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Is It a Sell Out?

Is It a Sell Out?

There has been a strange turn along the high road of the coffee trade, not unexpected, but just odd. And perhaps it is only odd because coffee has been considered an exception, something a little different than other industries and products, a place where the normal calculus of higher production, lower cost and maximal profits didn't come to bear as heavily as other industries.

Coffee has a high road on its map, and the businesses who have taken it do so with some conviction, a guiding definition of what "good" means in terms of coffee and small business practice. They take this path with personality and style, and spin a narrative around their own activities, ethics, and quality. They spin that narrative a lot, maybe a bit too much.

The first suggestion of a change, a forking in the path, was the sell-outs. You can call it "taking on investors," "teaming up," or "partnering."  In the tech-world it is an "infusion of Venture Capital."  It's really sell to another party who eventually will change the priorities of an enterprise. It's more than naive to think they wouldn't: of course someone who invests is seeking more than pride of ownership and good vibes, duh!

The funny thing is the recent responses to these sell-outs; there seems to be a general ho-hum indifference. It's different than a few years ago when I remember seeing online backlash to Stumptown selling out to TSG Partners.  The owner said he simply "brought in a buddy of mine to do things I want to do."  Even the lingo at the TSG site of "collaborations" and (again) partnering seem to soften the notion of selling out. But with 90% stake, and TSG investments spread across products as diverse as Vitamin Water, Comet Cleanser, SexyHair and PetSafe dog food, what specific interest might they have in coffee (besides expanding a good friendship of course)?

The customer response to the initial Stumptown sale was reactionary and a bit dumb. It was as if an indie garage band had signed to a major label and their fans were rejecting them. How is a coffee shop like a band? Why would shoppers of Stumptown think it was something to believe in? Why would they identify with the company in a nearly religious way, to feel personal betrayal at the move?

The more dramatic hate posts didn't last long at all, as people seemed to realize little would change on the local level, their friends would still work there, and yeah, maybe there was just a new buddy at the company and now they could do more cool things. Maybe the people who cried foul at the "sell out" ended up feeling a little dumb?

These days "sell out" has little foothold in the world of politics where it was once rooted.  It originated from groups on the radical left that held principles and practices incommensurate with the mainstream. Anyone who dipped a toe in the mainstream was a traitor, a sell out.

Selling out became linked to ideas of cultural expression, questioning the purity of an artist emerging from a subcultural niche and posed with a) "reaching a broader audience" or b) "cashing in", depending on how you see things. It was used most in music although wikipedia tells me that comedians who stop cussing to get more gigs are deemed as sell outs too. Good to know.

Co-option, or the somewhat more value-neutral term of "recuperation," is another term that has migrated out of the world of radical politics to into more commercial realms.  Recuperation is accomplished by the media when a fringe idea or trend is anesthetized and made palatable to mainstream audiences.  Remember the break dancing episode of Solid Gold? Or when Ponce and Jon encountered the graffiti artists on CHiPs?  In the coffee world, Ritual Coffee uses the symbols of Marxist resistance as a part of their brand. How pre-post-ideological of me not to get it!

If a small business sells out to a larger one, or to investors, it seems like a silly notion to accuse them of selling out in the moralistic sense of radical culture and such. I mean, these are enterprises who created products to sell from the day they were conceived. The principle was always to commercialize something, unlike a group organized around an idea. But maybe it is the fact that coffee businesses seem to have a style and character which gives the notion of selling out a rough fit.

And in fashion many brands that have devoted followers, and shift their practices in the presence of pecuniary forces, have been called out as such. As an example, Blue Bottle sell out didn't seem to faze anyone, as the company never professed any stylistic grit (as opposed to Stumptown). The BB fashion seemed fussy and posh from way back, so selling out seems unanchored to the potential loss of any ideals. Their fundraising is now in its 3rd round it seems, and ownership is split between 17 various capital funds and rich tech peeps.

People seemed much more disaffected by Blue Bottle taking down the Handsome Coffee sign in LA, although I am sure their clever "find the blue bottle, win a prize" social media campaign they staged around the city more than made up for the ire of Handsome lovers.

