| PEETS COFFEE & TEA INC Item 1A Risk Factors We may not be successful in the implementation of our business strategy or our business strategy may not be successful, either of which will impede our growth and operating results |
| Our business strategy emphasizes expansion through multiple channels of distribution |
| Currently, our retail stores, which generated over 67prca of our 2005 net revenue, continue to be an important element of our business |
| We do not know whether we will be able to successfully implement our business strategy or whether our business strategy will be successful |
| Our ability to implement this business strategy is dependent on our ability to: • Market our products on a national scale and over the internet; • Enter into distribution and other strategic arrangements with third party retailers and other potential distributors of our coffee; • Increase our brand recognition on a national scale; 6 ______________________________________________________________________ [30]Table of Contents • Identify and lease strategic locations suitable for new stores; and • Manage growth in administrative overhead and distribution costs likely to result from the planned expansion of our retail and non-retail distribution channels |
| Our revenue may be adversely affected if we fail to implement our business strategy or if we divert resources to a business strategy that ultimately proves unsuccessful |
| Because our business is highly dependent on a single product, specialty coffee, if the demand for specialty coffee decreases, our business could suffer |
| Sales of specialty coffee constituted nearly 84prca of our 2005 net revenue |
| Demand for specialty coffee is affected by many factors, including: • Consumer tastes and preferences; • National, regional and local economic conditions; • Demographic trends; and • Perceived or actual health benefits or risks |
| Because we are highly dependent on consumer demand for specialty coffee, a shift in consumer preferences away from specialty coffee would harm our business more than if we had more diversified product offerings |
| If customer demand for specialty coffee decreases, our sales would decrease accordingly |
| We believe that maintaining and developing our brand is critical to our success and that the importance of brand recognition may increase as a result of competitors offering products similar to ours |
| Because the majority of our retail stores are located on the West Coast, primarily in California, our brand recognition remains largely regional |
| Our brand building initiative involves increasing the availability of our products and opening new stores to increase awareness of our brand and create and maintain brand loyalty |
| If our brand building initiative is unsuccessful, we may never recover the expenses incurred in connection with these efforts and we may be unable to increase our future revenue or implement our business strategy |
| Our success in promoting and enhancing the Peet’s brand will also depend on our ability to provide customers with high quality products and customer service |
| Although we take measures to ensure that we sell only fresh roasted whole bean coffee and that our retail employees properly prepare our coffee beverages, we have no control over our whole bean coffee products once purchased by customers |
| Accordingly, customers may prepare coffee from our whole bean coffee inconsistent with our standards, store our whole bean coffee for long periods of time or resell our whole bean coffee without our consent, which in each case, potentially affects the quality of the coffee prepared from our products |
| If customers do not perceive our products and service to be of high quality, then the value of our brand may be diminished and, consequently, our ability to implement our business strategy may be adversely affected |
| Because our business is based primarily in California, a worsening of economic conditions, a decrease in consumer spending or a change in the competitive conditions in this market may substantially decrease our revenue and may adversely impact our ability to implement our business strategy |
| Our California retail stores generated 59prca of our 2005 net revenue and a substantial portion of the revenue from our other distribution channels is generated in California |
| We expect that our California operations will continue to generate a substantial portion of our revenue |
| In addition, our California retail stores provide us with means for increasing brand awareness, building customer loyalty and creating a premium specialty coffee brand |
| 7 ______________________________________________________________________ [31]Table of Contents As a result, an economic downturn or other decrease in consumer spending in California may not only lead to a substantial decrease in revenue, but may also adversely impact our ability to market our brand, build customer loyalty, or otherwise implement our business strategy |
| Labor conditions in the grocery business could negatively impact our grocery business |
| There have been grocery strikes in the past that have negatively impacted our grocery business and it is possible that future grocery strikes in places where we have large distribution may adversely impact our grocery business |
| Government mandatory healthcare requirements could adversely affect our profits |
| The Company offers healthcare benefits to all employees who work at least 21 hours a week and meet service eligibility requirements |
| In the past, some states, including California, have unsuccessfully proposed legislation mandating that employers pay healthcare premiums into a state run fund for all employees immediately upon hiring |
| If legislation similar to this were to be enacted in the states we do business, it could have an adverse affect on the company’s profits |
