It often astonishes people when I tell them I survived four years of Cornell University and three years of USC's Graduate Film Program without ever having consumed an ounce of coffee. Caffeine, that staple of the student lifestyle, had no place in my world because I never liked the taste of coffee. However, when I entered the real world and began writing at all hours of the day, the bean corrupted me. Now I'm hooked, along with millions of other global consumers.
Coffee is big business in the investment world. Starbucks Coffee (NASDAQ:SBUX) is, of course, the behemoth. There are also smaller players elbowing each other for consumer's mouths, including Diedrich's (NASDAQ:DDRX), privately held Coffee Bean and Tea Leaf, and fresh young upstart Peet's Coffee and Tea (NASDAQ:PEET).
I got to wondering how these other young beans can survive in a jungle dominated by the Starbucks predator. Heck, the ubiquitous roaster will often seemingly move right into a neighborhood where the competition is just to try to steal it. I was particularly interested in Peet's because my wife, a coffee expert herself, swears by its product, and I've come to regard it highly as well. Could quality be the powerful Starbucks' Achilles heel?
I tested my hypothesis by spending several hours a day (really) at each of the chains mentioned above -- all of which happen to be on the same block here in Santa Monica, Calif. The foot traffic at each store was roughly equivalent. Even more intriguing -- but perhaps obvious in retrospect -- was that each brand had its own crowd. People had apparently chosen their preferred chain and stuck to it. To draw a not-so-subtle analogy, each chain has its fans, just as McDonald's (NYSE:MCD), Cheesecake Factory (NASDAQ:CAKE), and Outback Steakhouse (NYSE:OSI) have theirs. In Peet's case, quality separates it from the pack.
This supplements Peet's other strategy that fellow Fool Tim Beyers points out. The company thinks of itself more as a bean roaster that happens to sell beverages. Fully 30% of its business comes from specialty sales such as filling Web orders, putting beans in supermarkets, and the like.
So, where next, Peet's? Well, well-managed, well-established, and with a cultlike following, it won't be headed to bankruptcy court anytime soon. The only danger is being so small, somebody else might drink it up.
Fool contributor Lawrence Meyers limits himself to two espresso shots per day but doesn't own an ounce of any stock mentioned herein.
