The New Stuff

Martin Diedrich

Martin Diedrich – Human Being


“Think about this: People get out of bed and spend their entire day on a man-made surface, never touching anything natural with their bare feet. People drive in climate-controlled cars so they don’t have to worry about global warming. Cars are sold for the entertainment they possess. We’re zipping down the road at death defying speeds in total isolation. We go to jobs where we sit in cubicles all day long. People feel isolated and disconnected.” Martin Diedrich’s Kean Coffee is an antidote to this isolation and disconnectedness, a chance to reconnect and reenergize. His goal is to be the new town square.

We met with him at his coffeehouse in Newport Beach. It was a hive of activity. “You’re established in this business when the guests know each other,” he says looking at the knots of people coming and going from the space. His goal is to create an “urban refuge,” a place where people connect over coffee and leave the hubbub of the day behind. To that end, there is no free wi-fi. Unlike most coffeehouses, people are talking to each other, not staring at screens. On this day, every seat was full and the space was loud with conversation.

“You can make this anywhere; people are people,” he says pausing to sip his coffee. “People are social creatures. They love to gather together and hang out with one another. The sad thing is society has departed from that in a major way. I think today people yearn for opportunities to get together.”

Recalling a particularly moving sunset on a wind-swept, trackless beach, he recalled how he wanted to share that experience to confirm that others could be as moved by it as he. “We need confirmation,” he remembered, saying some experiences are too big for us to understand and absorb. “We know that we need one another. We need one another to validate and verify our existence. We’re not just geeks about coffee. We want to create something of value for the community. This is what continues to motivate my wife and me.”

Martin should know about coffee. His family has been in it for three generations with over 150 years on his mother’s side of the family, beginning in the 1800s. His father was a coffee grower in Costa Rica and Guatemala since the early 1900s. Martin grew up in Guatemala on the family’s coffee farm, inherited by his grandmother in 1916, living a hardscrabble existence. “One good year for every three,” he says, describing a tough hand-to-mouth life. It’s clear the memories of running barefoot through the rich mountain soil are fresh to him. They make his sense of loss caused by the isolation of modern society more acute.

martine-d-3Martin comes from a family of high achievers. One brother followed his childhood desire and became a world class mountaineer. Another brother had his pilot’s license before his driver’s license. Martin’s passion was archaeology, having been inspired by growing up around the Guatemalan Mayan culture and their descendants. He went on to become an archaeologist, working with some of the leaders in Mayan archaeology at the University of Texas at Austin. His love of all things Mayan continues still, with actual glyphs printed on Kean’s coffee cups.

After a personal tragedy in 1972, the family relocated to California. It was at this time that Martin’s father opened a tiny shop and rostery in the garage of a condemned house on Bristol Street in Santa Ana Heights. A mechanical engineer by training, he had invented and built a coffee roster which he brought to America in the family’s VW microbus. The denizens of the neighborhood soon discovered the shop by following the scent of roasting beans. Senior Diedrich gave seminars on coffee as patrons sat on bags of coffee beans. “He made them feel like guest in his living room,” Martin remembers.

In 1975, his father moved into a 400 sq. ft. space in a shopping center across the street from the current Kean Coffee location in Newport Beach.

The family was forced to transfer their farm to thugs in 1982 during the political upheaval in Central America. The farm had been their retirement plan, the place they would live out their years. Now, with the coffee store as their only asset, his parents, still new to America and its culture were at sea. Knowing his parents were struggling, Martin chose to give up his first love, archaeology, to come to their aid the following year. He saw this as a temporary diversion, thinking “I’ll take a few years, get them back on their feet, and then resume my career.” This was not to be.

