Tully's hopes to expand with licensed stores

Tully's Coffee hopes to more than double the number of its retail stores in the next year and a half, founder and Chairman Tom O'Keefe said in an interview Monday after a special shareholders meeting.

The chain has about 165 stores in the West, half of them licensed, and plans to add 200 licensed shops in groceries and other locations during the next 12 to 18 months, he said.

Tully's already has begun opening in some closed Starbucks locations, he told shareholders.

Many of those stores were profitable but siphoning business from other nearby Starbucks outlets, O'Keefe asserted. "Finally, in the marketplace, we have what some people would call Starbucks fatigue."

Monday's meeting adjourned without a decision on the company's plan to sell its wholesale business to Green Mountain Coffee Roasters of Vermont for $40.3 million, because not enough votes were cast in one of Tully's three classes of shareholders.

Although two classes of shares — series A preferred and common stock — cast enough, those results were not announced.

The meeting will reconvene Friday morning at Tully's headquarters for additional voting. O'Keefe will answer shareholders' questions there from 4 to 6 p.m. Wednesday and 8 to 10 a.m. Thursday.

Although the official meeting ended after about 30 minutes, some 250 shareholders stayed at the Museum of Flight for more than an hour afterward, asking questions of O'Keefe and Tully's President Carl Pennington.

Many wanted to know how much money Tully's plans to distribute to shareholders if the Green Mountain deal is approved. O'Keefe said in the interview that Tully's lawyers and the Securities and Exchange Commission do not want him to provide a dollar figure in case Tully's is unable to deliver on it.

"You can't guarantee anything in life, but we wouldn't do anything unless it was beneficial to shareholders, and I'm a shareholder," he told investors.

Several shareholders complained that Tully's is selling a profitable business while keeping its unprofitable retail stores.

"I haven't seen one promise come true in 12 years," investor Rick Halbert told O'Keefe during a question-and-answer session.

After the meeting, Halbert said the deal with Green Mountain means "we're desperate and just sold off the only profit-making part of the company to keep us afloat until the stores go bankrupt."

O'Keefe and Pennington told shareholders that Tully's has cut overhead costs and closed some unprofitable stores, and it expects to start paying less for coffee from Green Mountain.

If the deal goes through, Tully's would buy coffee roasted to its specifications by Green Mountain, which buys green coffee in larger quantities than Tully's.

O'Keefe told shareholders he wanted to keep the two parts of Tully's together but that Green Mountain offered more for the wholesale business than any other prospective buyer offered for the entire company.

In a securities filing, Tully's said one potential buyer offered up to $36 million for the wholesale and retail businesses.

Tully's plans to use some cash from the sale to repay about $26 million in debt, including some $9 million overdue to lenders.

An unspecified amount would go toward cleaning up, repairing and making changes to existing retail stores.

O'Keefe's description of "drafting" off Starbucks — by opening in the larger company's former locations and in places where Starbucks might have opened if it were in growth mode — sounds like Tully's strategy from its early years.

After opening its first cafe in 1992, Tully's began putting shops adjacent to Starbucks. Early on, O'Keefe said his company would let Starbucks educate new communities about specialty coffee and "drag off them."

Now, he hopes Tully's will to gain momentum from the marketing efforts of a second coffee giant, Green Mountain.

The Vermont roaster intends to keep selling Tully's branded coffee beans in grocery stores, O'Keefe told shareholders.

"Every dollar they spend on marketing Tully's brand has an immediate impact (on us)," he said.

Melissa Allison: 206-464-3312 or mallison@seattletimes.com