| If we are unable to continue leasing our retail locations or obtain leases for new stores, our existing operations and our ability to expand may be adversely affected |
| If we are unable to renew these leases, our revenue and profits could suffer |
| In addition, we intend to lease other premises in connection with the planned expansion of our retail operations |
| Because we compete with other retailers and restaurants for store sites and some landlords may grant exclusive locations to our competitors, we may not be able to obtain new leases or renew existing leases on acceptable terms |
| This could adversely impact our revenue growth and brand building initiatives |
| Because we rely heavily on common carriers to ship our coffee on a daily basis, any disruption in their services or increase in shipping costs could adversely affect our business |
| We rely on a number of common carriers to deliver coffee to our customers and retail stores |
| We consider roasted coffee a perishable product and we rely on these common carriers to deliver fresh roasted coffee on a daily basis |
| We have no control over these common carriers and the services provided by them may be interrupted as a result of labor shortages, contract disputes or other factors |
| If we experience an interruption in these services, we may be unable to ship our coffee in a timely manner |
| A delay in shipping could: • Have an adverse impact on the quality of the coffee shipped, and thereby adversely affect our brand and reputation; • Result in the disposal of an amount of coffee that could not be shipped in a timely manner; and • Require us to contract with alternative, and possibly more expensive, common carriers |
| Any significant increase in shipping costs could lower our profit margins or force us to raise prices, which could cause our revenue and profits to suffer |
| We depend on the expertise of key personnel |
| If these individuals leave or change their role within our Company without effective replacements, our operations may suffer |
| The success of our business is dependent to a large degree on our management and our coffee roasters and purchasers |
| If members of our management leave without effective replacements, our ability to implement our business strategy could be impaired |
| If we lost the services of our coffee roasters and purchasers, our ability to source and purchase a sufficient supply of high quality coffee beans and roast coffee beans consistent with our quality standards could suffer |
| In either case, our business and operations could be adversely affected |
| 8 ______________________________________________________________________ [32]Table of Contents We may not be able to hire or retain additional management and other personnel and our recruiting and training costs may increase as a result of turnover, both of which may increase our costs and reduce our profits and may adversely impact our ability to implement our business strategy |
| The success of our business depends upon our ability to attract and retain highly motivated, well-qualified management and other personnel, including technical personnel and retail employees |
| We face significant competition in the recruitment of qualified employees |
| Our ability to execute our business strategy may suffer if: • We are unable to recruit or retain a sufficient number of qualified employees; • The costs of employee compensation or benefits increase substantially; or • The costs of outsourcing certain tasks to third party providers increase substantially |
| Because we have only one roasting facility, a significant interruption in the operation of this facility could potentially disrupt our operations |
| We have only one coffee roasting and distribution facility |
| A significant interruption in the operation of this facility, whether as a result of a natural disaster or other causes, could significantly impair our ability to operate our business |
| Since we only roast our coffee to order, we do not carry inventory of roasted coffee in our roasting plant |
| Therefore, a disruption in service in our roasting facility would impact our sales in our retail and specialty channels almost immediately |
| Moreover, our roasting and distribution facility and most of our stores are located near several major earthquake faults |
| The impact of a major earthquake on our facilities, infrastructure and overall operations is difficult to predict and an earthquake could seriously disrupt our entire business |
| Our earthquake insurance covers net income, continuing normal operating expenses and extra expenses incurred during the period of restoration |
| However, in the event of a catastrophic earthquake, our coverage is limited and we would incur additional expenses |
| We have a high deductible workers’ compensation insurance program and more claims and higher costs from these claims may adversely affect our profits |
| Our current workers’ compensation insurance program is a modified self-insured program with a high deductible with an overall program ceiling to limit exposure |
| The California workers’ compensation environment has been unpredictable with continually increasing costs in the past five years |
| The majority of our business is in California; therefore, we are exposed to the same increased costs |
| Additionally, we have had to estimate our liability for existing claims whose outcome is uncertain |
| While we believe our reserve methodology on these claims is appropriate today, unfavorable development in this area will also affect any open claims that were filed beginning March 2002, the date we transitioned to a high deductible program |
| Should a greater amount of claims occur or the settlement costs increase beyond what was anticipated, our expenses could increase and our profitability may decrease |