Once he was involved, he realized the business wasn’t making very much money. He was living with his parents again, spending his nights in a sleeping bag on their threadbare living room carpet. He and his father clashed over how to run the business. With the desires of a young man, he many times questioned his decision to come back. Nonetheless he stayed, committed to helping them build some security for old age. His brothers were involved in their own business, building roasters. As a family, they began to turn their parents’ fortunes around.

martin diedrichHarold Hanson, the manager of High Time Liquor, was a customer of the family coffee shop. He was building a gourmet food center and invited Martin to open a coffee bar in it. This was back in 1984, predating America’s love affair with coffeehouses. When Martin set out to create a coffeehouse he wasn’t just creating something new to him, it was new to everyone. Every decision was new territory. Nobody knew what would draw people to or keep people at a coffeehouse. “The bar wasn’t that high back then,” he muses. “You could get away with things I cringe to think of now.”

Nobody knew what the business should look like or even how the product should taste. The manufacturers of his first espresso machine couldn’t tell him how to calibrate it. Nobody knew the frequency that grinder disks should be changed.

In 1986, Martin opened his first Diedrich Coffee in Tustin, CA in a 900 sq. ft. end cap subleased from a Heidi’s Frozen Yogurt franchisee. Within weeks, he had lines out the door. By this time, Starbucks and Peet’s were still local bean stores far, far away. He had no example to draw on, instead relying on his own instincts by creating a place, as he put it, “where I’d want to hang out. I learned early that I wasn’t in the coffee business, I was in the people business.”

He had an epiphany while laying a tile floor in the Tustin space. “I realized my vision had brought tradesmen to my place to build it. But I was also dependent on them. It was then that I understood how interdependent we all are. My ability to influence the universe ends at my furthest reaching extremity. I was going to be far more influential and successful working together with other people.”

This sense of interdependence and interconnectedness had its place at the core of Deidrich Coffee’s culture. The team melded effectively together. Coffee, conversation, and sharing began bringing about a community, a micro culture that fascinated and captivated Martin. He knew he was part of something bigger than himself.

Martin’s advantage was that he knew how to grow and roast great coffee and how to treat his people well. This coupled with his disciplined mind began a journey that would lead to a huge coffee store chain with nearly 500 outlets in as many as 12 countries, a NASDAQ traded company, and some humbling defeats.

coffee bagsIn 1991, before building his third coffeehouse, Martin took a trip to Vancouver where he saw his first Starbucks. The store was the most successful in the chain at the time. It was so busy that they opened a second store across the street that became their second most successful unit. While talking to a manager at one of the stores, he discovered the chain was coming to Southern California. The revelation ruined the trip for him.

After months of worrying about Starbucks’ imminent arrival, he decided he wanted to stake his claim to Orange County, but didn’t have the capital. In 1992, he took on an investor. By selling a large stake in his now four coffeehouse company, he raised a million-dollar war chest. A year later, in a menacing confrontation, the investor sought additional equity by

claiming Martin overvalued the company at deal time. Martin, stunned, couldn’t make a response. When offered the opportunity to make up the short fall with stock, he thought he’d been let off the hook. With the additional stake, the investor now put a former accounting firm partner in place as watchdog. “This guy was not a people guy. He was a bean counter. And not coffee beans, either.”

Wall Street sensation Starbucks had gone public in 1992. His investor saw an opportunity to fragment Starbucks’ market and cash in on its reflected glory. He brought in an additional investor, diluting Martin’s ownership for a third time. The new investor added his own watchdog that was also tasked with identifying acquisition opportunities. The first was a failing 25 unit chain named Brothers Coffee with outlets in Denver, Washington, D.C., Houston, and Baltimore. The second was seven Java City stores in Denver. In 1995, they were able to acquire a total of 25 stores to be added to about 15 Diedrich coffeehouses in operation in Southern California. With their empire in place, the investors decided to take the company public.

Martin participated in the road shows leading up to the offering. “I didn’t know how to do this. This was unfamiliar territory,” he confesses. A team of people groomed and coached him on how to handle investors, provided him with talking points, and dressed him in expensive suits. “It was a heady time, and enjoyable, in a way.”

cappucinoAs the IPO date neared, he found himself sitting at a long conference table in a mahogany-paneled conference room signing stacks of papers. Outside were stunning city views and the Pacific Ocean beyond. It was a beautiful day. Intoxicated with high finance and in over his head, he relied on the people that had brought him to this moment. He trusted them. So when one of them handed him a folder with a few final papers to sign, he did so without even reading them. With the stroke of a shiny new Mont Blanc pen he signed away the right to use his family name in business ever again.

