12/12/2011

ASSESSING SUSTAINABLE VALUE AND STAKEHOLDER ENGAGEMENT

PEETS COFFEE AND TEA

Melissa Summers Kopavi Kinnaird Ben Nebo IMGT 8659 Sustainable Supply Chains | Professor Arvinder Loomba

2|Kyosei

Industry Analysis
Thirty-five thousand companies make up the $25 billion a year specialty eatery industry.1 The 50 leaders in this industry account for 45 percent of industry revenues. Industry leaders include the following companies: Starbucks, Tim Horton, Host International, Dunkin Brand Group, and Einstein Noah Restaurant Group.2 Coffee houses and coffee manufacturers are a significant portion of this industry. Coffee manufactures buy higherpriced Arabica beans for premium coffees and some companies rely on a single estate for certain types of coffee. Weather, violent conflicts, trade policies, and popular taste collaborate to determine the volatile annual, monthly, and even daily price of coffee.3 Between 1999 and 2002, for example, the price of unroasted coffee fell by 55 percent to a century low.4 Coffee companies must navigate this difficult environment when buying green coffee from brokers, farms, estates, exporters, or cooperative groups. Coffee is a major source of income for several countries: families, from the rain forests of Colombia to the mountains of Kenya, depend on coffee for their livelihoods. The crop, however, originated in the coffee forests of the Ethiopian plateau.5 By the 15th century, coffee was being grown in the Yemeni district of Arabia and by the 16th century it was known in Persia, Egypt, Syria and Turkey.6 The Arabs were the first to not only cultivate coffee but also begin its trade. In the 17th , traders brought coffee to Europe, where it first caused controversy but soon grew in popularity. Coffee was introduced to the United States in the mid-1600s and began replacing tea as the leading American beverage the decade before independence. As the popularity of coffee grew in the 18th century, Dutch companies established coffee plantations in Indonesia and successfully overcame the Arab monopoly on coffee.7 Coffee cultivation also spread to the Caribbean as well as South and Central America. By the beginning of the 19th century, coffee had established itself as the worlds most profitable crop.8 Currently, the U.S. coffee market is estimated to be $34 billion, with the specialty coffee

McLellan, Michael. (2011). Peets Coffee and Tea, fact sheet. Retrieved from http://subscriber.hoovers.com/H/company360/overview.html?companyId=53648000000000 2 Ibid. 3 Osland, A., & Lawernce. (2004). 4 Ibid. 5 National Coffee Association. (2011). The History of Coffee. Retrieved from http://www.ncausa.org/i4a/pages/index.cfm?pageid=68 6 Ibid. 7 Ibid. 8 Ibid.

3|Kyosei market at $16 billion.9 Although coffee consumers range in age and lifestyle, 61 percent of 18-24 year old coffee consumers drink specialty coffee, while only 36 percent of coffee consumers over 60 drink specialty coffee.10 Two important trends currently drive the growth of the coffee industry. First, consumers have put specialty coffee into the mainstream by constantly requiring higher quality coffee. According to the National Coffee Association, the United States has over 25,000 coffeehouses. Starbucks Corporation dominates this market and is larger than all other players combined. Second, the single cup coffee maker market is growing rapidly and is dominated by Green Mountain Coffee.11 In addition to Starbucks and Green Mountain, The Coffee Bean and Farmer Brothers have substantial market share.12 While small single unit coffee houses and local chains impact the industrys coffee house subcategory, multinational corporations like Kraft and Folgers dominate the industrys grocery channel. Formed in 1971, Starbucks is the coffee shop industry leader with sales of over $11,700 million for fiscal year 2010.13 The Seattle based company purchases and roasts highquality whole bean coffees.14 Along with fresh rich-brewed coffees, Starbucks also sells Italian-style espresso beverages, a selection of premium teas, and beverage-related accessories and equipment, primarily through its coffee houses. Starbucks licenses its trademark and sells its products through other channels such as other licensed retail stores. Additionally, Starbucks distributes a variety of ready-to-drink beverages through grocery stores. Established in 1963, The Coffee Bean and Tea Leaf operates 750 coffee shops in Arizona, California, Hawaii, Nevada, and Texas as well as in 20 countries.15 350 of these locations are company-owned and the remaining stores are franchised. The Coffee Bean sells a variety of fresh roasted coffees and specialty teas, along with baked goods and blended ice drinks. It also sells bagged coffee and tea at a handful of grocery stores. In 2010, The Coffee Bean had sales of $195 million and 5,000 employees.16 Founded in 1993, Green Mountain Coffee leads the single-cup coffee maker sub-category
9

Peets Coffee and Tea. (November, 2011). Investor Presentation, Online. PowerPoint retrieved from: http://files.shareholder.com/downloads/PEET/1561178383x0x181791/4c1dc86f-22e0-413b-870c9618e50a3a4d/Peets08_IR_Presentation.pdf 10 Ibid. 11 Peets Coffee and Tea. (2011). 12 McLellan, Michael. (2011). 13 Ibid. 14 Osland, A., & Lawernce. (2004). 15 McLellan, Michael. (2011). 16 Ibid.