Now we hear that Stumptown sold to Peets lately, which in itself is a funny way to put it. Peets was taken into private ownership by JAB Holding Company a couple years back, and JAB has a massive stake in coffee with DE Master Blenders, Jacobs Douwe Egberts, Mondelez International, Baresso Coffee, Espresso House (the huge Nordic chain, not that place in Sparks Nevada), oh, and Caribou Coffee. (Note: JAB bought Intelligentsia majority stake a couple weeks after this was written). If any of those are unfamiliar, it's because some are so huge you have to get in a helicopter to see their operations, and you can fit the Statue of Liberty inside one of their roasters. Okay, probably not, but they are XXXL-sized.

So TSG sold 90%+ of Stumptown to JAB, and why? Was it the cool company t-shirts and legendary company trips to see Slayer? Well, actually, yeah, in a way.

Take a look at this video (or if that's not barfy enough, try this) and you can see that it's about two things; brand image and product.

I don't think coffee companies are being sold like this because their coffee is so amazingly different (both Blue Bottle and Stumptown serve good coffee in their shops, certainly on that "high road" in the spectrum of coffee, although sometimes I really don't know about you, BB). It wasn't because they had grown into certain geographic areas that the buyer wanted to expand into, or that it was the easiest way for the buyer to gain market share. What these companies do possess is an "authentic" brand image, something mutable and expandable, something that, in the world of coffee, is very difficult to whip up from scratch, even for a company with deep pockets. In a way, it is like being a scout looking for bands, seeking the new and the authentic, the novel and the hip. But they key to the mutable and expandable nature of these companies isn't in opening new locations, sourcing more coffee at higher levels in price and quality, doing things that haven't been done before. Rather, it is something more mundane than far-out trips to far-out places, or urban adventures to hip Vice-sanctioned hoods.

It's about little cans, bottles and boxes of beverages, shelf-stable products with the same logos as the sign outside that cool cafe, that hand-stamped Kraft bag, those thick little espresso cups. It looks like a portable slice of the original experience, because the name, logo, text, and container evoke all of those things. Sadly, the cold brown liquid inside, does not.

Traditional roastery/cafes  can rake in the cash, especially when they are as popular a Stumptown or a Blue Bottle. I have seen spectacular lines at Ritual, at Four Barrel, at Sightglass here in SF. Here you have a coffee server making a fresh hot drink for each person to order. Bring a friend, buy a pastry, add a 11.5 oz bag of fresh-roasted beans, and you spent $30 maybe.

Seems like a good enterprise. But is that good enough for investors? How expandable is that? How many people can reach that destination? How many drinks can be made one-at-a-time to order? How many peeps' coffee can be dispensed per hour? You could expand out to the public, grow more branches, but that involves tons of real costs. How can you grow that business, generate big revenue, add a ton of value to the company, and sell your stake to the next investment group? (And if it's venture capital money, they will flip it as soon as they can).

I can hear the investor saying, "What are these hipster idiots thinking?"  It's like the roaster-retailer model of coffee was designed to defy the investment model of value-building.  With a typical small coffee business, the value of the brand is lodged into this tight niche of quality, and if you tweak that by changing practices like centralizing, becoming more efficient, spreading out, you're just back into the '90s big Specialty Coffee of Gloria Jeans and such. You'll damage the brand and lose the value of the company by taking that route.

There's bottlenecks at every turn in the practice of a "high road" coffee company. The entire premise of the small coffee enterprise was a response to the early purveyors of "specialty coffee" who thought they could have it both ways: roast a mega-stock of marginal "special" coffee (hey, its from the Terrazu valley of Costa Rica, it's special!), and pack it in valve bags for use a few months down the line. But we all knew it was fake: For coffee to be good, it has to be roasted recently, less than 7 days ago, optimal 1-5 days post-roast. That means a roaster needs to be local, in the shop, or in town. The green coffee needs to be fresh and clean tasting, and the drink preparation and service have to be competent, consistent, and very very good. That's expandable only by duplication, not exponentially. Yes, you can take what you did in one location, and do it again somewhere else. And bring along the roaster too. The model for this specification of quality has a problem: It is not scalable.

