US – Tully’s plans to open 40 new stores in the Us

Friday, July 10, 2009
Tully’s new blend: add stores

Freed of its debt, chain seeks 40 more U.S. franchises this year

Puget Sound Business Journal (Seattle) – by Greg Lamm Staff Writer

Fresh out of debt and fresh off its first profitable year since 2006, Seattle-based Tully’s Coffee says it is adding dozens of stores in the U.S. and Asia.

Despite watching giant coffee retailer neighbor Starbucks stumble and contract, Tully’s CEO Carl Pennington said this is a good time for his company to expand.

“I think the timing’s right,” Pennington said. “You can sit back and second-guess yourself. But I don’t think people are going to give up their coffee drinking, if we handle our portion of it right.”

Tully’s has been here before, setting lofty goals and promising its shareholders profits, only to see those plans unravel. But Pennington, who took over the struggling company 18 months ago after a long career as a grocery executive, said things are different this time.

In March, Tully’s sold its wholesale business to Vermont-based Green Mountain Coffee Roasters Inc. for $40.3 million. That money allowed Tully’s — which operates under the corporate name of TC Global Inc. — to pay off its debts and provide a $6 million dividend to shareholders.

The Green Mountain proceeds give Tully’s some latitude to enlarge its retail business, said Pennington. But he acknowledges that the company still faces hurdles.

Comparable store sales — a measuring stick of how well existing stores are doing — decreased by about 7 percent in the fiscal year that ended in March. While adding 35 stores last year, Tully’s also closed 17. And despite posting a profit of $22.9 million last year aided by the Green Mountain sale, the company lost a combined $23.7 million during the previous two years.

“We’ve got some work to do, no question,” Pennington said. “But we have a good plan.”

That plan has included cutting costs and getting better deals from suppliers, as well as adding more breakfast foods, and lunch items to pick up business in the afternoon when coffee sales taper off. Tully’s also intends to offer more “value” deals for combining items.

The Tully’s plan also includes franchise deals to add at least 40 U.S. stores in the next year. Tully’s has 80 corporate-owned stores and 92 franchised ones in Washington, Oregon, California, Idaho, Montana, Arizona and Colorado. The chain is looking at new deals with grocers, hotels and colleges, but the domestic growth will be focused on increasing the number of stand-alone stores in markets where it already has a presence.

Tully’s also has signed with a partner in Singapore, and Pennington sees opportunities in China, Korea and the Philippines as well.

Franchising makes good business sense for Tully’s because it spreads the risk to the franchisee, said Andrew Hetzel, a specialty coffee industry consultant and blogger based in Hawaii.

But Hetzel said he wonders if Tully’s plan to scale up more will spell success. Specialty coffee shops are seeing an explosion of business despite the recession, he said, but those faring the best are smaller businesses with a dozen or so cafes. It’s difficult to maintain the specialty coffeehouse feel with hundreds of stores.

“They become less of a coffee company and more of a quick-service restaurant,” said Hetzel, adding that coffee aficionados in Seattle and other cities have plenty of small specialty alternatives to Starbucks and Tully’s.

Pennington said he is not worried about falling into the Starbucks trap. He said Tully’s is getting plenty of interest from potential franchise partners, who can open a Tully’s store for a fee of $275,000 to $300,000. Tully’s also gets 3 percent to 4 percent of sales.

“As far as Starbucks, they are looking at where they have cannibalized their stores, more than anything else,” Pennington said. “They opened too many stores too fast. They are a damned successful store, still do a ton of business.”

It’s that success that Tully’s has often tried to emulate, including mimicking Starbucks by adding food and cold summer drinks.

This summer is no different. Tully’s is adding lemonade to the menu, as well as several cold treats. Tully’s held a companywide beverage contest among its baristas, and the winners — including a key lime pie bellaccino drink and a mango and cream smoothie — will be sold for the next several months, said Martin Walker, vice president of marketing and merchandising.

Pennington credits Walker and the rest of his senior management team for Tully’s newfound success. Tully’s board recently added CEO to Pennington’s title a year and a half after he was brought on as company president in the latest in a long line of management shake-ups.

That vote of confidence is no small feat. Tully’s has a famously impatient company board that is led by chairman and founder Tom O’Keefe and counts among its major shareholders the estate of Keith McCaw, the late billionaire cell-phone magnate.

Even Pennington says he was not sure how long he would stay on when he first joined Tully’s. He signed a one-year deal but maintained homes in Boise, Idaho.

He said he still has the Idaho properties, but he said he is enjoying living in a Seattle condo and running Tully’s.

“We’ve been able to turn things around,” he said, “and I feel good about it.”