4|Kyosei and, as a result, is a leader in the coffee manufacturer industry.17 In fiscal year 2010, Green Mountain Coffee had annual sales of about $2,651 million.18 The Vermont basedcompany sells over 200 whole bean and ground coffee selections, cocoa, teas and coffees in its patented K-Cup portion packs, Keurig single-cup brewers and other accessories in domestic wholesale and retail stores and directly to customers.19 Green Mountain Coffee also sells single-cup brewers to distributors for offices, and also to department stores and club stores for at-home use. Incorporated in 1923, Farmer Brothers Company is a California based coffee manufacturer that achieved sales of $464 million in fiscal year 2010.20 The company, however, had a net income loss of $543 million.21 Farmer Brothers roasts, packages, and distributes coffee related products from 115 branch warehouses in several major U.S. cities. The companys 400 products also include non-coffee products such as coffee filters, sugar, creamers, and assorted teas. Farmer Brothers makes direct and brokered sales to customers throughout the United States. The organizations 1,820 employees provide products to institutional food service providers, grocery stores, and coffee houses.22

Company Background
Like all the companies mentioned above, Peets Coffee and Tea plays an important role in the specialty eatery industry overall, as well as the coffee house and coffee manufacture sub-categories. Peets Coffee and Tea is the eighth largest company in the specialty eatery industry and a leader in the aforementioned sub-categories.23 Peets has higher margins than the industry average. The industrys price per earnings margin ratio, for example, is 23.40, but Peets is 39.53.24 Unlike its competitors, however, Peets Coffee and Tea has implemented sustainable initiatives since its founding while remaining profitable. This paper investigates Peets Coffee and Teas sustainable value and stakeholder engagement to better understand what sustainability means to an exemplary coffee company.

17 18

McLellan, Michael. (2011). Ibid. 19 Ibid. 20 Ibid. 21 Ibid. 22 Ibid. 23 Ibid. 24 Ibid.

5|Kyosei In 1966, Dutch immigrant Alfred Peet opened a coffeehouse at the corner of Walnut and Vine in Berkeley, California.25 Alfred Peet purchased high-quality Arabica coffee beans from all over the world, and used artisan-roasting techniques to produce a unique cup of coffee. Soon, the coffeehouse attracted a loyal following of hippies, college students, and liberal intellectuals who became known as Peetniks. In 1971, Peet leveraged this success and established a corporation, Peets Coffee and Tea, in Washington State.26 Although now a national corporation with 192 retail stores in six states and stock traded on NASDAQ, Peets Coffee and Tea has stayed true to its roots.27 Peets practices the same bean selectivity, freshness standards, and artisan-roasting style used by its founder to gain market share in the specialty coffee industry. The companys operations, however, have expanded into marketing fresh roasted whole bean coffee and premium teas through multiple channels of distribution including grocery stores, home delivery, food service, and office accounts.28 Since roasted coffee is perishable, Peets does not maintain inventory of roasted coffee. Instead, Peets roasts-to-order, and ships fresh coffee daily to stores and customers. Peets is positioned as higher in quality and value than its major competitors. Since May 2002, Patrick ODea has served as Peets Chief Executive Officer, President, and Director.29 Mr. ODea has maintained a commitment to freshness, enabling Peets to control purchasing, roasting, packaging, and distribution. At the companys Emeryville, California headquarters, Mr. ODea and Peets Chief Financial Officer oversee the following departments that report to the respective vice presidents: IT, Operations and Information Systems, Retail Operations, New Development, and Coffee and Tea. As of March 2011, Peets employed 3,523 people, about 765 of whom qualified as fulltime.30 Peets competitive benefits package, offered since 1979, helps attract and retain employees.31 Overall, Peets maintains good employee relations. For fiscal year 2010, Peets achieved $333.81 million in sales; this translated into net income of $17.50 million.32 Sales grew by 7.24 percent, but net income decreased by 9.10 percent from fiscal year 2009.33 Peets retail segment currently provides 66 percent of these revenues. The remaining 34 percent came through its specialty segment, which
25

Osland, A., & Lawernce, A. (2004). Peets and the Berkly Sustainable Coffee Initiative. The Case Research Journal, 24 (2),1-14. 26 Osland, A., & Lawernce, A. (2004). 27 McLellan, Michael. (2011). 28 Peets Coffee and Tea. (2011). Form 10-K for the fiscal year ended January 2, 2011. Retrieved from http://www.sec.gov/Archives/edgar/data/917968/000114420411015663/v215045_10k.htm 29 Osland, A., & Lawernce, A. (2004). 30 McLellan, Michael. (2011). 31 Peets Coffee and Tea. (2011). 32 Ibid. 33 McLellan, Michael. (2011).

6|Kyosei consists of different distribution channels such as grocery stores, home delivery, and food service and office.34 Peets stock currently trades at $59.05 per share.35 Federal laws relating to customs, health and safety, building and land use, and environmental protection regulate Peets coffee roasting operations and retail stores. Additionally, Peets roasting facility in Alameda, California must abide by state and local air-quality and emissions laws. At its retail stores, 122 of which are in California, Peets sells whole bean coffee, beverages, pastries, tea, and other related products.36 The company also distributes Peets brand products and, beginning in 2009, Godiva brand products, through a network of grocery stores, mass merchandisers and club stores such as Safeway, Wal-Mart, Target, and Whole Foods Market.37 Peets roasts-to-order and ships a wider selection of coffee and teas directly from its roastery to customers homes. The company also sells equipment and products to food service institutions for brewing and re-sale Peets coffee. Additionally, Peets grants licenses to institutions like airports, grocery stores, and college campuses to create a full Peets beverage store within their establishments.38

