Martin Hits Bumps With Diedrich, Easyriders
It’s been a bumpy ride on Wall Street for John Martin in his attempt to be No. 2 to both Starbucks and Harley-Davidson.
Martin is the former Taco Bell Corp. executive who built the Mexican fast-food chain into a powerhouse during the 1980s and early ’90s. Now, as chairman of both Diedrich Coffee Inc. of Irvine and Easyriders Inc. of Agoura Hills, he’s at the helm of two struggling companies whose stocks are at or near their 52-week lows. Last week, Diedrich’s shares were trading at more than a buck, while those of Easyriders were about 50 cents.
Based on his reputation for growing Taco Bell sales from $600 million to an impressive $4.5 billion in 13 years, Martin’s name lent credibility to these newcomers on Wall Street. But reinventing two specialty niche businesses,a coffee retailer and a biker publishing, retail, restaurant and event business,has been a tough sell.
Diedrich’s $34 million purchase of Coffee People Inc. in July 1999 boosted company sales from $24 million to more than $150 million. But the acquisition also added $11.3 million in long-term debt to Diedrich’s books.
Diedrich, which is now the No. 2 coffee retail chain to Starbucks Corp., has 362 stores in 38 states and nine countries. But the plan was to build a 1,500-unit chain by the end of 2003, and they are running about a year behind schedule, analysts say.
Prior to its acquisition of Coffee People, Diedrich was a small, 34-unit chain in three states with retail and wholesale sales of $24 million. Now it has 81 Diedrich Coffee, Diedrich Coffee Plantation and Diedrich Coffee People stores in six states, including 10 operated by franchisees.
The transitional monikers will be phased out in the next year for the Diedrich Coffee brand name, acording to Chief Executive Tim Ryan.
The Coffee People deal also included the 280-unit Gloria Jean’s, a mall-based seller of coffee products. Those stores eventually could be renamed Glories, Ryan said, starting with a test store in Thousand Oaks in September.
But the Coffee People acquisition only was part of Diedrich’s plan to grow.
In September 1998, the company began aggressively pushing its Diedrich Coffee franchise expansion.
So far, Diedrich has contracts with 10 area developers for 381 coffeehouses in 10 states set to open during the next five to seven years, plus two with options for another 143 units.
But, so far, only two franchisees have opened single units in West Hollywood and Avon, Conn. Five others have locations under construction, Ryan said.
“Finding commercial real estate has been a tougher struggle than we anticipated,” Ryan said. “It’s not because we are not trying. What happens is we get the site and the approvals, and someone else offers to pay more and we have to start all over again. We didn’t anticipate such tough competition.”
Andrew Barish, a retail analyst for BancBoston Robertson Stephens in San Francisco who covers Diedrich and Taco Bell parent Tricon Global Restaurants Inc., said there are other factors that have put Diedrich about a year behind on its franchise expansion.
“The problems at Taco Bell have impacted Diedrich because a handful of franchise developers are also Taco Bell franchisees and they have turned their attention to running the Taco Bell business rather than opening up new stores for Diedrich,” he said. “Diedrich’s plan and the concept is viable, but it needs to be executed and stores need to open.”
Martin’s ties to Taco Bell helped Diedrich forge ties with many of its franchisees. Trouble is, many Taco Bell restaurants are slumping, leaving operators little free time,or capital,to pursue coffee shops.
Diedrich, whose stores sell pastries and bags of coffee, recently opened a new company store in Aliso Viejo and plans to open six more this year. Three franchises were opened this year under the Gloria Jean’s moniker in Malaysia and Australia, Ryan added.
Still, Diedrich is not going to accomplish what it set out to do this year, nor will it make the money it thought it would for its recently concluded fiscal year 2000, said David Geraty, analyst at Dain Rauscher Wessles in Minneapolis.
The company’s results for its fourth quarter ended June 28 are due any time now. On June 29, Diedrich warned analysts to expect a big loss from charges relating to the Gloria Jean’s operation and the closure of 39 stores. The company also is increasing its focus on selling higher-profit coffee beans and beverages at Gloria Jean’s in a move away from its core porcelain, kitchen and giftware sales.
“The whole plan was they were going to acquire Gloria Jean’s chain and its roasting facility in order to support a national brand that is built around franchisees,” Geraty said. “But the fact is, a year later there are only a couple of franchises open and they are nine months behind on development.”
