Caribou Coffee Company, Inc.

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Caribou Coffee Company, Inc.

615 North Third Street
Minneapolis, Minnesota 55401
U.S.A.
(612) 359-2700
(888) 227-4268
Fax: (612) 359-2730
Web site: http://www.caribou-coffee.com

Private Company
Incorporated : 1992
Employees : 1,800
Sales : $65 million (1998 est.)
NAIC : 722213 Coffee Shops, On Premise Brewing

Caribou Coffee Company, Inc. is a privately held, neighborhood-based, specialty retailer of high quality coffees, teas, bakery goods, and related merchandise. The Minneapolis-based company operated 125 stores in six states at the beginning of 1999 and was estimated to be the second largest company-owned and operated coffeehouse chain. Caribou Coffee is positioned to take the leap from regional operator to national player in the rapidly growing gourmet coffee industry.

The Saga Begins: 1992-93

The Caribou story begins, as legend has it, with an Alaskan wilderness vacation. Kimberly and John Puckett were inspired during the trip to do something larger with their lives and consequently formulated an idea for a business of their own.

Kim and John, both graduates of Dartmouth College’s school of business, gained experience in finance and marketing prior to striking out on their own. Kim worked for General Mills, Dunkin’ Donuts, and the Chase Manhattan Bank, and John served as a consultant with Bain & Company and as an investment banker for Merrill Lynch Capital Markets where he specialized in mergers, acquisitions, and leveraged buyouts.

The Pucketts, one-time regulars at the Coffee Connection, a small Boston chain, spent about a year researching the coffeehouse concept and looking for ways to improve on it. “What really interested us in coffee was, at the time, it was just booming in Boston, same thing that’s happening in Minneapolis [now],” John Puckett said in a January 1994 Twin Cities Business Monthly article by Allison Campbell.

The pair moved to Minneapolis in the summer of 1992, following a six month analysis of potential markets. In addition to possessing positive demographics, the region was a known commodity: the home turf of Kim Puckett. Family, social, and school connections paved their way into the investment community and allowed the Pucketts to open their first coffeehouse that December.

In general, the gourmet coffee business was on an upswing. While overall U.S. coffee consumption had fallen during the 1960s, 1970s, and 1980s, the decline took the biggest bite out of the mass-produced ground variety of coffee sold in supermarkets. High gross profit margins on individual cups of specialty coffees, plus good return on investment, and relatively low start-up costs, drew scores of entrepreneurs such as the Pucketts to the business.

In the Twin Cities, the Pucketts’ first shop, located in the affluent suburb of Edina, joined other coffee vendors already on the scene. They ranged from eclectic neighborhood hangouts with names like Muddy Waters to locally owned microroaster/coffeeshops such as Dunn Bros. Coffee Co. and franchise operations including Chicago-based Gloria Jean’s Coffee Beans. On a larger scale, Folgers, Kraft General Foods, and Nestlé, entered the market with their own gourmet grinds, and the Seattle-based Starbucks coffeehouse chain went public in a push to become a national chain. The specialty coffee industry’s annual sales were about $780 million in 1993.

Brewing Up a Storm: 1994-95

The Pucketts opened their second shop in the robust Uptown area of Minneapolis. Site selection was utmost on their mind. A key ingredient for the success of the coffeeshops was location, and the couple was determined to lock in good sites before Starbucks arrived on the scene.

Four Caribou Coffee shops marketed espresso drinks, baked goods, coffee beans, and branded merchandise as a new round of financing was put in motion in September 1993. Two earlier rounds netted $600,000, but in their third the company received commitments for $3 million, more than double the target figure of $1.2 million. Opening costs for a Caribou Coffee shop ranged from $175,000 to $200,000. In a short period of time, the company established itself as a top player in the Twin Cities market.

Unlike other locally based competitors Dunn Bros, and Kafte Inc., Caribou Coffee purchased rather than roasted its own beans, choosing instead to concentrate on service and quality control. The mystery shopper was one technique used to ensure good customer service: loyal customers trained to critique their Caribou experience regularly visited the shops. Kim, who was in charge of personnel, received the historically low score when she filled in for an ailing employee, according to the Campbell article.

