The Saga of BROTHERES COFFEE.

Avenues Coffee Arises from Brothers' Dust

When Brothers Gourmet Coffees Inc. became Avenues Coffee Co, in early April, it marked the close of a unique chapter in Denver business lore and the start of a new story in Houston.

The company, founded in Denver in 1985 by brothers

That dream didn't pan out - and the brothers left the company in 1995. In 1998, Brothers went bankrupt, a quandary from which it re-emerged in February, to be reborn in a completely different form as Avenues. "We selected that name because we thought it gave us a new lease on life in the coffee world, a new avenue," said Linda Pennington, c.e.o. of the company, which is now based in Houston, Texas. She became president and c.e.o. in February, after serving as vice president of operations for manufacturing and distribution at the Houston plant, which has been owned by Brothers for five years. Houston became the headquarters of the company in July 1999 after the Boca Raton office closed.

Previously the company made and packaged its own Brothers brand of beans for sale on grocery store shelves. Brothers also pursued a retail coffee bar strategy in the early 1990s, which failed after 50 stores opened. Today, the Texas coffee company is leaner and meaner, said Pennington, and plans to operate as a private label company, which means it acts as a supplier, making and packaging gourmet coffee for other companies, including Proctor & Gamble, Millstone, and Mother Parker's Tea and Coffee.

"It's very important that the marketplace understand our objective is to be a private label manufacturer," said Pennington, who was born and raised near Houston and worked at Starbucks prior to joining Brothers three-and-a-half years ago.

The Houston location creates enormous operating efficiencies, she said. The company has shed all 30 of its distribution facilities around the country as well as the Boca Raton headquarters, leaving only the Houston plant. Those changes eliminate $2.7 million a year in overhead, she said. The company ahs invested in plant equipment and staff training that should create more efficient and proficient roasting and packaging, she added.

Pennington estimates the company has improved its cost to produce and its on-time delivery by 35% over a three-year period. "Our focus can be on the roasting of coffee to an identified specification and delivering it and not having to compete directly on store shelves," she said.

Consumers can still find the Brothers brand in grocery store aisles, though the brand name of that line was sold to Proctor & Gamble during the restructuring. Such an affiliation with a large corporation is exactly what the company needed, said Dennis Boyer, who now works as a professor in South Florida.

Brothers Coffee merged with Specialty Coffee in 1992, relocated to Boca Raton and went public in 1993. The company is now privately owned. Boyer moved from Denver to Boca Raton and stayed on as president and c.e.o. until 1995. He has not been involved in the company since then. His last few days in that post were spent on the road pitching the company to possible strategic investors who might be able to infuse it with badly needed cash. The retail rollout had turned out to be a huge cash drain and the company was also being squeezed by the so-called "slotting fees" at grocery stores, the price for placement on the shelves. It was thought that the backing of a big player might help keep the company afloat, Boyer explained. "My view is if you are an entrepreneur and you are growth-oriented, you have to work towards a strategic merger and acquisition or get out of business. Or keep it as a small regional business." But a merger relationship took three years to develop and the ensuing financial burden spelled on ly one option --- bankruptcy.

When the Boyers launched their business in 1985, they didn't pay slotting fees. As grocery store chains grew larger, that changed. Boyer said that by 1995 the company paid southeastern grocery store chain Publix $2 million per year simply for the privilege of being on its shelves. "We had to pay top dollar. It got to be expensive," agreed Pennington, who has never met the Boyers.

Competition also paid a huge role in the downfall of the company. In the late 1980s and early 1990s, giants like Proctor & Gamble, Nestle and Kraft General Foods, who could afford the rising fees, wanted to grow their coffee businesses.

"We were not successful in that marketplace. Our competition had the ability to market and sell at a price we couldn't compete with," said Pennington.

Nonetheless, the grocery store market is a shrinking one for coffee makers, said Gary Hemphill, vice president of Beverage Marketing Corporation in New York. Supermarket sales of coffee have been on the decline for the last decade, he said. "People are moving from hotter, darker, more bitter beverages to colder, lighter and sweeter beverages," he said. People's taste in coffee has broadened from the tins sold at the store and brewed at home to the seemingly endless variety of lattes, cappuccinos and frothy drinks that are popular in retail outlets.

True, acknowledged the National Coffee Association, but the ranks of coffee drinkers in America grew by four million over the last year, said Gary Goldstein, spokesman for the New York organization. According to a 2000 survey, 79% of the adult population, or 161 million people, were either daily or occasional coffee drinkers. The retail business is an $18.5 billion industry. While supermarket sales have been flat or down for instant and coffee blends, the gourmet market is soaring, he said.

According to Information Resources Inc. in Chicago, which tracks scanned items, ground coffee sales at supermarkets for the 52-week period ending Jan. 2, 2000, were about $1.68 billion, a 10.7% dip from the previous year.

The declining supermarket coffee revenue doesn't tell the whole story, Boyer pointed out. Those figures only include scanned -- items, those with a code on the bottom of the package. A lot of bulk gourmet coffees are sold like produce, without such codes to track their sales, he said. Bulk sales accounted for about 65% of the revenue mix when Boyer was with Brothers, he said.

Still, the company faltered in other arenas, notably retail. The retail business required more cash than Brothers had, since the stores were all company-owned, said Boyer. The company stopped its rollout after opening 50 stores in order to seek more money. The stall in the rollout meant a loss of momentum, a precious commodity in a retail business. Boyer believes that Brothers would have shared the market with Starbucks today -- if the economic model panned out. "The stores required more cash that we expected," he said.

Since the company had gone public a mere 18 months prior to the introduction of the retail stores, he didn't want to go back to the public market for additional funding. That's why a strategic partner was sought, but none was found for three years. "It was a calculated strategic risk," he said. People often ask why he even tackled the retail beast at all. His response: The wholesale market was tightening up because of the slotting fees, so he needed to pursue a new direction.

While he says he wouldn't have done anything differently with hindsight, he does wish that perhaps the company had stayed small and thus avoided the tugs, pulls and pressures from a larger marketplace, controlled by companies with deep pockets. "It's a corporate game and a corporate world," he said.

Though he has no interest in returning to the coffee business, he does believe that the private label strategy is the best direction for the revamped Avenues Coffee. Volume is the name of the game in private label and to succeed a company must make coffee better, cheaper and faster than the competition. Avenues' Houston plant is ideal for that, since it is centrally situated to serve the eastern and western U.S., said Boyer.

Still, the market is aggressive and it is harder to survive, said Goldstein. "Large companies want to increase market share. Mid-size companies are being squeezed out."

As for Boyer, he harbors fond memories of the early days. "My regret is that I couldn't keep the world from turning. The experience of Brothers Gourmet in Denver with our employees was as close to the Camelot experience as any could. We had a beautiful sense of mission and hard work and sacrifice," he said. And while there is some sadness that Brothers did not become the next "aspirin,' said Boyer, the name does live on in the Proctor & Gamble brand, which is still stocked at local Denver grocery stores.

Now Boyer has more time to spend with his family and do what he loves. A side project includes financing and creating the Center of Entrepreneurship at FAU and the Center for Leadership Communication at Barry.

Sam Boyer recently returned to retailing through a combination coffee store and flower shop in the Denver area.

Daisy Whitney is a freelance writer based in Denver. Her work has appeared in the Denver Post, Electronic Media and other publications.