Company Operations
Peets Coffee and Tea prides itself on the efficiency of its operations, which benefit greatly from being internally integrated for the most part. They begin by engaging the coffee farmers in their supply chain, allowing Peets to ensure that sustainable practices are used. Once beans are harvested, they are transported to the Peets owned roasting facility, where they are roasted by hand in small batches, packaged, and shipped within two hours of roasting to ensure customers receive the freshest possible coffee.39 Peets adamant commitment to quality and freshness means that they keep no inventory in stock at their factory. All orders from the previous twenty-four hours are processed and shipped the next day.40 In addition to their central values of delivering the freshest, highest quality coffee, Peets also places great importance on the sustainability of its product and operations. Here again, the integration of the operations is beneficial because it allows Peets to exercise considerable control over the entire supply chain, the production process, and the

34 35

Ibid. McLellan, Michael. (2011). 36 Ibid. 37 Peets Coffee and Tea. (2011). 38 Ibid. 39 Peets Coffee and Tea. (2009). Retrieved from: http://www.peets.com/images/pdf/SRPBrochure.pdf 40 Ibid

7|Kyosei distribution of its product from company stores or selected retailers. Peets controls its coffee from cradle to gate in order to uphold its quality and sustainability standards. Process Map The process map below illustrates the path Peets coffee takes from cradle to grave as it travels through the supply chain, to the customer, and ends in the landfill:

Raw Materials: In this stage, the coffee is cultivated, harvested, packaged in burlap sacks and transported to the Peets-owned roasting facility. Manufacturing: Once the green coffee beans arrive at the facility, they are roasted by hand in small batches, packaged in plastic bags specially designed with a one-way vent to allow for the escape of the volatile gases the beans emit as they cool and settle over the next few days. These specially designed packages allows Peets to ship the beans within two hours of roasting, fulfilling orders with fresh roasted coffee beans.41 Distribution and Retail: The fresh roasted coffee is transported in Peets trucks from the facility to Peets stores, and other select retail stores. Online orders placed on the Peets website are shipped via UPS or USPS.42 Coffee intended for sale at Peets stores is shipped in bulk whole bean form for store use, and also pre-packaged for individual customer purchase. Prior to consumption, the coffee is ground, and then brewed for
41

Denise Santoro Lincoln. (July, 2010). Touring the Peets Coffe & Tea Roastery. Bay Area Bites produced by KQED. Retrieved from: http://blogs.kqed.org/bayareabites/2010/07/08/touring-the-peets-coffee-tea-roastery/ 42 Peets Coffee and Tea. (2011). Retrieved from: http://www.peets.com/cust/shipping.asp?#methods

8|Kyosei sale.43 The method of brewing, preparation and additional inputs vary greatly depending on the particular menu item sold, but additional inputs tend to be limited to minimal amounts of water, milk, cream, sugar, chocolate, syrups and spices. Consumption: The majority of Peets sales take place at their retail stores, where customers purchase an order, which is then prepared.44 Once prepared, the drink is placed into disposable cups for which plastic lids are made available, and given to the customer for consumption. At this point, customers may choose to add other additional inputs to the menu item they purchased. As in the case above, these additional inputs are of minimal amounts and generally adhere to the same listed ingredients. The rest of Peets sales are split between select grocery stores, home delivery to customers, and food service or office distribution.45 Orders placed online are delivered either by the USPS or UPS, depending on the delivery requirements. Disposal: All processes along the way create waste that eventually ends up in the landfill or as litter, unless re-used by individual consumers. This waste is generated primarily from the various packaging stages the coffee passes through, including the plastic packages the beans are sold in, and the disposable cups and lids used in brewed coffee sales. Other waste products include organic matter from the harvesting process and used coffee grounds, which may be used as inputs in compost.

Stakeholder Engagement
As a socially responsible business, Peets highly values having positive interactions with the stakeholders encountered throughout its operations. From the farmers who grow the coffee beans, to the Peetniks and casual customers who enjoy the artisanal brews, Peets has always made efforts to include the needs and interests of its stakeholders in their business model. In order to evaluate this interaction with stakeholders, and the integration of their views into business operations, a Stakeholder Engagement Assessment was conducted, focusing first on Saliency and then Engagement. Points are allotted based on a 1 to 5 scale with 5 being the highest possible score. Salience Assessment In the Salience Assessment, Peets was rated on their interaction with individual nonprofit organizations, farmers and cooperatives, employees, and other external
43

Denise Santoro Lincoln. (July, 2010). Touring the Peets Coffe & Tea Roastery. Bay Area Bites produced by KQED. Retrieved from: http://blogs.kqed.org/bayareabites/2010/07/08/touring-the-peets-coffee-tea-roastery/ 44 University of Oregon Investment Group. (2010). Retrieved from: http://uoinvestmentgroup.org/wpcontent/uploads/2010/01/Peets-Coffee-Tea.pdf 45 Ibid

9|Kyosei stakeholders using the criteria of Legitimacy, Philosophy, and Impact. These criteria are intended to measure how legitimate society-at-large and other organizations view the stakeholder, how similar the stakeholders philosophies are to Peets, and how much impact the behavior of the individual stakeholder has on the operations and performance of Peets, respectively. Averages were calculated for each group of stakeholders, and an overall Salience average score is provided for each criteria.
Legitimacy Nonprofits Technoserve KIMSSA Butterfly School Coffee Kids Grounds for Health Kenya Auction Group Average Farmers Finca Don Bosco Peets India Peaberry Las Hermanas Coope Dota Group Average Employees Peets Retail Roasting Facility Headquarters Group Average Other External Certification Customers Law Makers Non Peets Retail UPS USPS Earth Group Average Salience Averages 5 2 2 4 4 4 3.5 3 4 3 5 3.8 5 5 5 5 5 5 4 4 5 4 5 4.6 3.8 Philosophy 5 5 5 4 4 5 4.7 5 5 5 5 5.0 5 5 5 5 5 3 2 2 5 2 3 3.1 4.0 Impact 2 2 2 1 1 2 1.7 3 3 3 5 3.3 3 5 5 4.3 3 5 4 2 4 4 5 3.9 3.1