The stock went out on September 12, 1996 at $9.25 per share and grew to $13 per share. Martin’s stake was 25 percent. “I was the Six Million Dollar Man on paper. But I never got to touch a single penny.” Martin explained that he was locked out by market rules from selling any of his shares. He didn’t borrow against them either, which was a wise decision as the value of the shares would soon plummet.

“From the time the company went public, it was all about making money,” Martin lamented. “There was no discussion about the quality of the customer experience.” When Martin suggested that their problems came from how the stores were run, he was dismissed. This was a sad time for Martin who remembered the days when everyone was committed to delivering the best possible experience.

John Martin, the former CEO of Taco Bell, was made Chairman of the Board sometime after the company became public. Unlike Starbucks, who had paid the price in the early years to create a solid business model, Diedrich Coffee was an amalgam of acquired companies designed by different founders who had no set corporate processes or procedures, no true corporate identity, and a mandate to grow. Then Diedrich Coffee acquired Gloria Jean’s Coffees, a 350+ store chain with international presence and an established franchise model.

The purchase required a secondary offering, the fifth equity dilution of Martin’s holdings. After the acquisition, management soon discovered that many of the franchises were sited in poor locations and were poorly performing with many of the franchises closing soon after. It became clear they overpaid for the property.

The store count went from nearly 500 under four brands in nine countries to 400 and the stock value continued to sink. The stock price fell to $3.00 and then under a dollar. NASDAQ threatened delisting. To save the company, management did a four to one reverse split. They hired a turn-around chairman, Mike Jenkins, to engineer it. This last dilution took Martin to just 3 percent ownership of the company he founded.

While painful, the new chairman had brought some integrity to the company and things seemed to be improving. However, as quickly as he had come, he was taken by cancer and things at Diedrich Coffee began a long, slow final slide. The CEO’s office had a revolving door installed. Eventually, Martin was told at five o’clock on the last day of his employment contract, June 30, 2004, that his contract would not be renewed. The public company experience left him devastated and doubting his own instincts. “I thought, since I created Diedrich Coffee, that I would be doing that for the rest of my life. My entire identity was tied up in it.” Diedrich Coffee would survive until 2007.

He couldn’t figure out how to tell his wife Karen, so he didn’t. He told her a week later what he had decided on the drive home from his last day at work. She completely agreed with his idea of starting a new coffeehouse company.

He decided not to do more of the same. The technology, the methods, how the coffeehouses themselves were being used had all changed. This new endeavor would take in the best from what was happening in the field while melding in the sense of community that Martin craved in “doing coffee as a culinary art, not just as a beverage, and evolving the coffeehouse experience.”

“Each and every original Diedrich coffeehouse was unique. None of it was cookie cutter.” He goes on to discuss his design philosophy, in which “everything in the coffeehouse needs to be exactly what it appears to be. No faux this or synthetic that. We’re creating a genuine environment in which to enjoy amazing coffee.”

“We’re striving to create an environment that is inviting. Where you feel comfortable and want to spend your time.” He discusses using the theatre arts director from University of California, Irvine to assist with lighting design: “It occurred to me that what we do is theatre and the baristas are performers.” It’s this attention to detail that sets Kean apart. Every decision about the place is deliberate. All the way down to the Fortuni light fixtures that were found during a trip to Venice, Italy and the authentic Venetian plaster finish on the wall. Every sense is thought of and accounted for. Taken in total, the experience communicates that Kean Coffee is solid, dependable, and reliable; a timeless respite from a busy world.

He remembers packaging coffee in with his father. “He would say our coffee is a gem and gems should be presented in jewel cases.” He goes on to describe the packaging of the product, the design of the store, and the small details that are not noticed but surely perceived are actually the packaging for the whole experience. “We are all about content. All of this is just the packaging for it. It matches the quality of the coffee we sell.”

