Van Houtte Inc. Business Information, Profile, and History

Company Perspectives:

Our Vision: Captivate North American consumers ... one cup at a time ... with Van Houtte's fine-tasting coffees and innovative merchandising concepts.

History of Van Houtte Inc.

Van Houtte Inc. is the largest gourmet coffee roasting company in Canada and one of the leading coffee service specialists in North America. The company operates in three principal areas: Coffee Services, The Coffee Group, and VKI Technologies. The Coffee Group purchases green coffee on international markets, roasts the beans, packages the product, and then markets it throughout North America under various brand names to food retailers. Van Houtte coffee is found in mote than 2,000 supermarkets across Canada and in thousands of other retail outlets. VKI Technologies Inc., a wholly owned subsidiary of Van Houtte, is the largest designer, manufacturer, and distributor of single-cup coffee brewing equipment in North America. The patented VKI brewers are sold under license to manufacturers in Canada, the United States, Europe, and Japan. Coffee Services, through the operations of Red Carpet Food Systems Inc., Selena Coffee Inc., and Filterfresh Corporation, provides coffee to 63 corporate outlets and 33 franchises across Canada and in 28 U.S. states.

Early 20th Century Origins

In 1912, Albert-Louis Van Houtte emigrated from France, traveling by steamer and landing at Montreal. A short time later, he established a coffee import business in Chelsea, Quebec, near the border of Ontario. However, by 1914, with Canada involved in World War I, Van Houtte gave up his coffee activities and worked at a variety of different jobs. In 1919, after the war had ended, he purchased a store in Montreal and once again turned his attention to importing coffee. His shop specialized in the import of fine teas, coffees, and spices. The Van Houtte logo would later feature a caricature of the mustachioed founder.

At his Maison A.L. Van Houtte, Albert-Louis imported specialty coffees from Europe and roasted small batches in the back of his specialty grocery store. Eventually, he established a good reputation in Montreal, and the business prospered. After Albert-Louis' sons entered the family business, the importing and retail operations of the family business grew. In 1944, following the founder's death, the Van Houtte sons took over, and, eventually, the second son, Pierre Van Houtte, headed the enterprise. During the first 60 years of operations, Van Houtte distinguished itself for its roasting expertise and brand image in the Montreal fine coffee market. In the 1970s, the company added wholesale distribution to the food and restaurant sectors to its portfolio of activities.

Business Perks Up: 1980-92

The 1980s and early 1990s represented a time of tremendous growth and change as Van Houtte responded to the increased demand for gourmet coffee in North America. In 1980, the company strengthened itself by partnering with Paul-André Guillotte Benoît Beauregard. The new venture retained the Van Houtte name, A.L. Van Houtte Inc., as well as its original mission, according to company literature, to 'offer consumers the enjoyment of discovering fine quality coffees.'

In the 1980s, Van Houtte focused on the coffee category in the Quebec retail sector, promoting its products in grocery stores and pioneering the concept of the café-bistro. In May 1981, Van Houtte opened its first coffee bistro in Montreal. Over the next few years, it established A.L. Van Houtte Bistros throughout Quebec. Also during this time, pursuing a goal of vertical integration, Van Houtte expanded and acquired companies involved in other areas of the coffee business.

In 1987, Van Houtte announced an initial public offering (IPO) of its stock at C$2.50 a share. With the funds raised from the IPO, Van Houtte was able to make further acquisitions, including those of the Café Orient Express and the Café Christophe Van Houtte roasters in Quebec. The IPO was regarded by the company as a major turning point in its journey toward national prominence. As the 1980s drew to a close, Van Houtte was selling coffee through supermarkets, convenience stores, and drug stores all across Canada. Annual sales of C$1 million in 1980 would increase to C$27 million by 1992.

