Sean McCarthy joined Irvine’s Diedrich Coffee Inc. in 2004 with the intention of operating and growing a chain of coffeehouses.
Instead, he oversaw the sale of the company’s coffeehouses to insurmountable rival Starbucks Corp. as Diedrich shifted focus to providing coffee to stores, restaurants and offices.
It was a big change for the company, and McCarthy.
A former finance guy for Irvine-based Taco Bell Corp. and what’s now Denny’s Corp., McCarthy had little experience running a manufacturing and wholesale company.
“I had to learn on the job,” he said. “We have an entirely different business model today than when I started with the company.”
McCarthy now is working with federal regulators on a pending buyout of Diedrich.
In December, Vermont-based Green Mountain Coffee Roasters Inc. prevailed in a bidding war with a $290 million offer for Diedrich. The deal could close in coming months if regulators sign off on it.
The Federal Trade Commission has asked for more details about the deal. Regulators are believed to be interested in the impact on the market for a new type of coffee gizmo known as the K-Cup.
K-Cups allow you to brew a single cup of coffee in a special machine by putting one of the K-Cups into a slot where coffee grounds and a filter would go in other machines.
They’ve been a hit among companies looking for ways to cut back on the cost of coffee provided for employees.
In the past year, sales of K-Cups have surged as they have become available at retailers including Wal-Mart Stores Inc. and New Jersey’s Bed Bath & Beyond Inc.
Green Mountain’s Keurig Inc. developed K-Cups and licensed them to Diedrich back in 2000.
The license languished for six years before K-Cups started to become a significant piece of business, McCarthy said.
“Sometimes it’s good to be lucky and capitalize on those types of lucky moves,” he said.
Turnaround
The buyout offer for Diedrich caps a turnaround at the company, which saw its shares soar on Wall Street last year, even before buyout offers from Green Mountain and Emeryville-based Peet’s Coffee & Tea Inc.
McCarthy—who’s now also president after the Feb. 1 departure of former chief executive Russell Phillips—played a major part in Diedrich’s transformation under multiple chief executives.
His efforts earned him the Transformation Agent award at the Jan. 27 CFO of the Year awards presented by the Business Journal and the Orange County and Long Beach chapter of the California Society of Certified Public Accountants.
In the 1990s, Diedrich was the No. 2 coffeehouse operator after Starbucks Corp. But the company’s bid to take on Starbucks brought big losses.
Diedrich’s turnaround started with Steve Coffey, according to McCarthy.
Coffey was chief executive from 2005 to 2008.
“Steve was a turnaround guy and was brought on to take an objective look at the company and figure out where we needed to concentrate our energies on,” McCarthy said.
Under Coffey, the company sold off coffeehouses.
“We couldn’t compete with the Starbucks, Peet’s and Coffee Bean & Tea Leafs of the world to get any quality sites,” McCarthy said. “We weren’t making any money on the retail side.”
The company got rid of the last of its Diedrich coffeehouses in 2006, when it sold 40 of them to Starbucks.
Diedrich sold all remaining coffeehouses in 2009 when it sold its Gloria Jean’s Gourmet Coffees & Teas in the U.S. to Praise International North America Inc., an affiliate of Australia’s Jireh International Pty. Ltd.
“We effectively gutted the company culture so to speak and moved off in a completely different direction,” McCarthy said.
Left For Dead
For a while, Diedrich was a shadow of its former self, left for dead by many investors.
Starting in 2005, a shrinking Diedrich turned its focus to selling coffee to stores, restaurants, offices and coffeehouses. The switch helped drive a turnaround.
McCarthy oversaw the realigning of the company’s manufacturing and distribution. He helped in hiring senior managers with expertise in volume manufacturing.
The company went from a coffee roaster—predominately selling one- and five-pound bags of whole bean coffee through its coffeehouses—to selling millions of K-Cups through national retailers.
McCarthy had a big hand in retooling a roasting plant in Northern California to accommodate production of K-Cups.
In the past two years, the company increased the plant’s capacity by nearly 90% to keep up with demand, McCarthy said.
By early 2009, Diedrich’s profits and stock were soaring. The stock ended 2009 up about 9,500% with a market value of about $200 million, including diluted shares.
Diedrich not only was the biggest local gainer on Wall Street but was the top stock nationally on Nasdaq.
Much of Diedrich’s gain came before a bidding war that started late in the year.
From November to early December, Green Mountain and Peet’s exchanged or matched offers for Diedrich.
Peet’s first offered $213 million in cash and stock for Diedrich in November.
Green Mountain was determined to prevail to consolidate production and sales of K-Cups, according to Mitchell Pinheiro, an analyst with Philadelphia-based Janney Mont-gomery Scott LLC.
Producing and selling K-Cups is about twice as profitable as collecting royalties from licensees, Pinheiro said.
