Home grown brew: Coffee Bean takes on Starbucks with atmosphere and Ice Blended.

WHEN it comes to growing a business--fast--a good place to look is the Coffee Bean & Tea Leaf location on La Cienega Boulevard near the Santa Monica (10) Freeway.

It's around 10 a.m.--well after the usual rush-hour crowd--and most of the half-dozen or so tables are filled with a familiar mix. There's a criminal attorney going over a case with an associate, a couple of guys talking rap music and a middle-aged businessman reading the paper.

"What attracted me to them first were their Ice Blendeds," says customer Mark Brandt, referring to the coffee-milkshake concoction topped with whipped cream that has become Coffee Bean's signature drink. "They were the first to have them and then Starbucks copied them with the Frappuccino."

But how many more Coffee Beans and Starbucks and Peet's can the world possibly support? With the number of U.S. coffee stores skyrocketing to the current 18,000 from 500 in 1989, when does saturation start eating into everybody's business? And how does a mid-sized chain that's growing fast manage the tricky matters of hiring and quality control?

For now, overexpansion is not an issue for the owners of Coffee Bean, a unit of International Coffee & Tea LLC. In fact, the company is on a tear, with a two-year growth rate of 30.7 percent and 2003 revenues of $114.3 million. That puts it on the Business Journal's list of L.A.'s 100 fastest growing private companies--and with its local expansion in the past two or three years, its name has become nearly as ubiquitous in some spots as the Seattle-based behemoth, Starbucks.

For true connoisseurs, Coffee Bean is considered the alternative coffeehouse, with brown-striped awnings and burlap coffee sacks instead of the more fast-food feel of Starbucks. "It's almost like an obsessive following," explained Melvin Elias, the company's senior vice president and chief operating officer. "Our customers have a real connection to the brand. They think of it as their local coffeehouse."

The trick is holding onto those customers--whether by keeping the stores clean, keeping the lines short or making sure the coffee is used soon after roasting. "It's not that barista training is brain surgery," said Bruce Milletto, president of Bellissimo Inc., a coffee consulting and training firm in Eugene, Ore. "But there are probably 10 to 20 things the barista has to do properly, and no matter how expensive the beans are. if you don't have proper training, you can turn out garbage."

For any fast-moving food business, it's all about maintaining control. Herbert Hyman, who started Coffee Bean in 1963 with the first outlet on San Vicente Boulevard in Brentwood, would add only three to five stores a year in the early going because that's all he figured the company could manage.

But that was before the specialty coffee business became a $9 billion industry. "We thought it was time to start leveraging the operations in California, to reach critical mass," said Sunny Sassoon, who with his brother Victor and family friend Severin Wunderman bought the operation in 1998. "We're looking at this as building a legacy."

Coffee Bean in Baghdad?

The Sassoons set out to expand their core markets in Asia and California by adding roughly 30 stores a year. There are now 130 stores in Southern California--triple the number of six years ago--and another 130 in Singapore, Malaysia, Korea and elsewhere in Asia, with plans to ramp-up expansion in the next three years by adding 150 to 200 stores, the bulk of them in California.

"If anything, we think the specialty tea and coffee market is underserved," said Elias.

Sassoon, who has been exploring the possibility of opening stores in Japan and Hawaii, said the company gets 600 calls a month concerning franchise possibilities. He's even heard from a U.S. Army procurer in Baghdad who was looking to bring in Coffee Bean to supply U.S. troops.

Coffee Bean's totals are still a pittance next to Starbucks' 4,081 company-owned and 3,182 licensed stores worldwide (it "remains in a class by itself," concludes a recent Value Line report). That might help explain why Coffee Bean is considering an initial public offering. Up until now, all the new stores have been financed through free cash flow.

Mike Sheldrake, owner of Polly's Gourmet Coffee, an independent coffee roaster and retailer in Long Beach, credits Coffee Bean for developing a medium-roasted coffee, in contrast to the richer offerings at Peet's and Starbucks. They both favor Vienna or French roasts that tend to be darker because the sugars are carmelized in the roasting process to bring out the sweetness of the beans. Dark-roasted coffees also can mask imperfections in the beans, particularly beans that are broken or have odd shaped sizes.

"There are differences in what people like," said Jay Isais, Coffee Bean's senior director of green coffee, manufacturing and distribution. "From Seattle to San Francisco, the taste preference is clearly for the darkest roasts, whereas if you take someone from the Southeast, they're going to want something very light and mild."

Like many hot beverage lovers, Coffee Bean drinker Brandt enjoys debating the merits and drawbacks of the chains. He likes the taste of Peet's for its robust flavor and avoids Starbucks, mostly because it's too corporate and ubiquitous. Coffee Bean seems to have just the right mix for him--a light-roasted coffee with a relaxed atmosphere.

