By HILDY MEDINA

Staff Reporter

On Santa Monica's Main Street there sits a Starbucks Coffee Co. shop only two blocks away from a Coffee Bean & Tea Leaf outlet ? and by April, a Peet's Coffee & Tea store will open within three blocks of the others.

Sandwiched in between these coffee retail chains are close to half a dozen cafes and restaurants that serve more than your mainstream coffee varieties.

How much of this beverage can a caffeine lover consume? Plenty, said retail watchers. The reason is that avid coffee drinkers seek out beans that fit their taste, just like a fast-food lover looks for the best chili fries or hamburgers among dozens of competitors.

Unlike the food industry, however, the specialty coffee business is not yet filled to the brim, and as the economy continues to grow, so will these businesses.

"You have McDonald's and Burger King and other fast-food chains, so I don't see why there isn't room for someone other than Starbucks," said Laura A. Richardson, an analyst at Portland-based Pacific Crest Securities. "This is still a growing industry."

Hence the arrival in Los Angeles of Peet's, the newest big coffee chain to the region but a store that has long been an institution in the San Francisco Bay Area.

The $3 billion-a-year coffee house industry has experienced dramatic growth since its inception in the 1960s. By the close of that decade, retail sales were just under $45 million. Nearly 20 years later in 1989, retail sales topped $1.5 billion, according to a study by the Specialty Coffee Retailers Association. Forecasters estimate the business will approach $5 billion by the turn of the century.

Los Angeles is a key market for these businesses, which is why James Baldwin, chief executive of Peet's Coffee, is expanding south from the company's East Bay headquarters in Emeryville.

The company, founded in 1966, opened a Manhattan Beach store last December. In April, it plans to open its first Westside outlet in Santa Monica and next month its first Santa Barbara location will be opening, bringing its store count to 41.

The Pasadena store, which opened in January of last year, was said to be the strongest opening ever for a Peet's store. The Pasadena outlet, which sits across the street from a Starbucks, remains among the top 10 performers.

Until recently, Peet's had been expanding at a rate of about three new stores a year, but in 1997 it opened seven. And starting this year, the chain plans to open about 12 new stores a year, according to Baldwin.

He wouldn't say how many of those will be in the L.A. area, but initial expansion will be concentrated on the West Coast. Plans to open Chicago and Boston sites are in the works, he said.

"We don't have a specific number in mind what we're continuing to do is look for additional locations," said Baldwin. Opening 12 new stores a year is expected to run about $5 million.

While Peet's is well known in the Bay Area, it has built a brand-name following outside of that region through mail order, which accounts for 15 percent of its sales.

"They have a bigger brand image than reach," said Ted Lingle, executive director of the Specialty Coffee Association of America, based in Long Beach. "That creates a great opportunity for a retailer."

Peet's, said Lingle, is "noted for finding unique and distinctive coffee beans the (coffee lover) has a natural, instinctive love affair with good-quality coffee. People will go out of their way to find it."

About 10,000 Southern Californians are on the company's mailing list, many of them graduates of the University of California at Berkeley, where Peet's is something of an institution.

The specialty coffee business actually goes back to the 1960s, when the Bay Area began sprouting coffee houses next to college campuses. Baldwin, who co-founded Starbucks in Seattle in 1971, first learned the trade from Alfred Peet, founder of the Peet's chain (and the initial supplier for Starbucks).

Baldwin and a group of investors bought Peet's in 1987, and to help finance the Peet's acquisition, Baldwin sold Starbucks to an investor group led by former Starbucks executive Howard Schultz.

Baldwin says he has no intention of turning Peet's into another Starbucks.

"We're not looking to get 50 percent of the market," said Baldwin. "For us, we want success on our terms. We just want to make the best coffee we can."

For reprint and licensing requests for this article, CLICK HERE.