While the Pucketts strived for product and customer service consistency from store to store, they also wanted each location to reflect the personality of the neighborhood. “All ours do now,” said John Puckett in Twin Cities Business Monthly.”That’s how we’ll compete with what I’m sure will be ultra-deep pockets that come into this business, as the big chain companies see the growth.” Neighborhood locations, preferably in older buildings, staffed by people with an affinity to the community helped create a unique feel at each location, according to Campbell.

As Kim managed the personnel aspects of the stores, John tended to coffee quality, real estate acquisition, and finances. A fourth self-managed private placement brought in $7.3 million in the spring of 1994. Some of the new capital was earmarked for expansion into a new market: Atlanta. Tennessee-native John Puckett planned to capitalize on his knowledge of the Southeast, just as they had used KIM’s knowledge of the Midwest as they built their Twin Cities market.

Bringing ten stores into operation in a relatively short period of time gave the couple ample learning opportunities. For example, they discovered downtown Minneapolis shops pulled in morning customers but slacked off over the rest of the day, thus proving to be poorer performers than the neighborhood shops. To facilitate growth the company made some internal adjustments, including the establishment of a central roasting facility and the hiring of a chief financial officer.

As expected, Starbucks came on the scene and opened shops in downtown Minneapolis in March 1994, providing competition for Caribou but also upping interest in specialty coffee. Kafte closed its Minneapolis locations a few months later, claiming competition among the larger players had inflated real estate prices for choice sites. Owner Joe Anderson, who established his first shop in 1985, also said in a November 1995 Minneapolis/St. Paul CityBusiness article, that Caribou Coffee had cornered the market on investment dollars as well.

The Pucketts continued to seek out opportunities which would strengthen their position in the market. In September 1994, Caribou Coffee entered into a joint agreement with Byerly’s Inc. for shops in or adjacent to four of the upscale supermarkets—competitor Starbucks had similar arrangements with independent supermarkets in Seattle and Chicago. In addition to serving beverages to Byerly’s shoppers, Caribou shelved branded coffee beans and merchandise. Caribou had other synergistic relationships with retailers, including bagel and bookstores.

Twenty-one Caribou Coffee shops pulled in a total of $6.45 million in sales in 1994, according to an April 1996 Corporate Report Minnesota article by Lee Schafer. The investment community, eager to send up the next Starbucks, continued to pump money into Caribou Coffee. The enterprise also drew interest, Schafer surmised in an earlier article, because of the caliber of investors already on board, such as John Puckett’s uncle Dr. Thomas F. Frist, founder of the Hospital Corporation of America, and asset manager James R. Jundt, who was well-known on Wall Street. A round of funding in 1995 brought in about $18 million including the first institutional dollars. Oak Investment Partners of Newport, Connecticut, contributed $3.5 million.

Company Perspectives

Caribou Coffee was founded in December of 1992 by Kimberly and John Puckett. The Caribou Coffee concept was created after the company’s founders backpacked through Alaska. On the summit of Sable Mountain in Denali Park, they decided they wanted to build a company to capture the spirit of accomplishment they felt during the climb. They began plans to build a special company that would bring the mountain experience into local neighborhoods where customers could find a place to “escape the daily grind” each and very day. On the descent, they saw a herd of wild caribou. The beauty and incessant movement of these caribou seemed to be a fitting name for a company that aspired to both rapid growth and high quality. The company was founded with the intent of building a leading national specialty retailer in the high growth industry of gourmet coffee.

Adjusting the Brew: 1996-97

A new look helped earn Caribou Coffee a spot on the 1996 “Hot Concepts!” list compiled by Nation’s Restaurant News. An Alaskan lodge format replaced the slick urban look Caribou Coffee had cultivated. The change differentiated Caribou from Starbucks and brought the concept more in line with the experience that originally inspired Kim and John’s enterprise. The Alaskan lodge concept, showcased in Caribou’s larger shops, featured rough wood and stone decor, comfortable seating, cozy fireplaces, and live music for evening patrons. A running caribou continued to dominate the company’s logo, and the Puckett’s Alaskan photo hung in each store along with a request for outdoor vacation shots of customers wearing Caribou Coffee T-shirts.

On average, beverages pulled in 60 percent of revenue, food 20 percent, coffee beans 15 percent, and merchandise five percent. Total sales reached $15.46 million in 1995, but the developing company continued to lose money.

