October 30, 2015 / 3:58 PM / in 3 years

Peet's rides coffee's 'third wave' with stake in Intelligentsia

(Reuters) - Peet’s Coffee & Tea [PEETC.UL] will expand its reach in the hot “third wave” coffee sector with the purchase of a majority stake in Intelligentsia Coffee, the two chains said on Friday.

The deal is the second this month for Peet’s, a pioneer in the craft U.S. coffee industry. It comes as upscale, independent coffee shops are popping up all over the United States - even as corporate rivals like Starbucks Corp (SBUX.O) and Dunkin’ Donuts (DNKN.O) keep adding shops.

Peet’s acquisition of Portland’s Stumptown Coffee Roasters from private equity firm TSG Consumer Partners will close soon and the Intelligentsia transaction is slated to be finished by year-end, Peet’s Chief Executive Dave Burwick told Reuters. Terms were not disclosed.

There has been a flurry of deals involving tiny chains that cater to sophisticated young taste makers who have basically grown up on Starbucks but now seek exotic and rare coffee drinks coaxed from traditional espresso machines or siphon and vacuum brewers by expert baristas.

Experts call this artisinal trend, coffee’s third wave.

“Their customers are willing to pay more and to wait longer because they feel like its a higher-quality, more unique experience,” said Bob Goldin, an executive vice president at food consultancy Technomic.

Chicago-based Intelligentsia, like Stumptown, will continue to operate independently. Intelligentsia co‐founders Doug Zell and Emily Mange as well as co­‐owner Geoff Watts will retain a significant stake and remain actively involved in operations.

The 18- to 34-year-olds who are driving demand for ever-higher quality coffee, as well as craft beer and other artisan products, are seeking a variety of experiences, Burwick said.

“That’s the coffee connoisseur of the future. To be relevant, we have to provide those types of experiences,” Burwick said.

The tie-up gives Chicago-based Intelligentsia added muscle, particularly when it comes to selling its packaged coffee in grocery and specialty food stores, Zell said.

Intelligentsia, Stumptown and Peet’s combined operate roughly 300 cafes. Those cafes will continue to use traditional espresso machines and make every drink by hand, the executives said. Starbucks, which now has more than 23,000 cafes around the world, years ago switched from traditional espresso machines to automated units to reduce worker injuries and speed up service.

Emeryville, California-based Peet’s is majority owned by JAB Holdings Co, a holding company controlled by Germany’s billionaire Reimann family. JAB also owns Caribou Coffee.

Other major third-wave players include San Francisco-based Philz Coffee and Oakland, California-based Blue Bottle Coffee, which recently raised $70 million in a funding round led by Fidelity. Blue Bottle already has scooped up Los Angeles’ Handsome Coffee Roasters and Tonx, a coffee subscription service.

Elsewhere, Chobani founder Hamdi Ulukaya has taken a stake in La Colombe Coffee Roasters.

Starbucks took direct aim at its third-wave rivals late last year, spending an estimated $20 million to open a showcase reserve coffee roastery and tasting room in its hometown of Seattle.

The world’s biggest coffee chain plans to open a similar facility in Asia next year and promises to add 100 reserve-only coffee shops in the coming years.

Additional reporting by Luc Cohen; editing by Matthew Lewis and Diane Craft

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