But a shelf-stable beverage, that can be ramped up infinitely. A shelf product can be spread rhizomatically, it can go anywhere, spreading brand as it travels. It is scalable up the wazoo! In this scheme, the cafes and roasteries, the blogs and travel shots on Instagram, that's all the machine for brand-generation. The taker recalls that trip to Portland and that coffee at the Ace Hotel, and now the 7-11 off Sandusky Blvd. on the way to the office has Stumptown too! It seems that when your company buys the domain "coldbrew.com," you might have brand value in mind.

My point is this: The mission of the true local coffee roaster/cafe is, in it's essence, at odds with gross expansion, with unlimited scalablity. In fact, this definition of coffee makes it different than other products, not just urban chic and hipster slacks. This definition of coffee is antithetical to empire-building, but apparently not to brand-building as crafty capitalists seemed to have discovered. According to them,it appears we undervalued our authenticity, that much more could be done with it than we realized. And now it is. These little seedlings just needed more water (the VC kind) ... now watch them grow green for you!

 

Notes:

 

Since I wrote this Intelligentsia also sold to JAB Holdings (... I mean to Peets) with precisely the same language referenced above in the Stumptown sale, that is "reach more people" ... " allow us to do things we couldn't do" etc. Then the behemoth Green Mountain sold to a group formed around JAB Holdings. And Stumptown released their Coconut Cold Brew. Meh

 

More Notes:

Obviously the "craft beer" trade has experienced similar forking paths, and in the last month this has accelerated with SAB Miller, Anheuser-Busch InBev, and Heineken (who just bought half of Lagunitas).

This Fortune article mostly celebrates those who sell, painting it as an inevitable future, and one that enables companies out of a cage of limitations so their ideas can soar! There's little considerations for the way the wings are also clipped.  An LA Weekly article recognizes the way this might represent backsliding to the '70s, and how it impacts true independent brewers. Note the references to punk/indie music.  And Martketwatch puts it bluntly ... big buyers can have their way, whatcha gonna do about it, huh?

Lagunitas has an elegant blog post explaining in detail how the sky has just cleaved in two and a gilded staircase has opened up all of Europe to them, and that's good.  It paints the sale to Heineken as an acceptance of the change in the indie beer trade, which infers that Lagunitas is evolving toward the light while the small independent brewers are hunkered around their campfires at the cave entrance. But the owners' smarminess is also clear from past tweets  when an Oregon brewer sold to AB InBev. The open question is whether, as in coffee, people care at all. Do they just want their drink?

On another postscript note, I would reference La Colombe here, especially since the owner pronounced Stumptown over and dead in 2011 when TSG bought 90%. The funny thing is to read his chest thumping article in Esquire and know that he just sold a huge stake to Chobani yogurt with aims to have 100+ stores chop chop. So much for his bloated macho closing list of coffee companies owned by "men who are coffee roasters for life". He has also invented Latte on tap for those who just can't wait. Groan.

 

Even More Notes:

So do you wonder about SM? We are a corporation with 2 officers; Maria and myself, Thompson. We don't have any investors and don't owe anyone anything. In terms of the coffee trade, we exist a bit apart, which is why I don't have a problem speaking freely or critically about the trade. (That is rare these days, as all the coffee news outlets themselves are strictly "pay to play" when it comes to coverage. What I mean is that if you want press for your event, for your nations coffee exports, for your new roastery, you will offer compensation to the online or print based coffee media). As far as SM and investor money, we don't want or need it. And we clearly don't have the right ingredients to attract people with bags of cash anyway ...and that makes me pleased, actually.

A VC type partnership that owns home beer brewing sites has approached us, promising how they could help us fine tune, expand, create, do a print catalogue, etc. Quite a nice fellow really. I eventually suggested that we use all those skills they could offer to work on a specific project together (designing a coffee appliance), one where we would invest together and share the results together, but there would be no chance of any ownership in SM. It would be completely separate. I didn't have to wait for an answer. It was an immediate "no thank you".

So clearly the interst of VC money isn't truly to "do things we couldn't do before," it's to sell off the value of what has already been built, and to use the established name to find more profitable and highly scalable money-making opportunities. They buy in to existing companies to make use of the name, because they realize the value of a company's credibility, of (in SM's case), near 20 years of building that name incrementally. If they didn't want that, they sould just go start something fresh that they controlled exclusively.