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Peet's Coffee & Tea Inc. (NASDAQ:PEET) held its annual shareholder meeting at an Emeryville hotel on May 20, 2009. The small hotel conference room was filled to capacity. Peet’s offered shareholders Peet's drip coffee, juices, fruit, pastries, and yogurt. Shareholders also received a reuseable Peet’s bag containing coffee beans and a box of tea.

Peet’s shareholder meetings are fun to attend for several reasons. First, although Peet’s is a publicly-traded company, it doesn’t act like most major corporations. Its meetings are less formal, and Peet’s executives seem more receptive to questions and comments than other companies. Second, Peet’s talks about what it is doing to find and develop coffee beans, which usually results in interesting stories involving international travel. Third, it is hard to walk out of a meeting unhappy when Peet’s provides good food, great coffee, and several complimentary items.

CEO and President Patrick J. O’Dea started the meeting with a brief slideshow presentation. He explained that recent economic events have caused American consumers to experience a 30% evaporation of wealth. He mentioned several retailers that had filed for bankruptcy (Circuit City, Levitz, Sharper Image, Linens ’n Things, and Mervyn’s) and indicated these retailers may have expanded too quickly. He talked about an “embarrassment of riches” and how consumers were avoiding conspicuous consumption. Despite these troubling events, however, Peet’s managed to grow sales by 14%.

Peet’s continues to use ERP (enterprise resource planning) to attack inefficiencies and cut costs. CEO O’Dea mentioned that executives had agreed to a management salary freeze for 2009, while increasing salaries for hourly workers. Peet’s commitment to its rank-and-file employees may explain why almost every Peet’s employee I’ve met has provided great customer service. (My local store, run by Store Manager Ian Batra, is particularly good at going the extra mile to make customers happy.)

Peet’s continues to expand by using targeted advertising, such as direct mail and email. Peet’s most recent advertising efforts involve a partnership with San Francisco’s de Young Museum. Peet's also has a promotion that provides a free medium iced drink after you buy five iced drinks. (Make sure you get the card--the promotion ends on August 31, 2009.)

CEO O'Dea explained that Peet’s has multiple channels to sell its products, including retail stores; home delivery; food services; office; and grocery stores. Peet’s coffee is currently sold in over 3,500 grocery stores. While Starbucks relied heavily on expanding its own stores to grow sales, Peet’s grew at a more measured pace and has focused more on grocery store alliances to sell its coffee beans. Peet’s strategy has paid off. Opening fewer stores and selling coffee beans through already-established grocery stores has allowed Peet’s to shift overhead onto third parties and lower its operating costs.

CEO O’Dea then turned the meeting over to coffee buyer Doug Welsh. I am a big fan of Mr. Welsh. Mr. Welsh naturally exudes sincerity and diligence, which is particularly helpful when dealing with international operations and finding reliable business partners. Mr. Welsh talked about how Peet’s finds its coffee beans and what it is doing to maintain quality and sustainability. He showed some pictures (unfortunately, only a few) of himself and buyer Shirin Moayyad in Africa tasting coffee. He explained how he judges coffee beans, using a five point scale:

5 is Peet’s Quality.
4 is Other high grade speciality.
3 is Good quality.
2 is Problematic but saleable.
1 is Defective.

He also explained how Peet’s helps communities create better living conditions. For example, in his never-ending quest for the best coffee beans, Mr. Welsh visited some places where “backyard growers” were smashing coffee beans on rocks, a highly inefficient process. (Mr. Welsh said these people were literally “between a rock and a hard place.”) After Peet’s became involved, it showed the residents how to buy and use various micro-mills to improve coffee production and quality. After residents establish a cooperative and pool money to purchase a micro-mill, production and profits increase. With increased profits, small villages are then able to provide basic health care to their residents and improve their quality of life. (Say what you want about globalization, but I love it for precisely this reason–when it’s done right, everyone benefits.)

Mr. Welsh made some other comments before turning the meeting back to CEO O’Dea. Mr. Welsh indicated he was looking forward to the “New Africa” blend. He said that for logistical reasons, Latin America exports more coffee beans than Eastern Africa. He said that Peet’s tends to pay more than the Fair Trade Certified guaranteed minimum living wage. (Lest you think Peet’s executives are purely altruistic, Mr. Welsh reminded everyone that the ultimate goal was to get the best coffee beans: “Any dime we spend to make the world a better place is your dime. We’re very conscious of that.”)

Mr. O’Dea then opened the meeting to questions. Before I go into the Q&A, I want to make one comment. Peet’s didn’t have a portable microphone. As a result, many questions were difficult to hear. Peet’s might want to bring a portable microphone to its annual meetings to make questions easier to understand. While the CEO repeated most of the questions, it would be better to hear questions directly from the person asking them.

