Peet's eyes U.S. grocery growth as Starbucks shuts cafes

By Lisa Baertlein

LOS ANGELES, July 20 (Reuters) - Peet's Coffee & Tea Inc (PEET.O: Quote, Profile, Research, Stock Buzz) executives say the premium coffee seller is poised for growth as bigger rival Starbucks Corp (SBUX.O: Quote, Profile, Research, Stock Buzz) pays the price for overbuilding cafes.

Peet's, which operates about 180 company-owned stores compared with Starbucks' almost 7,100, earns 72 percent of its operating profit from bagged coffee sales through grocery stores, home delivery and its food service and office businesses.

"We're a coffee company that happens to have retail stores, not a retailer that has coffee," Chief Executive Patrick O'Dea said in a recent interview at the company's San Francisco Bay Area headquarters.

This year, as Starbucks retrenches and closes stores, Peet's is opening just 25 company-owned stores and expanding into East Coast supermarkets in areas such as Boston, all of Florida, Washington, D.C., Baltimore and Pittsburgh.

The decision by Peet's to focus on grocery has helped insulate the company as consumers cut back on nice-to-have items -- such as $4 cafe drinks -- to pay for increasingly expensive must-haves such as groceries and gasoline.

In the most recent quarter, operating income at Peet's was up 63 percent on a 17 percent revenue gain. Starbucks' revenue was up 12 percent in its latest quarter, but operating income was down 26 percent.

While grocery sales remain robust, O'Dea said Peet's has seen softness at its retail coffee shops that last year contributed 66 percent of sales and 28 percent of profit.

"It's a pretty difficult environment," O'Dea said, adding that Peet's does not give same-store sales for its retail outlets. "If we did, we'd still be positive."  Continued...