“People are yearning for something that is real in all this strip mall ubiquity. People are looking for something they can connect with.” Kean Coffee is Martin’s best effort to meet this yearning. That was why Karen and Martin decided to keep things small and special. A year and a half after losing his corporate job, Kean Coffee opened for business.

The payoff for Martin and Karen isn’t monetary, it’s almost spiritual. “We have purpose. We provide a place for people to connect. Look at what people are doing here. They’re talking. They’re connecting. We’re making a positive difference in our own little corner of the world.”

Even though he had a bad experience with investors, he remains philosophic; “Their job is to make money, understand that. At Diedrich Coffee, they were constantly taking money off the table and it left the company resource strangled.”

“The advice I have is to look closely at those who might invest in you and see what kind of track record they have at other businesses. I would say never to do business with someone you can’t have a meaningful philosophical discussion with.” He’s succinct about why he got into trouble; “They had money and I had ambition to grow the company and I didn’t understand what kind of people they were.”

With Kean Coffee, he is more careful. He has double firewalled his personal assets with multiple business entities and has chosen investors that are content with a good return on investment instead of insisting on a killing. Because of his reputation in the industry, he’s been able to be selective about investors, seeking to keep control of the company and the coffeehouse experience.

Before starting Kean Coffee, he built three lessons into his business plan about expansion:

• No growth without solid, bullet proof, operating

procedures and systems.

• Grow for the right reasons, no growth for

growth’s sake.

• Be properly capitalized and have reserves.

Since he can’t use his family name, the business is named after their fifteen-year-old son, Kean, after paring down a large name list during some market testing. A year right after opening the business, Kean, who was then a precocious six-year-old, asked for name royalties.

When asked if he would pursue a big company experience again, Martin speaks of Alice Waters, the owner of the Chez Panisse restaurant in Berkeley, CA, “One woman, one restaurant has changed the meaning of fine cuisine. Every foodie in the world knows who she is. You don’t have to be big to be influential and powerful.”

Martin worries that too many people getting into business are chasing money. “The more you go after it, the more it recedes. To me, money is something that is sitting on your shoulder. You don’t want to ever be looking at it as the focus or purpose, but if you’re doing what you are supposed to be doing, it will always be there.”

He also isn’t fond of the classic business school model: Start a scalable business, grow it to sufficient size, create a liquidity event, and work on your exit strategy. “The students get starry eyed wanting to go off to make a bunch of money, but the likelihood of them succeeding is as much as them becoming the next Hollywood star.” He sees this as a great disservice to business school students.

“My exit strategy is when I’m six feet under. I’m not doing something so I can get enough money to do what I want to do,” he leans forward. To him this is the point, being in thismartine-d-7 moment now, doing what he loves. “Instead of pursuing money, pursue your dream. My blessing, as a result, is that I’m already doing what I’d rather be doing.”

Martin has found purpose and has survived the hard knocks he’s received by the sense of fulfillment and wonder that he finds in the smells, sights, and sounds of his coffeehouse and the people that fill it. He draws strength and renewal from their conversations and laughter that fill his days. His own journey from the Bristol Street garage through the desolation of public company hell and exile compels him to create this urban oasis, to heal the disconnection that he himself felt during those long years, to mend a heart broken by betrayal and misunderstanding.

“I’ve completed my calling. I came to help my family and I did. I have my health, I have the love of my family and I have my reputation in this community and within the coffee trade. I have all of the things that money can’t buy.”•

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About the Author

Peter Mehit

Peter Mehit is a serial entrepreneur, starting four businesses of his own as well as participating in the launch of a consumer products firm and an internet based automobile dealership management software company. He raised or was involved in teams that raised capital for these businesses. Mr. Mehit with his wife, Lydia, founded Custom Business Planning and Solutions in 2004. The company provides strategic and tactical planning, writes business plans, sources funding and improves the efficiency of existing businesses. He is also a published columnist, blogger and author, whose latest work, ‘Employee to Entrepreneur’ targets individuals leaving corporate employment in pursuit of starting their own business.


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