Tully's owner to shake off rivalry

'Obsession with beating Starbucks' was flawed plan, new chairman says

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Tully's Coffee customers will recognize the brew but maybe not much else about the long-beleaguered company, its new owners vow.

Everything from remodels of all company-owned stores to a new loyalty program and marketing push is part of their turnaround plan for the Seattle-based chain that in two decades turned an annual profit only twice -- both times by selling parts of the company.

New chairman and part-owner Michael Avenatti promises the new Tully's will not be boring -- and it has not been so far.

Actor Patrick Dempsey generated national interest as the public face of an investor group that bought Tully's out of bankruptcy June 30, paying $9.15 million and fending off Starbucks and others who wanted Tully's.

But in August, Dempsey sued Avenatti and left the group.

Now Avenatti and former investment banker Tod McDonald, hired by Avenatti to run the chain on a daily basis, are charting the next moves for the 103-location chain.

Their plans include:

• Spending more than $6.5 million to remodel all 48 company-owned stores.

• Spending at least $4 million on other improvements, including marketing via popular sports; speeding up both the Wi-Fi in its cafes and the time it takes roasted coffee to reach stores; and revamping the food and the loyalty program. The investment group is providing the capital for all these changes, said Avenatti.

• Moving the company's 25 headquarters employees into offices above a Tully's store near Seattle's Pike Place Market.

• Laying the groundwork to expand to at least 225 company-owned stores by the end of 2016.

Avenatti blames Tully's former business strategy for its financial hardship.

"This company has suffered for the last 20 years with a flawed strategy that was centered around an obsession with beating Starbucks," he said.

The most fundamental example, he said, was opening stores across the street from Starbucks locations. Tully's founder and real-estate executive Tom O'Keefe talked about wanting to "drag off of" Starbucks.

Dan Geiman, an analyst at McAdams Wright Ragen, said he has not been in a Tully's store for years; the one he used to visit closed long ago. But he's always thought it needed to stop focusing on its Goliath rival.

"They've always kind of wanted to mimic Starbucks, but they don't have the scale or resources to go toe-to-toe with Starbucks," he said.

Instead, Tully's needs its own identity — and the help of a big cash infusion like it is getting from the new investors, he said.

Still, he said, "It's getting late in the game in an incredibly competitive space. … It's going to be a challenge."

Tully's new management will focus on traditional business practices including making frequent visits to stores and seeking input from managers and baristas, Avenatti said.

August was Tully's most profitable month in four years, he said, with $2.8 million in net sales.

Two would-be buyers have offered $22 million and $26 million for the company, Avenatti said. However, "We didn't buy this to flip it. … I'd like to be affiliated with Tully's for 20 years or more."

The chain is one of the largest privately owned and independent U.S. coffee chains, now that Peet's Coffee and Caribou Coffee have been bought by a German conglomerate. This month, a large part of Coffee Bean & Tea Leaf in California was sold to institutional investors from Boston and Hong Kong.

It appears to be better known as a national brand in grocery stores than as a Seattle coffee-shop chain. Tully's grocery sales are often on par with Starbucks', industry figures show.

But those sales don't accrue to Tully's. It sold its roastery and wholesale coffee business to Vermont-based Green Mountain Coffee Roasters in 2009 to pay off $26 million in debt and keep operating.

Avenatti will keep his day job as a Los Angeles lawyer who sometimes appears in Seattle courts. To questions about Dempsey, he would say only, "We wish Ronald Wayne all the best" -- a cryptic reference to the Apple co-founder who sold his shares for $800 in 1976 instead of continuing with Steve Jobs.

In discussing Tully's future, Avenatti invoked a tech entrepreneur closer to home.

"(Amazon.com founder) Jeff Bezos nailed it recently when he made comments about Woolworths and the fact that, above all else, you can't get boring," he said.