Peet's Heads East in Grocery Expansion

If you live anywhere other than California, Peet's is more likely where your friend Pete lives than the company the makes your favorite coffee.

But that could soon change now that Peet's Coffee & Tea Inc., which has largely been a West Coast brand, is looking to stab eastward.

Just don't expect to see a Peet's store on your street corner.

Unlike its mega-competitor Starbucks Corp., Peet's says its biggest opportunity is in supplying coffee to grocery stores. Chief Executive Patrick O'Dea plans to supply freshly-roasted beans to more than 8,000 grocers by the end of 2008. He's starting in Florida, where Peet's coffee will soon be sold in Publix Super Markets Inc., one of the largest grocery store chains in the state.

"By the first quarter of 2009, Peet's will essentially be national," O'Dea said.

That would be a big change for the brand, which got its start in Berkeley, Calif., more than 40 years ago. Several years after the company opened its first store in 1966, the first Starbucks store opened in Seattle, selling coffee roasted by Peet's. For several years, the two had a common owner _ Jerry Baldwin. But in 1987, Baldwin sold Starbucks to focus on Peet's.

The two companies both specialized in premium coffee beans and specialty espresso drinks for a well-heeled group of coffee enthusiasts. But as premium coffee became more popular and more mainstream, the two went in different directions.

In the past 37 years, Starbucks has grown to 15,756 stores globally by the end of 2007. Starbucks coffee is also on shelves in about 34,000 stores nationwide through a licensing agreement with Kraft Foods Inc.

The company's growth has led to soaring sales and share prices. But those spoils haven't come without a few drawbacks.

"It's on every corner," said Joe Pawlak, vice president of food research firm Technomic Inc., adding that people may like the coffee but with a Starbucks always within reach, "is it really special anymore?"

Peet's, meanwhile, has grown far more slowly. The Emeryville, Calif.-based company went public in 2001 with 60 retail stores and coffee beans sold in 130 grocery stores. By the end of 2007, Peet's operated 166 stores and sold its beans in 5,700 grocers with total sales of $302 million.

To meet its 8,000-store goal, Peet's opened a new 138,000 square-foot roasting facility last year in Alameda, Calif., that can roast beans around the clock. The facility doubled the company's roasting capacity.

To keep coffee fresh, Peet's uses bags with one-way valves to allow carbon dioxide _ a byproduct of the roasting process _ to be released without losing the aroma of the beans. The bags are similar to the "flavor-lock" bags used by Starbucks.

O'Dea puts a premium on freshness. The bags are stamped with a roasting date _ something not found on Starbucks' product. Peet's also mandates that the bags are only kept on grocery stores shelves for 90 days. Some brands allow grocers to display and sell beans for up to a year.

The freshness focus has led Peet's to become one of the top grocery store brands on the West Coast, said Stifel Nicolaus analyst Steve West.

"If you look at who's driving the retail segment in grocery, it's Peet's, not Starbucks," West said.

Nationally, the brand isn't as well known. According to data from research firm Information Resources Inc., Peet's was No. 4 nationally in sales of whole beans at grocery stores. Starbucks was No. 1 with sales more than six times higher than Peet's as of Feb. 24.

Whether or not the company will be able to raise its profile nationally depends, at least in part, in the coffee lover's desire to make a quality cup of coffee at home. But with consumers clamoring for convenience and Starbucks attempting to raise the quality of the coffee served in its ever-present retail stores, it remains to be seen whether coffee lovers will head to the nearest grocery store to start the process of brewing a cup of Peet's joe.

"You can buy beans in the store, you can make it at home, but really when the rubber meets the road, it's all about convenience," said Pawlak.