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1991 the year of retrenchment.

1991 The Year of Retrenchment

Misery loves company, it is said, and the specialty coffee industry (to say nothing of the coffee industry in general) has seldom had more company, or more misery to share than in 1991.

It's hard to imagine how, with the market heading south (yet again), so many companies could be having difficulty at this time - particularly in a sector so allegedly vibrant as the specialty coffee industry.

Perhaps one of the most surprising events of 1991 was the Chapter 11 bankruptcy of Castle & Company. As president of the Speciality Coffee Association of America this year, and as the West Coast correspondent of this publication, Tim Castle had achieved a great deal of visibility and, many assumed, an equal amount of success. Yet the continuing doldrums of the market and lack of available financing "made it impossible to make up for some big market losses in 1989 and the general difficulties that a young company had to go through," Castle related.

Castle indicated that he hopes Castle & Co. can emerge from Chapter 11 as a successfully reorganized company selling coffee as an agency rather than as a dealer. "The financing needed for a successful dealer operation is not available to us, and frankly, the costs and risks of being a free dealer take a toughness that as a manager I was not able to muster. If, as a result of this |reorganization,' which will liquidate the current assets of the company for the benefits of the creditors, we can resume selling coffee as agents, and resume the good relations we had with most of our customers, I will be very pleased."

Other companies, while not in a state of insolvency, are close to it, according to Castle and other specialty green dealers. While no other green specialty dealers are rumored to be in trouble, many roasters have had difficulty paying their bills in a timely manner and taking up their contracted commitments. Several dealers have mentioned to us that their customers are several months behind in accepting delivery on their contracts, in addition to paying late for the coffee they are taking.

"Many roaster/retailer customers are also very slow right now," said another West Coast specialty green dealer reports who preferred to remain anonymous," ... and if they are doing well now what will happen when the market resurfaces from these levels?"

"It will be an absolute disaster," remarked Mark Mountanous of M.P. Mountanous referring to a possible rise in the market over the next year or two. "Roasters on the wholesale level have established prices and are competing on the basis of a 95 [cents] or so market. But if prices start upward, only the best managed companies will be able to hang in there." Another factor causing problems right now, according to Mountanos, is that many roasters over-bought last year based on the most optimistic sales projections and the assumption that prices could go no lower. "What people did not expect is that the market has consistently discounted the spot month, so even with March '92 at 86 [cents] it looks like you're paying a premium when September in 6 [cents] less.

Berard Trading's Elmer Place reports that they will be leaving the small-lot trading end of the specialty business. "We will no longer be in a position to store coffee. Rather, we will concentrate on selling container-sized lots to roasters in the gourmet trade. Because of the bankruptcies of United Coffee and then Castle & Co., we are simply not in a position to bring in these specialty coffees and sit on them."

"We are taking a serious look at the whole specialty industry and are finding that many customers simply are not credit-worthy by the standards that we normally use. There may be a lot of bags going through the specialty market, but it's not something that we want to be a part of right now," said one trader at a large New York house that has for the past several years warehoused large inventories of green specialty coffee for the West Coast.

The problems are obviously not all concerned with the specialty coffee industry. Many roasters are reporting their foodservice business is down and that their whole bean wholesale business is also lagging. The exceptions are the most competitively priced roasters in a given market. In both Los Angeles and the San Francisco Bay Area the most aggressively priced specialty roasters report brisk business. When asked where they feel the growth came from they both reported that their competitors' lunch was somewhat involved.

Similarly, wholesalers to grocery stores report mixed results and at least two wholesalers to grocery stores are reported to be significantly behind in their offtake of coffee.

When times are good and financing accessible, problems do not bubble to the surface with the regularity with which they have this year. In many respects, as the specialty coffee industry matures, periods of shakeout (if not shakedown) are to be expected. In a business however where margins are slim and payment terms lenient (green companies have extended generous terms to roasters as the number of specialty green dealers has increased) the similarity between the raw materials and cash is great (aside from green).

West Coast News Notes:

More Shakeout: Auction in Kona - The U.S. District Court trustee of United Coffee Corporation (in the finale stages of S. Bankruptcy Code Chapter 7) auctioned off the coffee processing equipment of the Donkey Mill on the Kona Coast. This eliminates one of the best known processors and may make it easier for the remaining processes to make a living. Elmer Place of Berard Trading, Emeryville, CA successfully bid on the processing equipment. The eventual disposition of this equipment is unknown at this time. Rene Jennet, former President and majority shareholder of United Coffee Corporation, was the last to bid against Place, Biding was said to have levelled off at $70,000. Some are still Expanding - Starbucks Coffee Company, its non-compete agreement with Peet's Coffee & Tea about to expire, is rumored to have leased two sites in the San Francisco Bay Area, and is said to have plans to open 55 more locations in the region. Three locations are already open in the Los Angles area in a joint venture with the upscale Von's Pavilions supermarket chain. The Los Angeles locations, according to company officials, are doing well.
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Title Annotation:specialty coffee industry
Publication:Tea & Coffee Trade Journal
Article Type:Industry Overview
Date:Sep 1, 1991
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