Blue Bottle Coffee: How a struggling clarinet player used $15,000 in credit card debt to launch a $700 million brand

There are only two things James Freeman has ever really wanted to do: play the clarinet and make coffee.

Today, Freeman is best known as the founder of Blue Bottle Coffee, the premium coffee chain with the simple, yet stylish, blue logo that adorns more than 75 upscale cafes around the world where you can buy a roughly $5 drip coffee made from high-quality single-origin, freshly roasted artisanal beans. In 2017, Swiss food giant Nestle bought a majority stake in Freeman's company in a deal that reportedly values Blue Bottle at more than $700 million.

But before Freeman was the founder of a company that is set to roast more than 2.6 million pounds of coffee beans this year, he was a struggling classical musician roasting his own fresh beans as a hobby.

An obsession becomes a business

Freeman had long been"fascinated" by coffee and was obsessed with drinking only the freshest cup. That meant roasting beans himself — buying raw, green coffee beans and heating them at roughly 500 degrees Fahrenheit — because he felt that most retail coffee chains over-roasted their beans.

In 2002, Freeman was making just enough money to pay his bills playing the clarinet at part-time gigs with regional orchestras throughout Northern California. In his off-time, he nursed an obsession with fresh coffee that inspired him to roast his own raw coffee beans in the oven of his Oakland, California, apartment. Freeman began wondering if there might be a business opportunity for a dedicated coffee snob like himself to sell his version of the perfect cup of coffee to like-minded caffeine junkies. While friends warned him that the coffee market was already oversaturated, Freeman also noticed that, at the time, few coffee sellers in the Bay Area even revealed how fresh their coffee was.

"At the time, there literally was not a place in San Francisco one could go to get a bag of coffee with a roast date stamped on the back," he says.

Freeman started ramping up his homegrown roasting operation by renting (for $600 a month) a 186-square-foot potting shed located near his apartment in Oakland's Temescal district where he could roast beans in 7-pound batches using an old Diedrich roaster he'd driven to Idaho to buy directly from the manufacturer. He decided to quit his music career and try his hand as a barista, selling his own home-roasted coffee beans, along with fresh cups of coffee, at farmers' markets around San Francisco and Oakland.

"In my career as a clarinetist there were moments of satisfaction, but they tended to be few and far between, and so I saw coffee as a place, a little refuge, where I could work out the things I'm interested in, but also this opportunity to not play clarinet anymore. So, something that might pay my bills, so I don't have to go to gigs," Freeman tells CNBC Make It.

For the next couple of years, Freeman got by on his relatively simple setup and business model, but Blue Bottle's origins weren't without costs, from the roaster to rental fees for the potting shed and the coffee cart's spot at farmer's markets, not to mention the cost of raw beans and paying a local graphic designer to sketch the brand's simple, blue logo. Freeman says he poured everything he could into the business."Clarinetists don't accumulate a lot of wealth, so I put in all of the money I had, plus a couple credit cards."

That came out to about $20,000 in total, including up to $15,000 in debt spread across two credit cards.

Catching on

Freeman still remembers one particular moment "very intensely and specifically" when he realized word had gotten around about his fledgling business. It was a weekend in January 2004, and dozens of customers were lining up at his Blue Bottle coffee cart.

It had been receiving positive buzz from its most dedicated customers. But on this day,"it was like a pretty crushing line, 30 [to] 40 people in line," he says. "This is the days before Twitter, yet somehow word got out — and [I remember] just feeling like 'Whoa, something happened.'"

Freeman realized there was an opportunity to turn this into a much bigger business. A year later, Blue Bottle opened its first full-time, brick-and-mortar location in a small, converted garage in what Freeman has described as"a pee-smelling dead-end alleyway" in the heart of San Francisco. That location remains open today, with Twitter's headquarters now located just a few blocks to the east (former Twitter CEO Evan Williams is reportedly among the tech industry fans of Blue Bottle's coffee, and he also invested in the company in 2014).

The company does not disclose its revenue, but Freeman notes that Blue Bottle's stores have been profitable from the beginning, mostly out of necessity. Freeman says that his lack of business expertise forced him to be cautious when it came to growing Blue Bottle, and he would always ensure that the company ended each month with"money left in the bank account."

"I didn't realize that it's possible to spend more money than you have," Freeman tells CNBC Make It. "So the kind of the nice thing about not really knowing very much about business is you think you have to make more money than you spend."