| Increases in the cost and decreases in availability of high quality Arabica coffee beans could impact our profitability and growth of our business |
| Green coffee is our largest single cost of sales |
| We do not purchase coffee on the commodity markets, but price movements in the trading of coffee do impact the price we pay |
| Coffee is a trade commodity and, in general, its price can fluctuate depending on: • Weather patterns in coffee-producing countries; • Economic and political conditions affecting coffee-producing countries; • Foreign currency fluctuations; 9 ______________________________________________________________________ [33]Table of Contents • The ability of coffee-producing countries to agree to export quotas; and • General economic conditions that make commodities more or less attractive investment options |
| If the cost of our green coffee beans increases due to any of these or other factors impacting us negatively, we many not be able to pass along those costs to our customers because of the competitive nature of the specialty coffee industry |
| If we are unable to pass along increased coffee costs, our margin will decrease and our profitability will suffer accordingly |
| If we are not able to purchase sufficient quantities of high quality Arabica beans due to any of the above factors, we many not be able to fulfill the demand for our coffee, our revenue may decrease and our ability to expand our business may also suffer |
| Our roasting methods are not proprietary, so competitors may be able to duplicate them, which could harm our competitive position |
| We consider our roasting methods essential to the flavor and richness of our roasted whole bean coffee and, therefore, essential to our brand |
| Because we do not hold any patents for our roasting methods, it may be difficult for us to prevent competitors from copying our roasting methods |
| If our competitors copy our roasting methods, the value of our brand may be diminished, and we may lose customers to our competitors |
| In addition, competitors may be able to develop roasting methods that are more advanced than our roasting methods, which may also harm our competitive position |
| Competition in the specialty coffee market is intense and could affect our profits |
| Competition in the specialty coffee market is becoming increasingly intense as relatively low barriers to entry encourage new competitors to enter the specialty coffee market |
| Our whole bean specialty coffee competes with several major national brands, such as Gevalia (Kraft Foods), Green Mountain Coffee, Illy Caffe, Millstone (Procter & Gamble), Seattle’s Best (Starbucks) and Starbucks, as well as numerous smaller, regional brands |
| In addition, we compete indirectly against all other coffee brands on the market |
| A number of nationwide coffee marketers, such as Kraft Foods, Procter & Gamble and Nestle, are distributing premium coffee brands in supermarkets |
| These premium coffee brands may serve as substitutes for our whole bean coffee |
| In addition to competing with other distributors of whole bean coffee, we compete with retailers of prepared beverages, including coffee house chains, such as Starbucks and The Coffee Bean & Tea Leaf, numerous convenience stores, restaurants, coffee shops and street vendors |
| If we do not succeed in effectively differentiating ourselves from our competitors or our competitors adopt our strategies, then our competitive position will be weakened |
| Despite competing in a fragmented product category, whole bean specialty coffee brands are being established across multiple distribution channels |
| Several competitors have been aggressive in obtaining distribution in specialty grocery and gourmet food stores, through online and mail order and in office, restaurant and food service locations |
| Other competitors may have an advantage over us based on their earlier entry into these distribution channels |
| Many of these new market entrants may have substantially greater financial, marketing and operating resources than we do |
| In addition, many of our existing competitors have substantially greater financial, marketing and operating resources than Peet’s |
| Lawsuits and other claims against the Company may adversely affect our profits |
| We may from time to time become involved in certain legal proceedings in the ordinary course of business, such as the two lawsuits filed in 2003 against us entitled Brian Taraz, et al |
| In investigating any claims against the Company or defending any allegations, we may incur legal fees, settlement fees, damages or remediation expenses that may harm our business, reducing our sales and adversely affecting our profitability |
| 10 ______________________________________________________________________ [34]Table of Contents Adverse public or medical opinion about caffeine may harm our business |
| Our specialty coffee contains significant amounts of caffeine and other active compounds, the health effects of some of which are not fully understood |
| A number of research studies conclude or suggest that excessive consumption of caffeine may lead to increased heart rate, nausea and vomiting, restlessness and anxiety, depression, headaches, tremors, sleeplessness and other adverse health effects |
| An unfavorable report on the health effects of caffeine or other compounds present in coffee could significantly reduce the demand for coffee, which could harm our business and reduce our sales and profits |
| Adverse publicity regarding customer complaints may harm our business |
| We may be the subject of complaints or litigation from customers alleging beverage and food-related illnesses, injuries suffered on the premises or other quality, health or operational concerns |