The first question was about free Wi-Fi. CEO O’Dea said that Peet’s offered free Wi-Fi in most of its stores to attract customers.

A shareholder asked about options, referring specifically to page 11 of the proxy statement. The shareholder complained that Peet’s had shortened the vesting time period for certain options from seven years to four years. This change appeared to diminish the link between long term share performance and executive compensation, he said. CEO O’Dea disagreed and later mentioned that 75% of his individual net worth was linked to Peet’s stock.

A shareholder asked whether Peet’s would expand operations in airports and other outlet-type facilities (e.g., BART stations). CEO O’Dea said that Peet’s is always searching for good locations. Later, in response to a related question, CEO O’Dea said that Peet’s had no plans to enter the franchising business but had 70 licensed stores. (A “licensed” store is a store that Peet’s does not own but allows the operator to use the Peet’s brand name and products. Persons serving coffee in those non-Peet’s-owned outlets participate in a Peet’s training program.)

A shareholder asked about what Peet’s was doing to improve brand recognition and sales growth on the East Coast. CEO O’Dea talked about targeted advertising.

Someone asked how many stores Peet’s planned on opening in 2009. (I apologize, but my notes are not definitive on the response, so I cannot provide an answer. In case you are interested, my notes indicate, “10 stores (reduced #) – open in ‘09. 58 –> 200 stores.”)

Someone asked about a Consumer Reports taste test that rated "Eight O’Clock" coffee as the best-tasting coffee. Mr. Welsh said that the survey was flawed for several reasons, which drew some laughter. Mr. Welsh opined that the persons who participated in the taste test probably grew up tasting less strong coffee.

Someone asked whether Peet’s would enter the chocolate business. CEO O’Dea said no, but a partnership might be possible.

Someone asked about diversity, pointing out that the Board wasn’t diverse. CEO O’Dea said that diversity was a continuing process and an important factor. He said that Peet’s had done well in a UC Davis leadership survey when compared to other corporations. He also said that half of the executive team reporting to him were female.

Someone asked what Peet’s did to choose the best tea. A Peet’s employee said that he had inherited many good relationships with tea suppliers. CEO O’Dea said that Peet’s was now selling cold tea in select grocery stores. (I’ve tried these teas–my favorite is the Snow Leopard Tea with Honey.)

A shareholder mentioned that Peet’s was very helpful when it came to composting and that Peet's gave away expired beans for composting.

Someone asked how Peet’s finds high quality coffee. Mr. Welsh said that too-rapid growth leads to reduced standards (a little dig at a certain Seattle-based competitor), and Peet’s slower growth allowed it to focus more on finding high-quality coffee beans.

A shareholder asked if any Peet’s stores had not done as well as expected. CEO O’Dea mentioned that Peet’s had closed the Westminster store due to its poor location/visibility.

I asked Peet’s to publish more information, perhaps on Facebook, about Doug Welsh’s and Shirin Moayyad’s travels. I said I really enjoyed seeing the pictures from the coffee buyers’ international trips, and I regretted that Peet’s only showed a few of them at its meeting. I said Peet’s ought to consider publishing a “coffee table” book with pictures from different countries and, with permission, the people its buyers meet and work with.

I also asked a question about food sales in Peet’s retail stores. It turns out that Peet’s makes 60% of its retail store profits from drinks and 40% from food sales. If I heard the CEO right, the margins Peet’s gets on its food items must be incredible. (Try the vegan chocolate chip cookie–it’s delicious.)

A few tips for Peet’s customers:

1. If you are staying inside the store, order a large drink in a “for here” cup. The “for here” glass cup seems larger than the “to-go” cup. You get more coffee and you also help the environment.

2. It costs Peet’s about 7 cents for a hot coffee “to-go” cup, but about 15 cents for a cold coffee “to-go” cup. As a shareholder, you should buy a Peet’s tumbler, because you get a discount each time you use it, and Peet’s also saves money. Of course, you also help the environment by reducing waste.

3. When ordering a frozen drink (e.g., a frappe), order it “extra bold.” If you don’t order it “extra bold,” your drink won’t have espresso–just regular coffee.

I look forward to attending next year’s meeting and hearing more about Mr. Welsh’s travels. In the meantime, I will be buying lots of Peet's coffee. Although the economy isn't doing very well, and I will earn much less money this year, I cannot bear to give up my one luxury--a Peet's cappuccino.




Note: the pictures above are of myself, Doug Welsh, and Shirin Moayyad, and the food trays after the meeting was over.

Note: a review of Peet's 2008 meeting is here.

Disclosure: I own an insignificant number of Peet’s (PEET) shares.

Source: Notes from Peet's Annual Shareholder Meeting