Nonprofits:

Legitimacy 3.5

Philosophy 4.7

Impact 1.7

Legitimacy: In general, the nonprofit groups affiliated with Peets are generally considered to be legitimate, resulting in an average group ranking of 3.5. The highest ranking among these organizations is Technoserve, an international nonprofit that provides business training to rural farmers on how to process and export their own beans,

10 | K y o s e i resulting in 70% higher prices.46 The increased profits are used to build stronger infrastructures in the impoverished communities, such as schools and health care services. Technoserves perceived legitimacy is likely influenced by the support it receives from the Bill and Melinda Gates Foundation.47 Philosophy: The assessment reveals a very high score for alignment of philosophies with an overall group average of 4.7. This score is not at all surprising, considering most of the organizations either receive considerable financial support from Peets and/or shares the same social mission as the philanthropic roaster. KIMSSA48 is a tutoring and vocational school in Ethiopia for underprivileged kids, which helps them graduate and find employment. Peets underwrites the operating costs for the school, as well as the salaries of the teachers. The Butterfly School49 in Papua New Guinea was built in an isolated coffee farming community in the highlands to provide children access to educational services. The school also provides health services to the community and employs local teachers. Peets has underwritten the costs for this school for the next three years. Coffee Kids50 is a nonprofit organization that operates in Mexico, Guatemala, Honduras, and Peru. Coffee Kids works with coffee farming families to improve their lives and livelihoods by creating programs in education, health awareness, microcredit, food security and capacity building. These programs, and the benefits they produce, allow the coffee farmers to have greater financial independence as they become less vulnerable to the volatile changes of the coffee market and experience increased community development. Peets makes donations to support their operations, as well as supplying a link to make donations on their company website.51 Grounds for Health52 is a nonprofit organization that works to improve cervical cancer screening and female health issues awareness in coffee farming regions of Africa and Latin America. Peets supports the organization through financial donations. Peets supports the Kenya Auction53 by regularly buying lots from the auction and featuring them in its product line. The coffee industry in Kenya manages and ensures fair
46 47

Peets Coffee and Tea. (2009). Retrieved from: http://www.peets.com/images/pdf/SRPBrochure.pdf Ibid 48 Peets Coffee and Tea. (2011). Retrieved from : http://www.peets.com/who_we_are/community_kimssa.asp 49 Peets Coffee and Tea. (2011). Retrieved from : http://www.peets.com/who_we_are/community_bunum_wo.asp 50 Coffee Kids. (2011). Retrieved from: www.coffeekids.org 51 Ibid 52 Grounds For Health. (2011). Retrieved from: www.groundsforhealth.org 53 Peets Coffee and Tea. (2011). Retrieved from: http://peets.net/shop/coffee_detail.asp?id=35

11 | K y o s e i prices by auctioning lots sold by small individual farmers to the highest bidder, thereby ensuring that quality coffee earns a premium price, regardless of the farm it came from. Impact: The overall score for impact is relatively low, coming to 1.7. The low score indicates that while Peets shares a similar philosophy with these stakeholders, their behavior does not greatly impact the companys operations. The support Peets provides to these organizations is external to the primary operations and serves as a conduit for the companys philanthropic mission. While this bolsters the company reputation as a socially conscious organization, this effect could be achieved by supporting other similar organizations without greatly impacting Peets operations.
Farmers: Legitimacy 3.8 Philosophy 5.0 Impact 3.3

Legitimacy: The overall group score for this category is a 3.8, indicating that Peets farms are generally viewed as legitimate. This would imply that other organizations and society-at-large consider the farms to be sustainable and socially conscious, as they claim to be. Philosophy: In this category, the overall group rating was the highest possible score of 5. This high rating reflects the great depth of engagement Peets exercises with its farmers. All of the farms employ sustainable agricultural practices, and implement social programs that address poverty and underdevelopment in coffee farming communities. For example, Finca Don Bosco, located next to La Amistad Biosphere Reserve on the border of Panama and Costa Rica, is a family-owned farm that plants coffee on only one third of their land, preserving the other two thirds for first growth rainforest. Every year, Peets buys the entire crop from this family farm at higher prices per pound than the market would render for the product.54 Peets India Peaberry Coffee at Elkill Estate, carries out programs similar to those of Peets partner nonprofit organizations. The farm employs over 500 salaried and unionized workers who receive housing on site and a living wage, and who enjoy such benefits as annual paid leave, maternity and retirement benefits, and access to services such as health care, daycare and scholarship opportunities.55 Las Hermanas Cooperative in Nicaragua is another example of Peets commitment to engaging with the farmers from whom it sources its coffee. The farmland has been owned and operated by women since 1999. Peets has worked with the women of Las Hermanas to help them become established as a cooperative, and to train them in

54 55

Peets Coffee and Tea. (2009). Retrieved from: http://www.peets.com/images/pdf/SRPBrochure.pdf Ibid