Since buying Coffee People, Diedrich’s stock has lost 68% of its value in the past 52 weeks. Its market capitalization stands at $22 million. Industry leader Starbucks, whose goal is to open 900 stores this year and 1,100 next year, was trading at around 40 last week, up from its September 1999 low of about 19 and down from its April peak of 45. Its market cap is $7 billion.
To be sure, Martin inherited some of Diedrich’s troubles. The company underwent rapid expansion in the early 1990s, growing from three stores in fiscal 1992 to 47 stores in fiscal 1997.
Diedrich’s raised $12.6 million in its September 1996 initial public offering, but six months later losses were mounting and the stock tumbled from 9 to 3.
The company’s former chief executive was fired and its founder’s son, Martin Diedrich, resigned from his role as chairman and was reassigned to be chief coffee officer. By fall 1997, John Martin and fellow former Taco Bell executive Tim Ryan were chosen as chairman and CEO respectively.
Costly Biker Brand
Besides his interest in the specialty coffee niche, Martin has a penchant for Harley-Davidson motorcycles. But, so far, he has only lost money on Easyriders, a diversified company geared toward motorcycle enthusiasts. Nearly two years ago, Martin touted his ambitious plans to build a billion-dollar biker brand second only to Milwaukee-based Harley-Davidson Inc.: “We want to be the Pepsi to their Coke,” he said at the time.
The company’s magazine publishing business, which immortalized the raunchy biker lifestyle, was to be the basis for a chain of themed biker restaurants, barbecue eateries, a national chain of stores selling motorcycles, apparel and accessories, and an events division for tattoo and motorcycle enthusiasts.
But at its first shareholders’ meeting last year, the board dropped the Easyriders Cafe concept. Later, the retail division adopted a licensing program instead of the company-owned and franchised approach. And the events division was recently licensed to another company.
Additionally, the new company adopted a magazine whose circulation had been declining for years. Prior to Easyriders going public in October 1998, the average paid monthly circulation had already fallen from 345,297 for the year ended June 30, 1993 to 210,538 for the year ended June 30, 1998.
Under the Martin-led board, plans included upgrading the magazine business and replacing the bearded, tattooed biker posing on his homemade chopper for a clean-cut yuppie on a shiny new custom machine. The result has been a 34.3% increase in subscription sales to 97,444 copies and a 9.5% decline in single- copy sales to 128,204 between October 1998 and Dec. 31, 1999, according to the latest data compiled by the Audit Bureau of Circulations.
BBQ to Go
Finally, the six-unit El Paso barbecue chain is being lopped off.
“While all (divisions) are fundamentally sound, each business requires a significant amount of cash to sustain growth,” Martin recently told shareholders. “Restaurant development, in particular, is quite capital intensive and the board felt that it was not realistic to continue trying to build three businesses with limited cash. The board also believes that, because we are no longer developing Easyriders Cafes, restaurant operations are not now an appropriate strategic fit within the framework of publishing and product licensing. It is important for us to put forth a cohesive company story.”
The El Paso Bar-B-Que restaurant chain subsidiary, whose 1999 sales were $11.2 million and projected 2000 is $16 million, was put up for sale in June.
“It was not a bad idea at all; we just recognized there was an opportunity for the restaurant business to be separate from publishing it was a good concept, but we have decided to move in a different direction,” said Robert Fabregas, chief financial officer for Easyriders.
Martin and Easyriders President and CEO William Prather were finalizing their bid last week to buy the concept out as a new brand for Martin’s upscale restaurant venture called Culinary Adventures Inc., based in Newport Beach.
$17 Million Invested
Management owns 73% of Easyriders, with Martin owning 22.9% of that stake. At current prices, Martin’s share of the company is worth $3.6 million, a fraction of the $15 million he invested in the company two years ago. In the past 16 months, Martin has pumped an additional $1.5 million into the company, plus an additional $500,000 last year, for a total investment of $17 million.
Joe Teresi, founder of the former Paisano Publications that originally published Easyriders magazine, owns a 40.3% stake. He matched Martin’s infusion with another $2 million this past year.
Easyriders’ stock has steadily lost steam since its 1997 initial public offering. In the first quarter, the company reported a net loss of $1.4 million on sales of $11.8 million (second quarter results are due out Aug.15). In the first quarter, the company reported its first profit before taxes and other items: $536,774 vs. a loss of $158,201 for the same period a year earlier. n