"We know people who live in New York who literally come straight from the airport to a Coffee Bean--especially the celebrity crowd," said Sassoon. (A quick check of paparazzi-type photographs turns up the likes of Robert Downey Jr., Britney Spears and Katie Holmes holding cups of Coffee Bean brew.)

'Coffee defective'

But you can't please everyone. In a blind taste test of several coffees last week, Business Journal staff members placed Coffee Bean dead last, behind not only Peet's and Starbucks but the undistinguished office brew. "Coffee is a very susceptible product to outside flavor and influences," explained Isais, who dubs himself a "coffee detective" but couldn't offer any explanation for the taste test results.

"Though it's disappointing that our product would come off as second-rate, there are some understandable reasons why that would occur, depending on the circumstances of the test and the participants," he said. "I don't think that really changes the coffee--it just speaks to the circumstances that you did it under, or those that you're not even aware of."

Specifically, beans lose 25 percent of their flavor in the first two weeks after they are roasted, and many coffee retailers, including Coffee Bean, claim they will only sell coffee within 10 days after roasting (even though employees at some stores say that tight timeframe is not always followed). Beans in vacuum-packed bags can be sold for up to 12 months after roasting.

"Most of the chains have a 90-day shelf life, but at these prices, you really want the coffee to be more drinkable," said Sheldrake, who maintains a policy of selling coffee within a week of being roasted. "The real strength of Coffee Bean & Tea Leaf is in their iced blended coffee drinks."

Steven Krolak, editor of Fresh Cup magazine in Seattle, said the taste of coffee is not necessarily a recipe for success or failure in the industry. "Coffee Bean & Tea Leaf has been on a remarkable growth trajectory and that is due as much to their ability to create a pleasant gathering place as it is to the specific taste of their coffee," he said, noting also that "they're very strong on frozen beverages that don't really depend on how good their coffee is."

Company lore has Herbert Hyman, along with his wife Mona, coming up with the idea for a coffee store during a trip to Europe, where they saw that coffee was treated in a far different way than in the United States. The UCLA graduate rounded up a group of college friends to invest in the business in 1963, when it just had a single location.

But the coffee craze hit critical mass in the late 1980s, when Jerry Baldwin, chairman of Peet's, sold a small spin-off called Starbucks Coffee Co. to an investor group led by Howard Schultz, who then began a rapid expansion.

One explanation for all this growth is that the coffee is simply better than it used to be. "Many of the independent retailers can differentiate from chains because they can roast their own beans on site," said Mike Ferguson, a spokesman for the Specialty Coffee Association of America, based in Long Beach. "It's just like bread: the fresher out of the roaster, the better the coffee."

Coffee Bean, like other specialty coffee brands, was among the first to capitaxlize on selling coffee as a luxury item by gussying up a plain cup of Joe with shots of espresso and cannel or vanilla flavorings. That's where coffee retailers really make their money.

The chain relies heavily on sales of its most popular item--the Ice Bended, which comes in assorted flavors and costs $3.60 for a 10-ounce cup. It contributed 45 percent to total sales of $114 million last year.

Pushing tea, crumpets

When the Sassoons and Wunderman first looked at Coffee Bean in the mid-1990s, they knew virtually nothing about the business.

Victor Sassoon happened to stop at a local Coffee Bean in Los Angeles and decided the brand could be marketed as a luxury item worldwide. In 1996, the Sassoons persuaded Hyman, a former cigarette vendor, to sell them the Asian franchise rights. The first country they tackled was Singapore, where the Sassoons were born and raised (they moved to Los Angeles as teen-agers).

Two years later, Hyman agreed to sell the U.S. operations for an undisclosed sum to the Sassoons and Wunderman, a Holocaust survivor who built Gucci's watch business and ultimately retired as chairman of Swiss luxury watch firm Corum.

The new owners made subtle changes to Coffee Bean when they took over operations in 1998 and opened a new headquarters on La Cienega Boulevard. "Most people didn't even know there was a change in ownership," said Sassoon. "We basically let things alone and built systems--changes that the customers couldn't see."

Because coffee is 99 percent water, they installed reverse osmosis water filtration systems to ensure consistency. They also streamlined the decor; many of the stores had a scatter-shot look to them, with red signs at a store on Melrose and white signs everywhere else. As the chain grew to 4,000 employees, 40-hour training classes were launched to teach the basics of making coffee and tea, even to part-time employees.

Though tea often gets short shrift from other coffee retailers, Coffee Bean has refocused on its tea blends, pumping up sales to 16 percent of total revenues from 7 percent when the current owners bought the chain.

