. Schultz had been on Rose's show twice before, in 1997 and 2007. Schultz is a business whizz, having risen from poverty in Brooklyn to a position as the CEO of Starbuck's Coffee, one of the fastest growing businesses in the world. He talks a fast, slick line of MBA patter, all about how he "redeemed" the company after its first growing pains, and raised its status to a position of prominence not just in America, but around the world. Schultz, however, is not a "product-based" investor, but a man interested primarily in building "consumer loyalty" through the creation of "retail environments," offering "product mixes" and branding expansion--none of which, really, has anything to do with the taste of coffee (or the price of beans!). In other words, Schultz is a marketing expert, uninterested in the details of the quality of his product. And this is reflected in the approach of his business. Schultz is an egotist, almost continually amused and pleased by his own clever take on the world, and his very good fortune. The former owner of the Seattle Supersonics, he sold the team to a group of investors in Oklahoma City, and the team was moved. The City of Seattle resented this, and Schultz's reputation took a nosedive in Starbuck's mother city. If Schultz does indeed persuade Peet's to sell itself to Starbuck's, we can expect the quality of Peet's coffee products to be compromised through the application of Schultz's marketing approach.

Schultz represents the very worst of the new breed of monopolistic corporate management types. Not content to run a competent business serving a loyal clientele, he wants to take over the world. In an environment in which every CEO thinks his days (and those of his company) are numbered unless he keeps expanding its reach, relentlessly, it hardly seems worth the trouble to produce anything simply for the joy and decency of doing so. We want capitalism to present opportunities to people, but the chaotic, pernicious, aggressive brand, represented by Schultz and his ilk, doesn't serve its customers; it "creates" customer bases, and milks them. Starbuck's a Blob, whose identity is based on selling rather than serving; it's a perversion of the entrepreneurial spirit.

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