Blue Bottle grew slowly from there, opening additional locations around the Bay Area (there are a total of 18 cafes there today) before expanding to New York City in 2010. Blue Bottle then opened its first cafe in Los Angeles in 2014 before expanding internationally a year later with a location in Tokyo (there are now 14 Blue Bottle cafes in Japan and the company opened its first South Korean outpost in April).

https://www.instagram.com/p/BgpM757FE_Q/

Today, we open our eighth cafe in Japan in one of our favorite places on earth, Kyoto. While you enjoy the ever perfect cherry blossoms, please visit us for a delicious coffee. – 私達の大好きな街、京都にようやくお店を作ることができました。 桜も私達の開業を待っていてくれたようです。 これから見頃の桜を、ぜひコーヒーと共にお楽しみ下さい。 皆様にお会いできるのを楽しみにしています。

A post shared byBlue Bottle Coffee (@bluebottle) on

And, along the way, the company raised a total of $117 million from outside investors — including the former Twitter CEO along with Google Ventures, Instagram co-founder Kevin Systrom and U2 singer Bono, as well as Morgan Stanley and Fidelity Management. Another one of those investors was Bryan Meehan, an Irish businessman who took over as Blue Bottle's CEO after investing in the company in 2012 before helping to fuel further global expansion and lead the way for the sale of a majority stake to Nestle.

The rise of premium coffee

Blue Bottle's evolution from farmers market coffee cart to an international coffee chain came as the brand rode a wave in the overall coffee market, which has seen the rise of premium coffee options over the past decade as newcomers like Blue Bottle challenge giant chains like Starbucks, Peet's Coffee and even Dunkin' Donuts.

Those smaller brands — which include Blue Bottle, along with similar premium coffee chains like Intelligentsia, Stumptown and La Colombe — are at the vanguard of what is known in the industry as"third-wave coffee" roasters, according to IBISWorld analyst Rachel Hyland.

https://www.instagram.com/p/BizWWiQguDg/

Our first home.

A post shared byBlue Bottle Coffee (@bluebottle) on

"Third-wave coffee is a movement that has been created to produce higher-quality coffee. It's considered an artisanal food, like wine or craft beer, rather than a commodity [like apples or beef]," Hyland says.

For example, when Blue Bottle expands into new cities, the company typically also invests in building roasteries near its new cafes, which is"environmentally friendly" and "helps the quality and the freshness of their coffee," Hyland tells CNBC Make It.

It's a segment of the overall retail coffee chain market (which Hyland pegs at more than $50 billion in the U.S. in 2019) that's grown rapidly over the past decade as more consumers are willing to pay more for higher-quality coffee.

But Hyland notes that much of Blue Bottle's success to date has come in larger cities where consumers may be more willing to spend more for a cup of premium coffee than in smaller markets where companies like Starbucks and Dunkin' Donuts have long-established footholds. In February, the company shuttered its only two Miami locations a little more than a year after they opened, with the company citing the opportunity"to invest back in other regions." However, some critics have noted that the expansion plans of premium coffee chains like Blue Bottle could be limited by the fact that not every city or town has enough locals willing to shell out $5 for a cup of coffee.

Of course, most of Blue Bottle's premium coffee rivals are also charging bigger bucks per cup and younger consumers in particular are willing to dig deeper in their wallets for a truly high-quality cup of Joe (though, more than a few financial experts argue that buying expensive coffee is a waste of money). However, Hyland says consumers generally only spend more money on coffee when the economy is performing well. So it is worth noting that Blue Bottle's expansion beyond San Francisco started in earnest in the past decade, once the U.S. economy started turning around after the 2008 financial crisis.

That means Blue Bottle will likely have to prove eventually that it can appeal to a larger demographic of coffee drinkers. But that doesn't mean Freeman sees Starbucks and the other coffee mega-chains as Blue Bottle's competition. In fact, he's more likely to think of the coffee giant as inspiration for the way Starbucks paved the way for coffee chains like Blue Bottle to bring higher-quality coffee to more and more people around the world.

"I think we have a lot to thank Starbucks for in terms of creating a market where people want to go out to coffee and feel like that is a fun and acceptable thing to do," Freeman says.

Still, Freeman can't deny that the primary reason he launched Blue Bottle was to offer something completely distinct from the coffee sold by massive chains like Starbucks and Peet's. When he first started Blue Bottle, Freeman says, those big companies more or less set the tone for the business models of coffee cafes across the country.

"I wanted to do something different," Freeman says. "And I was advised by many people with many opinions that those differences were going to make me unsuccessful, where actually people were quite attracted to those differences —differences in making coffee one cup at a time, the difference of not roasting things super dark, the difference of having each milk drink steamed to order."

"That made it slightly more labor-intensive, a little bit harder, a little bit more expensive," Freeman adds. "[But], those were actually the differences that attracted people."

— Additional reporting by Beatriz Bajuelos.

Don't Miss:

How these 33-year-olds are taking Sweetgreen from a dorm room start-up to the 'Starbucks of salad'

How Allbirds went from Silicon Valley fashion staple to a $1.4 billion sneaker start-up

Like this story? Subscribe to CNBC Make It on YouTube!

Source: Read Full Article