12 | K y o s e i sustainable coffee farming practices. Peets has bought nearly the entire production from this farm since 2001.56 The Coope Dota Cooperative in Costa Rica enjoys one of the longest working relationships with Peets, resulting in an entire community that has developed with the benefits of this relationship. Product purchases from this farm are made based on multiple-year premium fixed contracts, locking in premium prices for the farmers. This practice has enabled Coope Dota to provide health, education and sports programs to its members. The cooperative even uses energy efficient technologies such as using coffee hulls to fuel coffee driers and capturing methane from coffee pulp.57 Impact: The overall group rating for impact is a 3.3, indicating that the behavior of these farmers does have a considerable impact on the companys operations. However, while the behavior would affect the operations, Peets would have many potential means by which to mitigate this impact. They work closely enough with the farms that they would be able to influence operations, and they always have the option of buying from another source, or increasing the purchase quantity made from some of their other sources.
Employees: Legitimacy 5 Philosophy 5 Impact 4.3

Legitimacy: Overall, Peets employees are viewed as being legitimate and standing for the core company values, resulting in a group score of 5. Philosophy: The group score for this category was a 5, indicating that employees of Peets share a similar philosophy with the company they work for. Impact: The impact, however, of the Peets employees is not so great as to score a 5 overall, resulting instead in a 4.3. Individual retail store employees do not perform tasks that are crucial to long-term operations, and they are easily and relatively cheaply replaced, compared to their more highly trained counterparts. Employees at the roasting facility, on the other hand, have a huge impact on operations since the primary business model is that of being a premium roaster. Similarly, the behavior of employees at headquarters is weighted more heavily, due to the influence their actions and decisions have on the operating practices of the company.
Other External: Legitimacy 4.6 Philosophy 3.1 Impact 3.9

Legitimacy: The perceived legitimacy of Peets other external stakeholders vary depending upon the organization. The other stakeholders include certification agencies,
56 57

Ibid Ibid

13 | K y o s e i Peets customers, law makers, non-Peets retail sites, and their delivery providers UPS and USPS. We have also included Earth in order to provide a moderate reflection of how Peets interacts with the natural environment overall. The high group score of 4.6 illustrates that all of these other affiliated entities are widely considered to be legitimate. Philosophy: The group score for this category came to 3.1, connoting a divergence between the philosophies of some stakeholders from those of Peets. Most notably, law makers, non-Peets retail sites, and the USPS all scored a 2 respectively. Law makers obviously have entirely different agendas, which may at times happen to align with Peets philosophies. Non-Peets retail sites include large chain grocery stores and other select vendors, but similarity of mission and values is not currently a prerequisite for being granted permission to sell Peets coffee. Finally, while the UPS holds itself to high standards of sustainability, these are not values shared by the USPS, evidenced by a general lack of sustainable practices employed in its operations. Impact: The impact these external stakeholders have over Peets operations also varies depending upon the organization. The two most notable aspects of this category are the scores of 5 assigned to customers and the Earth. The behavior of Peets customers is crucial to its operations, since if they did not buy Peets coffee, the organization would be out of business. Additionally, Earth was rated with a score of 5 to reflect the considerable impact environmental changes would have over all the processes in the supply chain, from cultivation to consumption. Engagement Assessment In the Engagement Assessment, Peets was rated on their interaction with the same individual stakeholders, this time using the criteria of Strategic, Communicative, and Absorptive. These criteria are intended to measure the extent to which Peets integrates engagement with the stakeholder into its strategic planning and implementation activities, the extent to which they engage in proactive and two-way communications with the stakeholder, and the extent to which Peets seems to gain input and knowledge from the stakeholder, respectively. Similarly, averages were calculated for each group of stakeholders, and an overall Engagement average score is provided for each criteria.
Strategic Nonprofits Technoserve KIMSSA Butterfly School Coffee Kids Grounds for Health Kenya Auction 1 1 1 1 1 4 Communicative 2 4 3 2 1 4 Absorptive 1 1 1 1 1 2

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Group Average Farmers Finca Don Bosco Peets India Peaberry Las Hermanas Coope Dota Group Average Employees Peets Retail Roasting Facility Headquarters Group Average Other External Certification Customers Law Makers Non Peets Retail UPS USPS Earth Group Average Salience Averages 1.5 3 3 3 4 3.3 2 5 5 4.0 3 5 2 2 5 5 3 3.6 3.1 2.7 3 3 3 4 3.3 2 5 5 4.0 3 3 2 2 5 5 1 3.0 3.2 1.2 3 3 3 4 3.3 2 5 5 4.0 4 5 3 2 5 5 2 3.7 3.0

Nonprofits:

Strategic 1.5

Communicative 2.7

Absorptive 1.2

Strategic: The low score of 1.5 in this category illustrates that Peets does not make common practice of integrating the engagement with these stakeholders into its operations. The standout in this category is the Kenya Auction. While Peets is able to support the other nonprofits and schools with the revenues it makes from operations of nearly any sort, they strategically purchase beans from the Kenya Auction on a regular basis and feature the line in their product offerings. Communicative: The score for two-way communication with this group is slightly higher, resulting in a 2.7. Again, the Kenya Auction ranks highly due to the frequency and significance of the engagement. Peets must communicate with the auction to place its orders, just as the auction must communicate with Peets as a buyer. The KIMMSA school was also rated highly here due to its heavy reliance on Peets support to fund their operations and the considerable interaction Peets has with this school. Absorptive: The low average score for this category of 1.2 reflects how independent the actions of these stakeholders are from Peets company operations. While Peets gains input and knowledge from the Kenya Auction, the other nonprofit organizations are all geographically distant and carry out vastly distinct missions from their partners. While some knowledge about progress and plans is most definitely shared between Peets and