The 1990s

One highlight of the company's early 1990s activities was its entrance into the coffee services market, in which it pioneered a new category: single-cup brewing. Single-cup brewing technology was targeted towards the office coffee market, a segment that had been largely ignored up to that point. Company CEO Paul-André Guillotte observed in an article in Profit Magazine, that 'the industry had lost the younger generation because coffee offered in coffee shops and everywhere else was a very bland product. But companies such as Starbucks have made coffee a fun beverage again. Now people used to good coffee at home and in restaurants expect the same at work.' From 1992 to 2000, pursuing its mission to provide better coffee to office dwellers, Van Houtte invested some C$175 million to acquire approximately 50 businesses (primarily coffee service operators) and expended nearly C$125 million in the purchase of single-cup coffee brewers and coffee roasting, distribution, and retailing facilities.

Perhaps the most significant acquisition during this time was that of VKI Technologies Inc, located in St-Hubert, Quebec. Van Houtte purchased 51 percent of VKI Technologies in 1994 and the remainder in 1997. VKI had developed and patented the world's first single-cup coffee machines to brew coffee the traditional way. Van Houtte made the machines available to customers on a rental basis. Also during this time, Van Houtte paid C$49 million to acquire Canada's largest coffee service company, Red Carpet Food Service, as well as a 51 percent stake in the U.S.-based coffee services company Filterfresh Corporation. The remaining interest in Filterfresh was purchased by Van Houtte in 1997, around the same time that it acquired VKI in total.

The size of Van Houtte's single-cup equipment base increased more than six-fold, as the company expanded its presence in all Canadian provinces and 28 American states. Soon Van Houtte had captured a dominant share of the Canadian market (more than 45 percent) and had established a network of 16 corporate branches in the Unites States, along with 33 franchises. One stock analyst, quoted in Profit Magazine, commented on the unique position of Van Houtte: 'No wonder. The only thing they don't do is grow the coffee. There is no other company like it in North America.'

In Canada, the Coffee Group expanded its presence and increased shipments by an average of 12 percent annually. Such growth was bolstered by its late 1990s acquisitions of Gold Cup Coffee Company Ltd., a Vancouver-based roasting outlet, and the Gerard Van Houtte roasting plant in Montreal. Meanwhile, Van Houtte's Coffee Services division realized 32 percent of its revenues from Quebec, 29 percent from Western Canada, 20 percent from the United States, 16 percent from Ontario, two percent from the Atlantic Provinces, and one percent from export.

Van Houtte's net earnings grew at an annual compound rate of 23 percent. By 1999, the company had acquired approximately 40 coffee-service companies, including Selena Coffee Inc., Red Carpet Food Systems, and Filterfresh Corp. It had a network of 61 corporate branches and 36 franchised outlets to sell, install, and service the single-cup coffee machines. Still, the company had only a three percent market share of the $3-billion U.S. coffee service market, the American market being more than ten times the size of the Canadian market. Detecting an opportunity, the Van Houtte decided to focus on increasing sales to its larger neighbor to the south. Toward that end, the company launched Caffe Mondo, a workplace coffee-sampling program. The program proved an effective marketing strategy that helped increase single-cup technology sales in the United States.

2000 and Beyond

In hopes of further penetrating the U.S. market, Van Houtte developed a strategic plan that focused on repositioning itself from a Canadian company with American interests to a leader in the North American market. The plan involved four objectives: 1.) to align the Coffee Group's roasting and merchandising strengths, the Coffee Service network's expertise and VKI's product innovation capabilities to offer consumers an experience that would be unique to A.L. Van Houtte; 2.) to establish Van Houtte's brand image among North American consumers as the most accessible fine coffee roaster; 3.) to grow the number of single-cup sites through acquisitions and internal development, and increase coffee consumption per site; 4.) to complete the coverage of the retail food industry in Canada and penetrate certain target markets in the United States. To further strengthen the Van Houtte name, the company began to phase out the former names of its subsidiaries.

Van Houtte had already begun focusing on markets in the American Midwest as well as in Seattle, where it competed in the grocery stores with such big brand names as Nestlé. Profit Magazine reported that the first major win for Van Houtte outside these areas occurred when the company struck a deal with Florida's Publix stores, which agreed to carry Van Houtte's coffee in 300 outlets. Having identified the search for professional sales staff as a challenge, the company opened the Single Cup Sales Academy near Boston and prepared a manual on managing coffee services for its partners.