And unlike many chains, Coffee Bean has its own bakery. It makes all of its muffins, pastries, cakes and salads at a plant on Lincoln Boulevard in Marina del Rey. Food makes up 12 percent of total sales and is shipped daily to local stores.

"There's a certain kind of baked good we like to see--it's homey, home-style, it's big and it has value," said Elias, adding that Coffee Bean was the first chain to "toast its own bagels and call people's names," when their coffee order is ready.

In Arizona and Nevada, the only states besides California where Coffee Bean operates, the chain contracts with local bakers to create uniform baked goods from its licensed recipes. Even company-owned stores in Singapore, Malaysia and a partnership franchise in Korea operate their own bakeries.

Milletto thinks highly of Coffee Bean and its prospects but he warns that as the chain keeps growing, it could encounter problems in quality control.

"Espresso-based beverages like lattes, cappuccinos and mochas are driving a large portion of the specialty coffee market," he said. "As a result, factors as varied as properly steaming the milk to grinding the espresso to using the exact amount of coffee can dramatically impact the taste of the final coffee drink.

"It's no different in coffee or tea than it is in any other industry. As you grow, you have to have wonderful operational systems in place to replicate the same success of when you were a smaller operator," he said.

That's why Sassoon has postponed any IPO plans until 2006 at the earliest, while the chain ramps up its expansion. "There are lots of costs associated with going public," he said, "and right now we're really concentrating on growing the business."

Taste Test The Coffee Bean took some lumps in a blind taste test that ranked it against two national brands, a local independent and the stuff from the office kitchen.

PEET'S COFFEE

Rank: 1

Roast: 101 Blend

Price per pound: $11.95

Comments: "Strong, robust roast." "Strong, with modest bitter aftertaste." "Nutty smell, sharp taste, enjoyable." "Very strong aroma, very full body and strong flavor. Best by far." "Very nice roast. This is for people who enjoy the taste of coffee."

Background: All six taste testers ranked Peet's house blend in first or second place. Peet's workers say they never sell any coffee more than 14 days after it's been roasted; after that it loses freshness and they give it away to charity. Well known in the Bay Area, Peet's hasn't caught on as well in L.A. Our test location on South Beverly Drive was nearly empty on a Monday in mid-afternoon.

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BLACK DOG

Rank: 2

Roast: Six Country Blend

Price per pound: $9.65

Comments: "Strong aroma, full body, not robust enough. Tastes like good beans, but needs to be brewed stronger." "Decent, hints of berry." "Good, strong smell. Strong flavor." "Bitter but strong."

Background: Black Dog is a small independent shop near the Business Journal's Wilshire Boulevard office and a favorite among staffers. Our blind tests prove that smaller can actually be better, as the Six Country--Black Dog's version of a house blend--scored second overall.

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STARBUCKS

Rank: 3

Roast: Sumatra

Price per pound: $9.95

Comments: "Not bad. Good roast." "A good, full-bodied flavor." "Weak aroma, weak flavor. Could be drinkable if brewed slightly stronger." "Not bitter but not bold. Well-rounded flavor."

Background: The folks at the Larchmont Boulevard store weren't brewing their house blend when we visited, so Sumatra got the nod. In becoming the McDonald's of coffeehouses, Starbucks has inherited some of the same image problems: It's the standard-bearer that rivals aim to surpass, and its ubiquitous, inoffensive coffee has a hard time rating better-than-average in reviews.

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FLAVIA

Rank: 4

Roast: House Blend

Price per pound: N/A

Comments: "Too weak, watery, bitter. Horrible coffee." "Light flavor, no aftertaste but lacks zing." "Good, medium strong aroma, medium body." "Tastes like good beans. Is smooth, but not robust enough." "Slightly burnt tasting and a little bitter."

Background: This is the Business Journal's office coffee that features a variety of individual packets and a hot water dispenser that churns out individual cups. It replaces the standard issue urns that never got washed out and always seemed to be empty. It'll do in a pinch.

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THE COFFEE BEAN & TEA LEAF

Rank: 5

Roast: House Blend

Price per pound: $10.95

Comments: "Weak coffee, too many bubbles. Bitter. Office brand?" "Watery with watery aftertaste." "Strange floral scent, unexciting flavor, the worst by far." "Weak aroma, no body, no flavor, bitter and biting." "Tastes as if mint or something else was added before brewing."

Background: The only commercial brand that did worse than our office coffee. Maybe the staff in the crowded Larchmont Boulevard store was having a bad day and brewed a poor batch; the abundance of customers milling about didn't seem to have any concerns. Perhaps freshness is a factor: a pound of house blend that we purchased was roasted nearly two months ago.

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