15 | K y o s e i these groups, the information would not be heavily weighted in the decision making process.
Farmers: Strategic 3.3 Communicative 3.3 Absorptive 3.3

Strategic: While engagement with coffee farmers is undeniably central to Peets operations, they have enough partner farms that no one farm exerts extreme influence over the company. This diversity of resources results in an overall group average of 3.3, with Coope Dota ranking the highest given its long-standing and intimate relationship with Peets. Communicative: Likewise, the group average for two-way communication came out to 3.3, exemplifying again the benefit of diversifying input sources, allowing no one provider to exert too much influence over the company. This score also reflects the fact that farms are likely to communicate much of their activity to Peets, but the company may not necessarily reciprocate to the same extent. Absorptive: In similar fashion, the average score is again 3.3 for this category for the same reasons listed for the previous categories Peets gains knowledge and input from a myriad of sources, and only certain aspects of the farming operations are of relevance to the company. While the farms no doubt provide Peets with extensive input and knowledge, these are not necessarily absorbed into the companys plans and practices.
Employees: Strategic 4.0 Communicative 4.0 Absorptive 4.0

Strategic: The scores in this category are expectedly higher, all averaging at a solid 4.0. Peets retail employees and their needs must be considered and accounted for in planning and decision-making. Even more pressing is the need to include the concerns of roasting facility and headquarters employees, as their engagement is central to daily and long-term operations. Communicative: The average of 4.0 was earned in this category as a balance between the largely one-way communication that happens between the company and its retail employees, and the mutually-disclosive relationship that exists between the company and its roaster and headquarter employees. Absorptive: The 4.0 in this category comes from the same balance of scores, with retail employees earning a 2, and both roasting and headquarter employees scoring at 5 as a result of the need for two-way communication to happen between all critical administrators and employees of the company.

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Other External: Strategic 3.6 Communicative 3.0 Absorptive 3.7

Strategic: The overall group ranking here was a 3.6, with three notable scores. Customers, UPS and USPS all ranked the highest as the needs of these stakeholders must be central to operations. Peets relies on UPS and USPS to deliver all of its online, front door deliveries, so the engagement with these organizations must be strategically integrated into plans and activities. Similarly, customers are always central and strategically considered. Communicative: Mutual communication between these stakeholders ranked moderately at 3.0, with the highest scores found again among the delivery agencies. Of all their external stakeholders, UPS and the USPS are undeniably the most regularly engaged, and two-way communication is a requisite for the successful operations of all parties involved with the deliveries information about orders must flow both ways. Absorptive: The overall ranking of 3.7 for this category results from Peets need to input the knowledge and information they gain from these organizations into their plans. As with the other category scores in this group, customers, UPS and USPS take the lead, illustrating how crucial the input of these stakeholders is to improving and streamlining operations.

Sustainable Value Framework

A core value of Peets Coffee and Tea is that quality coffee requires social, environmental, and economic sustainability. The company had a strong sustainability reputation before green business became a buzzword. The following framework summarizes Peets current approach to promoting sustainability from source to cup.
INTERNAL Uses new lighting technology HVAC systems reduce greenhouse emissions Heat exchange technology Use of Microsoft Dynamic AX, Junction Solutions MCR and Junction F/B to integrate and manage supply chain expansion EXTERNAL Educates coffee growers on product improvement Donates to organizations improving lives of people living in coffee growing regions Provides Fair Trade and/or premium prices to farmers Womens empowerment: project in Nicaragua

T O M O R R O W

LEED Certified Roaster

Certifications: Fair Trade; UTZ;

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T O D A Y

LEED Certified coffee houses Treatment of storm water runoff 87% reduction in water usage due to efficient landscaping and irrigation 40 % energy reduction through use of natural light Diversion of 75% of construction waste from landfill to recycling HVAC systems reduce emissions Recycled materials, like coffee chaff, used in mulching

Organic; Rainforest Alliance Form direct relationship with producers and pay them above the Fair Trade Certified Brand price Over 20% of construction materials come from local and regional sources LEED Certified Roaster Partner with socially and environmentally progressive coffee farmers Response to Measure-O Communication of Peets quality requirements to origin country farmers Compliance with regulation

Today Internal To reduce cost and manage risks Peets has taken several steps to minimize waste and emissions from its operations. In 2008, Peets built the nations first LEED Gold certified roaster. The building followed strict guidelines set by the U.S. Green Building Council and produced major environmental benefits. During the plants construction, for example, 75 percent of waste was re-diverted to recycling rather than a landfill.58 The plants heat exchange technology recovers roasting heat and has led to a 40 percent reduction in natural gas.59 High efficiency HVAC systems have also reduced green house gas emissions. Natural light and lighting technology have produced a 40 percent reduction in energy use.60 Efficient landscaping and improved irrigation systems have helped reduce water usage by 87 percent at the plant.61 All storm water runoff at the plant is processed through bio-swales or treated.62 Additionally, roasting by-products and coffee chaff are recycled into mulch. Peets LEED certified coffee houses produce similar waste and emission reduction benefits. Tomorrow Internal Peets has used innovative and disruptive technology in all of is LEED certified buildings. Its heating, ventilation, and air conditioning systems, for example, have not
58

Peets Coffee and Tea. (2009). Lasting Quality: Sustainably Peets. Retrieved from: http://www.peets.com/images/pdf/SRPBrochure.pdf 59 Ibid. 60 Ibid. 61 Ibid. 62 Ibid.