By May 1996, the Pucketts’ grand adventure had spun off 58 units, including four Detroit-area Coffee Exchange stores acquired and converted to the Caribou Coffee format in 1995, but repeated rounds of financing had diluted their ownership to less than 20 percent. Board member James Jundt, who personally invested $1.65 million, held more than 10 percent of the company. Representatives of three venture capital firms, including Oak Investment Partners, also sat on the board.

The influx of funds from the investment firms put pressure on the Pucketts to reach the 100-store mark and take the company public, as had Starbucks at that watershed. Yet internal changes such as executive management turnover—the head of store operations and the chief financial officer departed—and the revamping of the concept slowed the growth rate. Predictions that the last round of funding would bring Caribou to the 100-store mark by the end of 1996 failed to pan out, and some investors expressed concerns regarding the Pucketts’ ability to manage a larger company, reported Schafer.

Twenty-five store openings pushed the count to 89 by the beginning of 1997. In May, Jay Willoughby, a 24-year veteran of chain restaurant management, joined Caribou as president and partner. Willoughby previously headed the 1,000-plus Boston Market chain and PepsiCo restaurant ventures. Willoughby took command of all operations. Kim Puckett, as chair of the board, concentrated on corporate culture and communications, and John Puckett, as CEO, focused on raising funds.

Caribou’s 89 units, located in the Twin Cities, Atlanta, Detroit, Chicago, North Carolina, and Ohio, placed the company in the number two spot among all U.S. company-owned coffee houses. Market leader Starbucks owned and operated 1,140 and San Francisco-based Pasqua Inc.’s held third place with 55. Two franchise operations, Gloria Jean’s and Coffee Beanery, held the number two and three spots, respectively, behind Starbucks, when considering all U.S. coffeehouses.

Estimated to be the nation’s fifth largest coffeeshop chain, Caribou Coffee ranked among the top 20 percent in the country among any business when it came to raising private funds. “Caribou might not have achieved that ranking if things had gone more smoothly,” wrote Terry Fiedler for the Star Tribune in June 1997. “Because the company didn’t have its cups in a row, it enlisted existing private investors for another round of financing—$12 million—this year instead of selling shares to the public.” Caribou did finally top the 100-store mark in 1997, and total sales were about $40 million.

A deal with Delta Airlines in early 1998 promised the company some welcome exposure. Most of the Atlanta-based carrier’s domestic flights would offer Caribou brand coffee. The coffee company already had a strong presence in the region: Caribou operated 18 Atlanta stores, second in number to the Twin Cities. Starbucks coffee had been aboard United Airlines flights since 1996, part of a growing trend in the airline industry to offer brand-name products.

The sheer number of tasting opportunities afforded by the airline deal outweighed anticipated sales gains: only about $4 million but for an estimated 60 million cups of coffee. Caribou Coffee sold just ten million cups in its stores on an annual basis but based on gross profit margins of up to 80 percent the stores earned the lion’s share of revenues. Direct mail sales also got a boost when Caribou gained access to Delta’s preferred customer list.

Another opportunity to build recognition as a national brand came by way of an agreement with Target stores. Caribou began test marketing bags of coffee beans in 20 Target stores across the country in July 1998 and then in all Target stores during the holiday season. A decision about a long-term deal was expected in 1999.

Pushing Toward the Peak: 1999 and Beyond

Caribou ads hit the airwaves for the first time in February 1999, beginning in the Atlanta area. Nationally recognized Twin Cities-based ad agency Carmichael Lynch handled the radio campaign which was slated for other major Caribou markets in the spring. Caribou used its “Life is short: Stay awake for it,” slogan from print, outdoor, and direct mail ads in conjunction with slice of life scenarios.

The $3 billion gourmet coffee market steamed along but remained highly fragmented as the century wound down. Meanwhile, Caribou continued to position itself for the move from a regional to a national chain. Willoughby worked to create internal stability capable of supporting the leap. He brought the business to profitability for the first time by strengthening existing markets and working to retain and satisfy employees. Growth scheduled for 1999 was to be funded internally, but Willoughby had his eye toward that long-promised public offering as a vehicle to move Caribou to the next level.