Coffee People slims down, looks for fit with Gloria Jean's

Nation's Restaurant News, Feb 23, 1998 by Mark Hamstra

PORTLAND, Ore. -- Coffee People Inc., hoping to rebound from a failed expansion effort outside of its core Oregon and Arizona markets, has streamlined operations and is preparing to merge with the 277-unit Gloria Jean's chain.

The Gloria Jean's units are located primarily in shopping malls. Coffee People operates 25 cafes in Oregon and two in Denver and also owns the 14-unit Coffee Plantation concept in Arizona. The merger, subject to approval by the shareholders, is expected to be completed by mid-May.

With the approval Coffee People would streamline its operations further and essentially become a regional subsidiary of the much-larger Gloria Jean's chain, which had revenues of $30.6 million on systemwide sales of $101 million in the fiscal year ended June 28, 1997.

During the year ended Dec. 31, 1997, Coffee People incurred restructuring charges of $5.5 million, partially attributable to the second-quarter restructuring, which involved closing seven outlying Coffee People stores. The company reported a year-end loss of $6.38 million. In the preceding fiscal year, Coffee People had reported profits of $204,000.

Coffee People said its second-quarter restructuring helped set the stage for fourth-quarter profits of $188,000, vs. profits of $24,000 in the year-ago quarter.

"In a relatively short time following the decision in the second quarter to close seven stores ... we are seeing the benefits of our restructuring," said Taylor H. Devine, president and chief executive of CPI.

In addition to the closure of Coffee People stores in California, Denver and Chicago, the restructuring also included a reduction in corporate staff, which drove down general-and-administrative costs as a percentage of revenues.

In the year-ago fourth quarter, G&A expenses were $570,000, or 17.5 percent of revenues. In the most recent quarter, G&A expenses were $595,000, or 9.4 percent of revenues.

Revenues for the most recent quarter nearly doubled, to $6.35 million, from revenues of $3.26 million in the year-ago fourth quarter. The revenue gain was fueled by some 19 new units -- including the Coffee Plantation chain -- and a slight increase in wholesale coffee sales. The gains were offset partially by a 4.7-percent decline in fourth-quarter same-store sales, vs. sales in last year's fourth quarter. Revenues for the year were $20.42 million, compared with those of $12.28 million in the preceding year.

The pending merger calls for Coffee People to acquire Gloria Jean's in exchange for issuing 7.5 million shares of stock to Gloria Jean's parent, Second Cup Ltd. of Toronto, which then would own 69.5 percent of Coffee People Inc.

Plans call for Devine to become chief operating officer of the Coffee People concept, while Alton McEwen, the current president of U.S. operations for Second Cup, would become president of Coffee People Inc., overseeing all three U.S. brands. Jim Roberts, the chairman and founder of Coffee People, recently left the day-to-day operations of the company, said Ken Ross, Coffee People's chief financial officer.

Stock in CPI would continue to trade publicly.

All three U.S. brands -- Gloria Jean's, Coffee People and Coffee Plantation -- would retain their identities although the Portland headquarters of Coffee People would be consolidated into Gloria Jean's Castroville, Calif., offices.

"Our focus for the time being really is to adopt the strengths of these different businesses," McEwen said. He said the combined concepts could share administrative functions, and Gloria Jean's roasting facility could begin supplying coffee for Coffee People and Coffee Plantation.

He projected that there would be synergies for the two companies in "manufacturing, distribution and sourcing and purchasing, and for areas like finance and real estate."

"And if we franchise," he added, "that can be-combined."

Most of Gloria Jean's stores are franchised, while Coffee People and Coffee Plantation are company-owned chains.

Coffee People would retain a small operations office of six to eight people in Portland, according to Ross, down from about 20 who currently staff the office.

"We will not centralize the operations or the marketing at all," McEwen said. "The local operations and marketing have been the key to these concepts' success in their markets."

McEwen was one of the principals who acquired Second Cup in 1988 and helped it more than double in size, to some 325 locations across Canada. In the fiscal year ended June 1997, Second Cup had profits of C$2.98 million on revenues of C$73.06 million. By acquiring a majority interest in Coffee People, Second Cup also is bringing the Coffee Plantation concept back under its auspices. Second Cup sold Coffee Plantation to Coffee People last year.

"Having just acquired Gloria Jean's at that time, the question was, `Should we devote time to this one concept in Arizona when we had the challenge of incorporating the much-larger Gloria Jean's concept?'" McEwen said. "But we have always had tremendous respect for Coffee Plantation."