18 | K y o s e i only helped the company reduce its corporate footprint, but also helped develop sustainable competencies for the future. Peets use of highly efficient lighting technology also shows the companys commitment to nurturing green technology. Peets has integrated other disruptive technologies into its supply chain operations. Peets fast expansion during the early 21th century produced major challenges for its supply chain. Growing order volumes made Peets patchy combination of older software and custom software applications obsolete.63 Peets worked with Junction Solutions, a Microsoft Gold Certified Partner, to integrate its supply chain expansion. Junction Solutions created an integration template that gathers product orders from various distribution channels and maintains them within Microsoft Dynamics AX as unique order types. Additionally, a touch screen inventory system enabled roasters, packagers, and shipping employees to provide real-time updates.64 This innovative system simplified the work of roasters and gave Peets reliable, timely information for good decision making. Peets, consequently, has maintained its excellent quality standards alongside rapid growth. Today External Peets has earned a good reputation as a socially responsible company by integrating stakeholder views into its business model. Peets communicates its quality requirements to socially responsible coffee farmers throughout the world. The company also pays its partners more than the fair trade minimum price for consistently producing high quality coffee beans.65 In doing so, Peets enables coffee farmers to maintain excellent land stewardship. Domestically, twenty percent of construction materials for Peets roasting plant originated from local and regional sources.66 Peets has also complied with all government laws and regulations and has obtained all operating licenses.67 Peets has integrated best practices from civil society organizations into its business by working with farmers who have obtained the following certifications: Fair Trade; UTZ; Organic; Rain-forest Alliance.68 Fair trade certified coffee is purchased at a minimum price set by FLO international. In response to Berkeleys Measure-O that required all
63

Microsoft Case Studies. (July, 2010). Premium Specialty Coffee Roaster and Distributor Manages Growth with Outstanding Quality. Retrieved from: http://www.microsoft.com/casestudies/MicrosoftDynamics-AX/Peet-s-Coffee-Tea/Premium-Specialty-Coffee-Roaster-and-Distributor-Manages-Growthwith-Outstanding-Quality/4000007910
64 65

Microsoft Case Studies. (July, 2010). Peets Coffee and Tea. (2009). 66 Ibid. 67 Peets Coffee and Tea. (2011). 68 Peets Coffee and Tea. (2009).

19 | K y o s e i coffee shops to offer Fair Trade certified coffee, Peets increased its selection of fair trade coffee.69 However, since Fair trade certification is only given to cooperatives, high quality coffee that is family owned cannot bear the fair trade label. Peets, therefore, purchases coffee from farmers that have received other forms of sustainability certification. UTZ certified, for example, is an independent organization that certifies sustainably produced coffee bearing its label. Peets coffee originating from Brazil and Indonesia are UTZ certified.70 Peets organic coffee bears the USDA certified organic label. Organic coffee is grown using low-impact practices, organic fertilizers, and minimal chemicals. Farms that have received certification from the Rainforest Alliance conserve biodiversity. A Peets partner in Guatemala was the second farm ever to become Rainforest certified.71 Peets LEED certified buildings also follow its strong trend of incorporating societal best practices into its business model. Tomorrow External Peets has also responded to population pressures, poverty and inequity by working with a myriad group of partners to meet unmet needs. Peets pays its own farmers above market prices and educates growers on how best to improve their crops. For example, Peets has partnered with TechnoServe and the Association of Kilimanjaro Family Farmers to help farmers improve coffee quality.72 Peets experts donate their time to evaluate coffee from these farms in Peets lab and advise farmers on the ground. Peets also makes coffee purchases at a Kenyan auction lot that provides higher prices to farmers.73 As a result, these farmers have experienced major increases in coffee profits. Peets also creates an enabling environment for womens empowerment. For example, since 2001 Peets has purchased the entire production of a womens collective coffee farm in Nicaragua.74 Peets buyers work with these women to improve their coffees quality, and, thereby improve their livelihoods. In addition to directly improving the quality of life of farming communities through profits, Peets also provides financial support to organizations assisting people living in coffee growing areas. Peets pays the operating costs and salaries of an Ethiopian nonprofit that provides vocational and traditional education to underprivileged children.75 Peets also supports a school in Papua New Guinea for children from farming families. Along with providing employment for teachers, this school provides health care
69 70

Osland, A., & Lawernce. (2004). Peets Coffee and Tea. (2009). 71 Ibid. 72 Peets Coffee and Tea. (2009). 73 Ibid. 74 Ibid. 75 Ibid.

20 | K y o s e i to students. Similarly, Peets provides considerable financial support to regional NGOs that improve the health and livelihoods of farming communities in Mexico, Guatemala, Peru, and Honduras.76 By combating poverty and inequity, Peets will continue its solid growth trajectory.

Recommendations
Stakeholder Engagement Recommendations In A Sustainable Value Framework Given that Peets takes a relatively holistic stance on stakeholder engagement, it was challenging to find many potential recommendations for the company to take in regards to its stakeholders specifically. For this reason, we followed the quadrants of the Sustainable Value Framework to guide all of our proposed recommendations.
INTERNAL Biodegradable and/or recyclable packaging for all products Community composting programs and training seminars Set long-term goal of zero waste in Peets retail stores EXTERNAL Expansion of programs in coffee growing communities Offer tastings and tours of the roasting facility to highlight sustainability in operations

T O M O R R O W

T O D A Y

LEED certification for all facilities, office building and coffee houses In-store composting

Lawmaker engagement Communicate with customers CSR reporting Carbon neutral coffee

Today Internal LEED certification for all facilities: Peets already has many locations and facilities that are located in LEED certified buildings. It is recommended that this practice be made compulsory, as it will ensure that the companys facilities are held to high standards for sustainability. This addresses the drivers of pollution, consumption and waste found in
76

Ibid.

