Diedrich Coffee Inc.’s ambitious expansion effort has been set back by the recent cancellations of three franchise agreements and the pending cancellation of a fourth, halving the number of gourmet coffeehouses in the company’s U.S. development pipeline.
Irvine-based Diedrich this month terminated a franchise-area development agreement with M & P; Coffee Ltd. for 50 locations in Riverside, Orange, Los Angeles, Kern, San Luis Obispo, Santa Barbara and Ventura counties, as well as 17 locations in Nevada. M & P; had failed to pay its area development fees, Diedrich said in its quarterly report.
That came on the heels of two other cancellations:
n Diedrich and Rocket Enterprises Inc. on Sept. 13 mutually ended an agreement for Rocket to develop 50 coffeehouses in the Temecula, Palm Springs and San Diego areas. That agreement also included an option for Rocket to open up to 45 stores in Arizona.
n On Sept. 25, Diedrich and K. Andrew Wilson Enterprises mutually agreed to terminate their August 1999 contract to develop 50 coffeehouses in Wyoming, Montana and Colorado.
And the company expects to terminate one more franchise development agreement for 50 stores this fiscal year, reducing the number of proposed locations to be developed under similar agreements to 214, the company said in its quarterly report. Which batch of planned stores would be affected was not disclosed.
Diedrich would not comment for this report.
One expert said the change in plans reflects the realities of the coffee market in Southern California and other areas covered by the agreements.
“The growth rate (for specialty coffee companies) is not even across the country,” said Ted Lingle, executive director of the Long Beach-based Specialty Coffee Association of America. “The market is growing rapidly in the Midwest but it has leveled off in developed areas such as Seattle. Southern California is in a leveling off,squeezed by the availability of good locations and the availability of good labor.”
Meanwhile, the company,which also operates coffeehouses under the names Coffee People and Gloria Jean’s,issued a tepid earnings report for the fiscal first quarter. Revenue increased 3.7% to $16.9 million from its previous first quarter, but its net loss tripled to $1.1 million.
Diedrich’s operating expenses rose to $4.4 million in its quarter ended Sept. 20 from $3.9 million for the same quarter a year earlier, primarily because the chain ramped up its benefits packages to attract and retain employees at company-owned stores, according to the report.
Despite the losses and the canceled U.S. roll-outs, the company has plans to grow in other markets. Diedrich on Oct. 3 signed an agreement to open 40 Gloria Jean’s retail stores in the Thailand area. The agreement between Gloria Jean’s Gourmet Coffees Franchising Corp. and Specialty Beans Holding calls for the new locations to open during the next five years.
Diedrich is the nation’s second-largest specialty coffee market retailer in the nation, with annual revenue of more than $150 million and 374 retail locations in 38 states and 10 foreign countries. However, it remains well behind Starbucks Corp., the Seattle-based industry giant that has 2,000 retail locations in North America, the United Kingdom and the Pacific Rim.
Diedrich also has more than 300 wholesale agreements with restaurant chains and businesses.
Miller is a staff reporter at the Business Press, Ontario. n
