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Originally published September 12, 2013 at 8:33 PM | Page modified September 13, 2013 at 10:40 AM

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New Tully’s chief: No more ‘obsession with beating Starbucks’

The coffee chain’s new chairman and part-owner says his group will pour more than $10 million into turning around the long-beleaguered company.

Seattle Times business reporter

Tully’s Coffee

First cafe: 1992

Bankruptcy: October 2012

Acquired: June 2013 for $9.15 million

New owners: L.A. lawyer Michael Avenatti and unnamed business partners, doing business as Global Baristas

Locations: 103, including 48 company-owned

Employees: About 485, including 25 at headquarters

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Tully’s Coffee customers will recognize the brew, but maybe not much else about the long-beleaguered company, its new owners vow.

Everything from remodels of all 48 company-owned stores to a new loyalty program and marketing push is part of their turnaround plan for the Seattle-based chain that in two decades only turned an annual profit twice — both times by selling parts of the company.

New Chairman and part-owner Michael Avenatti promises the new Tully’s will not be boring — and it has not been so far.

Actor Patrick Dempsey generated national interest as the public face of an investor group that bought Tully’s out of bankruptcy June 30, paying $9.15 million and fending off Starbucks and others who wanted Tully’s.

But in August, Dempsey sued Avenatti and left the group.

Now Avenatti and former investment banker Tod McDonald, hired by Avenatti to run the chain on a daily basis, are charting the next moves for the 103-location chain.

Their plans include:

• Spending more than $6.5 million to remodel all 48 company-owned stores, starting with shops in Bellevue, Clyde Hill and near Pike Place Market.

• Spending at least $4 million on other improvements, including marketing via popular sports; speeding up both the Wi-Fi in its cafes and the time it takes roasted coffee to reach stores; and revamping the food and the loyalty program. The investment group is providing the capital for all these changes, said Avenatti.

• Moving the company’s 25 headquarters employees out of the old Rainier Brewery building near Interstate 5 and into offices above the Tully’s store on Western Avenue near the Market.

• Laying the groundwork to expand to at least 225 company-owned stores by the end of 2016.

An unhealthy obsession

Avenatti blames Tully’s former business strategy for its financial hardship.

“This company has suffered for the last 20 years with a flawed strategy that was centered around an obsession with beating Starbucks,” he said.

The most fundamental example, he said, was opening stores across the street from Starbucks locations. Tully’s founder and real-estate executive Tom O’Keefe talked about wanting to “drag off of” Starbucks.

Dan Geiman, an analyst at McAdams Wright Ragen, said he has not been in a Tully’s store for years; the one he used to visit closed long ago. But he’s always thought it needed to stop focusing on its Goliath rival.

“They’ve always kind of wanted to mimic Starbucks but they don’t have the scale or resources to go toe to toe with Starbucks,” he said.

Instead, Tully’s needs its own identity — and the help of a big cash infusion like it is getting from the new investors, he said.

Still, he said, “It’s getting late in the game in an incredibly competitive space. ... It’s going to be a challenge.”

Tully’s new management will focus on traditional business practices including making frequent visits to stores and seeking input from managers and baristas, Avenatti said.

August was Tully’s most profitable month in four years, he said, with $2.8 million in net sales.

That’s up from $2.3 million in June, according to court records. Its net loss in June was $153,000.

Two would-be buyers have offered $22 million and $26 million for the company, Avenatti said. However, “We didn’t buy this to flip it. ... I’d like to be affiliated with Tully’s for 20 years or more.”

The chain is one of the largest privately owned and independent U.S. coffee chains, now that Peet’s Coffee and Caribou Coffee have been bought by a German conglomerate. This week, a large part of Coffee Bean & Tea Leaf in California was sold to institutional investors from Boston and Hong Kong.

One of Tully’s biggest assets is that it is the only coffee-shop chain in Boeing’s Puget Sound-area facilities, with 13 locations.

Tully’s new investors — and ostensibly those still eyeing it — were attracted to its brand, Avenatti said. In particular, people like the taste of its coffee.

It appears to be better known as a national brand in grocery stores than as a Seattle coffee-shop chain. Tully’s grocery sales are often on par with Starbucks’, according to industry figures.

However, those sales don’t accrue to Tully’s. It sold its roastery and wholesale coffee business to Vermont-based Green Mountain Coffee Roasters in 2009 to pay off $26 million in debt and keep operating.

Green Mountain moved the roastery from the old Rainier Brewery to an expanded facility in Sumner and still supplies coffee to Tully’s retail stores.

Lawyer, race-car driver

Avenatti will keep his day job as a Los Angeles lawyer who sometimes appears in Seattle courts. He said he owned and ran two retail businesses before but is “not at liberty” to name them.

He also races cars on the side and already has a car with Tully’s name on it that he has raced in California and Florida.

Tully’s marketing will include other sports, he said — mountain biking, mountain climbing and “a host of activities that people in Seattle are enthusiastic about.”

Although Dempsey’s lawsuit says Avenatti was the only other investor in Tully’s — and the only one with money in the game — Avenatti said there are others, including people in Seattle whom he declined to name.

He also declined to discuss the loan over which Dempsey sued. According to the lawsuit, the company quickly borrowed $2 million at 15 percent for working capital and secured the loan with Tully’s assets.

“What’s been reported is not close to being accurate,” Avenatti said.

To questions about the actor, he would say only, “We wish Ronald Wayne all the best” — a cryptic reference to the Apple co-founder who sold his shares for $800 in 1976 instead of continuing with Steve Jobs.

In discussing Tully’s future, Avenatti invoked a tech entrepreneur closer to home.

“[Amazon.com founder] Jeff Bezos nailed it recently when he made comments about Woolworths and the fact that, above all else, you can’t get boring,” he said.

Bezos was talking to staffers of The Washington Post, which he is buying, but Avenatti saw a coffee connection. “If there’s a brand that’s suffered from boredom, I think it’s this brand. We’re going to change that in a very big way.”

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

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