21 | K y o s e i the Today Internal quadrant, but also addresses some of the drivers found in the Tomorrow Internal quadrant, such as footprint and clean technology. For this reason we would include it somewhere on the spectrum of Today-Tomorrow Internal. In-store composting: Coffee grounds are excellent additions to compost, and the paper from filters is a necessary requirement for composting, along with other eligible discarded food products and packaging materials (see Recommendations for Tomorrow Internal). As all of these things are abundant in the waste generated at Peets retail stores, the sites are ideal for in-store composting programs. Ideas would be to potentially give compost to Peetniks, local community gardens or to sell locally at a discount. Not only would there be direct benefits to the community from such a program, but it would also provide an excellent opportunity to educate customers on composting practices. Engaging in such practices would educate consumers, encourage individual behavior change among Peets consumers, and allow Peets to have a highly positive impact in the communities in which they operate. Today External Lawmaker engagement: Engage more proactively with lawmakers to prevent laws, like Measure-O, that may negatively impact operations. Peets should make a concentrated effort to communicate the nuances of sustainable coffee cultivation and certification to ensure that lawmakers have the information necessary to make decisions that would benefit Peets operations. Communicate with customers: Peets has a tremendously loyal customer base, and there is significant potential for a high level of engagement with this group of stakeholders. It is recommended that Peets increase the level of marketing and communication to customers regarding the sustainable initiatives the company has taken to benefit coffee communities above and beyond fair trade standards. With such a captive audience, this would be an effective way to educate the customers on the sustainable company practices. CSR reporting: Additionally, it is recommended that Peets begin to use standardized metrics for measuring the companys impact with CSR and carbon footprint analysis, among others. The results of these analyses should be publicized as a means of communicating the organizations impact to their loyal customers and potential investors. Carbon neutral coffee: As sustainable initiatives and business operations become more mainstream, customers will hold organizations to ever-higher standards. In order to maintain a competitive position, it is recommended that Peets create long-term goals of

22 | K y o s e i selling carbon neutral coffee. The details and methods used in pursuit of this goal would require in-depth research and planning, but such a goal would ensure that Peets would remain a forerunner in the sustainable coffee industry. Tomorrow Internal Biodegradable packaging: It is recommended that Peets use biodegradable packaging and disposable items (cups, lids, etc.) in its daily operations. Since Peets relies heavily on inputs like coffee that must be shipped from locations around the world, Peets generates a large amount of waste with packaging materials. With a strong focus on togo specialty drinks in retail stores, there is a significant amount of waste created just in daily operations. Using biodegradable materials will allow the company to substantially decrease their environmental impact. Community composting program and training seminars: In expansion upon the idea to create an in-store composting program, if Peets were to implement such a plan it could be built upon by evolving into a community-wide composting program. Such a program would require a larger composting site, but would allow for community members to donate food and paper inputs into the composting process. Further ideas include hosting educational composting workshops to train the community on individual composting techniques and practices. Long-term zero waste goal for Peets retail stores: Depending on the success of other sustainable programs and reception of these efforts by Peets consumers, Peets may also consider adopting the long-term goal of implementing a zero-waste policy in their stores. While such a move would be extreme and would require compliance, willingness, and possibly even enthusiasm on the part of Peets consumers, the potential impact and benefits are numerous and profound. Tomorrow External Expansion of programs in coffee growing communities: Peets already engages raw coffee suppliers and their communities, but it is recommended that the company both broaden the scope of their community engagement to encompass new and existing suppliers, and that the company deepen its involvement within existing areas. Peets could leverage its extensive experience in community programs and apply best practices to suppliers around the world to expand the companys reach and impact. Ideas for deeper community engagement could include the creation of additional revenue streams for suppliers and their families. This might occur through selling artisanal goods in stores and online, among other possibilities. This will not only ensure better futures for

23 | K y o s e i the communities themselves but will also lead to an increase in long-term successful supplier relations and new revenue streams for the company. Offer tastings and tours at roasting facility: Part of what makes Peets so special is the hand roasting process its beans undergo at the LEED Gold certified roasting facility in Alameda, CA. Offering public tours of the facility coupled with a coffee tasting event would provide Peets a means of demonstrating to its customers how the company implements sustainable values into its operations. Such an event would allow customers to meet the roasters and feel more engaged with the product and the company. This deepened level of engagement with the customer may also provide the company greater influence on the behavior of its customers, which may be leveraged to encourage sustainable behavior change.

Implications for Other Companies

Overall, Peets is accomplishing a tremendous feat by maintaining large-scale operations and consistently achieving profitability over the long term while simultaneously employing many sustainable practices. Though more can always be done, Peets sets a good example in the competitive world of corporate coffee. As an industry leader in sustainability initiatives, Peets practices should be adopted by companies in the specialty eatery industry. As big players in this industry, large coffee companies are in the position to have a substantial effect on the world around them. Following the examples of Peets activities, from those benefitting coffee farmers at the cradle down to the engagement of loyal customers at the gate, large coffee companies could leverage their massive potential to develop sustainable practices. As a result, coffee companies would foster continued success and a more holistic approach to coexisting with the world in which they operate.