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FRESHLY ROASTED coffee beans pour out of the roaster to cool at Peet's Coffee and Tea's roastery in Emeryville.
SHADOW, an Australian cattle dog, crouches at the feet of youngsters Teresa Dayrit and Isabella Brown as they sip tea with Isabella's mom, Sarah Brown, outside Peet's Coffee and Tea. They are surrounded by a crowd including a 15-year-old golden retriever and other Peet's customers.

Less than half a block away on Berkeley's Solano Avenue, in full sight, is a Starbucks. Though there is a bench outside, not a soul is in evidence.

"Peet's was here first," says Sarah Brown when asked why she comes here. "They're a Berkeley original. The Solano Avenue store has vegan cookies." Somewhat wistfully, Brown adds, "Peet's wasn't always so much of a corporate company — but it's changing. They have many more stores now. It's getting more and more like Starbucks."

And that, industry insiders say, concisely frames the 40-year-old, $175 million company's challenge: to retain the unique quality that inspired generations of devotees like Brown — "Peetniks," as they are affectionately dubbed — while continuing the rapid expansion it began at the end of the 20th century.

By now, the story of Peet's is as much a part of local lore as that of Chez Panisse. Just as Alice Waters' North Berkeley restaurant changed the character of American cooking, the neighboring Peet's, founded in 1966 by Dutch immigrant Alfred Peet, transformed the coffee trade with its hand-roasted, premium-quality dark roast coffee.

Indeed, Seattle-based Starbucks, the $6.


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4 billion, 20-ton gorilla of the $11 billion annual specialty coffee market, was nurtured by Peet's. Gerald "Jerry" Baldwin, one of Starbucks' three founders, learned about coffee selection, blending and roasting from Alfred Peet. In 1984, Baldwin bought Peet's and in 1987 sold his interests in Starbucks.

Now, Peet's, currently based in Emeryville, is — like certain types of shade-grown coffee — flourishing in the shadow of 35-year-old Starbucks. Other smaller players in the specialty coffee industry include $58.2 million, Seattle-based Tully's, with more than 110 stores and an expanding wholesale business.

At first, Peet's was known for its slow and methodical growth in comparison to Starbucks, which currently has nearly 12,000 stores.

"They wanted to expand and they wanted to keep their unique brand identity, so they were very cautious at first," said Kenneth Davids, author of "Coffee: A Guide to Buying, Brewing and Enjoying" and editor of Berkeley-based Coffee Review.

But as the 21st century dawned, a new era of accelerated growth began for Peet's — growth that insiders like Davids say poses a dilemma. The company went public in January 2001 at $8 a share. The stock has more than tripled since then to about $25.

When Chief Executive Patrick O'Dea took over in May 2002, the company had 60 stores. The tally has now doubled to 120 — including 65 in the Bay Area — and Peet's coffee and tea is sold in more than 4,000 grocery stores nationally. Peet's is building a $17 million, 135,000-square-foot roastery in Alameda, which is scheduled to open in 2007. Of course, compared with the rapid expansion rate of Starbucks, which plans to add 2,000 stores this year and 2,400 stores next year, Peet's approximately 25-store-a-year growth rate — mostly in California — is minuscule.

"Revenue for Peet's is up 19 percent this year compared to last year," said Rob Black, a financial analyst for KRON Channel 4. Not only that, Peet's stock is up 220 percent over the last five years, he said. Though the company reported a rough second quarter this year, with profit dipping nearly 30 percent, Black dismissed the development as a hiccup caused by higher costs that quarter.

Black is bullish on Peet's, saying he believes that coffee sales will remain strong for years to come. About 15 percent of the U.S. adult population drank specialty coffee daily in 2005, according to the Specialty Coffee Association of America.

"Their dilemma is, are they going to stick to the methods that made them distinctive?" Davids said, citing the company's unique roasting approach.

Colin Newell, editor of Vancouver, British Columbia-based Coffeecrew.com, agreed with Davids.

"Peet's roasts one 120-pound bag of coffee beans — about the size of a sack of flour — at a time," Newell said. "Starbucks uses machinery that can roast 10,000 pounds at a time."

There's a downside to that. The quality of the coffee suffers or you have more fractured coffee beans. There are always compromises when you increase the scale of an operation," Newell said.

Peet's dark roast and "the incredibly strong drip coffee they make in their stores" are two of its unique aspects, Davids said. "Another part of their identity is selling only bulk coffee that is freshly roasted."

The company will stick to its values, CEO O'Dea vowed in a telephone interview in August.

"The most important thing to us as we grow is to make sure that we stay true to the 40-year deeply seated culture of quality that emanates from this place," O'Dea said, speaking from the Emeryville roastery.

"Our religion around coffee is: First, we are selective about the beans we buy and we pay whatever it takes to get the quality. Second, we only artisan roast by hand in small batches by trained masters. Our average roaster has been roasting over 10 years, our master roaster over 25. It's as much an art, like winemaking, as it is a science."

Third, the CEO cited "our commitment to get our coffee from roaster to cup as fast as possible." He said the company built a direct store grocery delivery system in 2002 "to meet our freshness standards."

Asked if Peet's will continue its hand-roasting process at its new 135,000-square-foot roastery in Alameda, O'Dea said, "You bet. Absolutely. We can use a little extra space, but it doesn't change the process.

"Though we are moving into a new home, we are bringing along a lot of our existing furniture. By that, I mean the roasters will be the same."

O'Dea described his company's marketing approach as "inside-out, as opposed to what large consumer packaged goods companies do. They go out and figure out what people want and build a product based on that. Peet's is built inside-out, from the passion people have about the quality of the coffee, and, hopefully, over time it attracts a customer base that is equally passionate."

Though the question is by no means resolved, Davids notes that Peet's made a skillful transition into espresso some years ago.

"The popularity of espresso threatened them, because they didn't sell espresso," Davids said. "But they managed to make that transition very successfully. They added espresso without losing their identity.

"It's a risky and difficult thing to do. But my cursory observation is that they did this skillfully in the Bay Area," Davids said.

In the original Peet's at Walnut and Vine in Berkeley, the air is redolent of the dark, rich coffee that has graced its confines for 40 years. A dad emerges bearing the familiar white paper cup, pushing his offspring in a stroller, while two cyclists fresh from their morning blast of coffee jump onto their bikes.

Inside, the espresso prices coexist peaceably with other offerings on the brown wooden sign setting forth the classic Peet's menu. A small coffee of the day is $1.50, a small latte $2.65 and a bag of Kenya $13.95, compared with $1.45 for a small coffee, $2.45 for a small latte and about $9.95 for Kenya at the Starbucks on Solano Avenue. About 12 people stand in line or engage in conversation while savoring the brew. A group of three men in slacks and shirts, possibly from the nearby University of California, Berkeley, appears to be discussing programming; phrases like "only when you have a gray line boundary" and "diagnostics" are uttered.

"With any branded company, the brand is a reflection of the person who is consuming the brand. The Peet's core customer has a much different perspective as a coffee connoisseur than a Starbucks customer," says Bill Cody, managing director of the Jay H. Baker Retailing Initiative at the Wharton School of the University of Pennsylvania.

Cody compared Peet's to successful microbrewery Samuel Adams, which started small and expanded nationally.

"Rather than growing for growth's sake, the goal is to find the customer who is the most successful customer," Cody said. "You're trying to get your product to the customers who will appreciate it."

Business Writer Janis Mara can be reached at (510) 208-6468 or jmara@angnewspapers.com.