St. Anthony: Dunn Bros is the non-chain coffee chain

Last week's announced sale of Caribou Coffee Co. Inc. to German food-and-coffee consolidator Joh. A. Benckiser Group for $340 million leaves smaller Dunn Bros as the Twin Cities' biggest "local" retail coffee chain.

But the "chain" word makes Chris Eilers of Minneapolis-based Dunn Bros wince. Seventy-five of Dunn Bros' 80 stores are owned by independent franchisees, small-business people who run their shops with some latitude.

Eilers and co-founder Skip Fay, who share the CEO title, were the first Dunn Bros franchisees 20 years ago. That was before they bought the franchisor rights from founder Ed Dunn. They, together with like-minded franchisees, fueled success with roasted-in-store exotic coffees grown around the globe.

And they learned during the 2008-09 recession years that it takes more than coffee drinks to make a buck in the coffee-shop trade.

"The Great Recession caused us to recalibrate," Eilers said. "Specialty coffee is mainstream now. And it's much tougher for independent franchisees to borrow money to open a Dunn Bros or tap their [diminished retirement] accounts or home equity loans."

Dunn Bros has diversified into homemade baked goods and sandwiches. It has struck partnerships with a local candymaker and independent publishers to help its franchisees grow organically in a business where even McDonald's boasts about its coffee drinks.

Dunn Bros owners pride themselves as the premier local coffee shops for on-site roasting, avoidance of "specialty blends" in favor of single-origin coffees and personal relationships with small growers that extend to visits with farmers in Mexico, Central America and Africa.

Still, 12 Dunn Bros franchisees folded during the lean years. And the number of Dunn Bros stores, 50 of which are in the Twin Cities, shrank from 90 to 75. Systemwide revenue declined for three years from its $35 million peak in 2007.

However, thanks to new food initiatives and a better economy, revenue recovered in 2011. Management expects systemwide revenue to rise by a strong 9 percent to a record $38.1 million this year. Dunn Bros' corporate office, which gets franchisee fees and royalties, has reinvested most of its cash flow since 2009 in research, equipment, a chef and marketing to test and roll out its "Provisions Bakery Café."

"We wanted to elevate the food experience to mirror what customers know on the coffee side," said Kim Plahn, president of Dunn Bros. "We saw an untapped market for specialty coffee coupled with fresh, high-quality food. Unlike most coffee-house chains, food at Provisions is baked in the store and handmade, right in front of the customer."

A central commissary provides the doughs and batters. On-site convection ovens bake breads, pastries, scones, muffins and brownies every day in a growing number of stores. Food sales at the dozen new and existing shops that have installed Provisions have doubled within several months of installation. Food sales account for up to 30 percent of total sales in those stores, compared with 15 percent before.

"So far, the results are selling the program," Plahn said. "You'll see more stores investing in Provisions. Total sales in Provisions stores are up 20 percent this year. Customers spend more per visit and we also get more customer visits." The investment is substantial. The specialty ovens, sandwich tables and refrigerators cost more than $30,000 per store.

But Eilers said Provisions gives Dunn Bros another high-caliber weapon in the daily competition against the likes of Starbucks and Caribou.

Publicly held Caribou, with 610 mostly company-owned shops, also was born in the Twin Cities. But it has had a higher-profile and turbulent life under several management teams. Caribou went public at $14 per share in 2005 and is selling out for $16 per share after finally getting traction under CEO Michael Tattersfield, who closed weak stores, increased institutional sales and effectively marketed the brand.

Still, Caribou revenue rose only 1 percent to $239 million for the first nine months of this year. Benckiser, a multibrand food peddler, has indicated that it will seek growth by consolidating and expanding its bagged coffee sales. Caribou is the distant No. 2 U.S. retail coffee-house chain behind titanic Starbucks.

Dunn Bros management also is working to increase bagged coffee sales online and through third-party retailers. But the privately held company remains committed to growing its cornerstone business: coffee houses.

And it doesn't have outside shareholders to please like publicly held Caribou, noted John Potter, a mergers-and-acquisition partner at PwC. Tattersfield had led a turnaround of once-flagging Caribou. But the board decided to take a nice offer from a deep-pockets buyer.

Fay and Eilers have an "entrepreneurial advantage" as principal owners and don't have to worry about outside shareholders as they reinvest in their growth strategy -- as long as they and their franchisees are satisfied, Potter said.

Marty Koessel spent more than $60,000 on franchise rights and borrowed more to open a Dunn Bros in the Minneapolis Central Library and on Washington Avenue N. in the resurgent Warehouse District in 2005. He survived the recession, thanks in part to his wife's day job. Koessel, who employs 20 people at the two shops, plans to invest in Provisions equipment.

"I've tried it and it's good stuff and very important to have food that's close to the fantastic quality of our coffee," Koessel said last week.

The 55-year-old Koessel was laid off from a corporate job before he became an entrepreneur. He said Dunn Bros also allows him to develop his business independently, including hosting North Loop neighborhood events, a book club, and offering discounts to veterans.

Books are a key part of the Dunn Bros strategy going forward. This fall Dunn Bros and independent publisher Hillcrest Media Group struck a partnership (www.coffeeandbooks.com) that allows customers to discover independent titles online and in Dunn Bros shops. The partnership, which offers coffee deals to book buyers, also includes Milkweed Editions and the University of Minnesota Press.

Dunn Bros also has struck a partnership with St. Paul's Pearson Candy Co. and its Nut Goodie candy bar. The "Nut Goodie Latte" is being featured to celebrate the 25th anniversary of Dunn Bros and the 100th year of Pearson's.

"To survive the recession, we didn't just batten the hatches," Eilers said. "We invested our [corporate] cash flow in food, roasting and other equipment. We want to be the cool, independent 'non-chain' chain. And our customers are perfect for that."

Neal St. Anthony • 612-673-7144 nstanthony@startribune.com