In its home territory, in February 2000, Van Houtte reached a commercial agreement to expand its presence in Western Canada by providing 17 additional outlets in the Calgary region, at Calgary Co-Op stores, with a selection of specialty and gourmet coffee. Later that year, Van Houtte purchased Heritage Coffee Ltd., a Vancouver-based coffee company.

Earmarking significant investment dollars for internal development and for business acquisitions that would be directed mainly towards the U.S. market, Van Houtte warned investors that net earnings might dip temporarily. Management remained confident, however, that the company would regain and then surpass its growth rates. At the annual meeting held on September 12, 2000, shareholders ratified a resolution to change the company name to Van Houtte Inc., dropping the initials of founder Albert-Louis for a corporate name that more readily reflected its brand names.

Management also introduced shareholders to a new generation of single-cup compact coffee brewers. The Caffe Mio model was targeted to groups of 20-40 users, while the Piccolina was designed for smaller groups of 20 or less. These products were regarded as superior because, in addition to the main brewing system found in all Van Houtte equipment, these products offered a packet system that allowed consumers to choose among eight different coffee blends as well as tea and hot chocolate. Company executives pointed out that in the previous five years, 90 percent of all jobs created in the United States had been in small businesses with 20 employees or less. 'This gives you an idea of the size of the potential market we are targeting,' said Gerard Geoffrion, executive vice-president.

In December 2000, Van Houtte acquired the Millstone gourmet coffee roasting plant in Henderson, Kentucky. Formerly owned by Procter & Gamble, the plant was to be decommissioned to allow Millstone to centralize production facilities in New Orleans. Van Houtte acquired assets such as the roasting and packaging equipment and also hired several of the plant's key employees. The acquisition was in keeping with Van Houtte's plan to accelerate expansion in North America. 'Not only will this plant yield a potential 50% increase in our fine coffee production capacity, but it is also located in the heart of Filterfresh's densest market, mid-way between Chicago and New Orleans In fact, this location is recognized as strategic in the U.S. food distribution industry. We will therefore be able to provide our American coffee service customers with fast, efficient service, while gradually developing our presence in targeted areas of the retail food market,' wrote Jean-Yves Monette, president of the Coffee Group, in the annual report.

Van Houtte set a growth objective of ten to 12 percent in net earnings for fiscal 2001, allocating $2 million to complete the implementation of the strategic plan. The money was targeted at Coffee Service development and integration, training activities, and implementation of a customer satisfaction program. Van Houtte appeared well financially stable, well managed, and working methodically towards achieving its strategic goals.

Principal Subsidiaries: Gold Cup Coffee Ltd.; Filterfresh Corporation (U.S.); Selena Coffee Inc.; Red Carpet Food Services.

Principal Divisions: Coffee Group; Coffee Services; VKI Technologies.

Principal Competitors: HDS Services; Aramark Corporation; Nestle S.A.; Starbucks Corporation.

Chronology

• Key Dates:

• 1912: Albert-Louis Van Houtte immigrates to Canada.
• 1919: Van Houtte opens a coffee import business and grocery.
• 1944: Company founder dies, and family carries on the business.
• 1980: Management partners with Paul-André Guillotte Benoît Beauregard and reincorporates as A.L. Van Houtte Inc.
• 1987: Company goes public on the Montreal Stock Exchange.
• 1994: Red Carpet, Canada's leading coffee service company, is acquired for C$49 million; a 51 percent stake in Filterfresh and VKI Technologies is acquired.
• 1995: Stock is listed on Toronto Stock Exchange.
• 1997: A.L. Van Houtte acquires remaining shares of Filterfresh and VKI Technologies; announces a two-for-one stock split.
• 2000: U.S. sales represent about 20 percent of Van Houtte's total revenues; company opts to shorten its name to Van Houtte Inc.