Hot Java Firm Cools on L.A.

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Hot Java Firm Cools on L.A.
Looking Outside State: Chief Executive Mike Keown in 2012 file photo.

Just as things were looking up for long-struggling coffee maker Farmer Bros. Co., the 103-year-old L.A. company has decided the time is right to roast its coffee beans elsewhere.

Though the company has deep roots here and just posted its first profitable year since the recession, it also has an outdated factory that needs to be replaced and a gold mine of a property that can be sold to help finance a move to a lower-cost state, either Oklahoma or Texas.

Local officials and economic development experts were disappointed – and caught off guard – by the company’s Feb. 5 announcement that it will leave town and lay off 350 workers, but they weren’t surprised by its reasoning.

Not only will the move to either Oklahoma City or the Dallas-Fort Worth area put Farmer Bros. closer to the center of its nationwide customer base, but the company expects to get an incentive package from one or both cities – moving to whichever makes the better offer – and to save between $12 million and $15 million annually by operating in a new, more efficient plant built in a lower-cost state.

Taking all of that into account, the move looks like a no-brainer, said economic development consultant Larry Kosmont, chief executive of downtown L.A.’s Kosmont Cos.

“It’s a very strategic and deliberate decision relating to their goal of being competitive,” Kosmont said. “Everything they are doing is based on a strategy to reduce costs and increase efficiencies.”

The timing is also right, said Kara Anderson, an analyst with B. Riley & Co., in West Los Angeles who follows the company. Farmer Bros. is now profitable – it reported $12 million in net income in 2014 after six consecutive years of losses – and revenue has grown steadily to $528 million. Cash flow is also substantial and the improved financials are likely why it’s now moving.

“We think Farmer Bros. has reached a point in its turnaround at which it is financially capable of executing such an overhaul of its infrastructure so that the company can remain viable for many more years,” Anderson said.

Farmer executives declined to be interviewed but answered a few questions in an email exchange with the Business Journal.

Real estate

Farmer Bros. was founded in 1912 and for decades has been headquartered on Normandie Avenue in the thin strip of Los Angeles running from South Los Angeles to San Pedro. Though it is in Los Angeles, the company has long listed its address as Torrance, which is just a few blocks to the west.

At its plant there, built in 1950, the firm imports, roasts, grinds and packages coffee, and also develops new roasts and blends. Farmer Bros. sells some coffee through grocers, but is mostly in the business of supplying coffee and coffee machines to offices and restaurants.

In its Feb. 5 announcement, which coincided with its most recent quarterly earnings report, the company said it plans to move its L.A. operations and headquarters to Texas or Oklahoma by the middle of next year, a move expected to cost about $80 million.

The company expects a big chunk of the cash to pay for that move to come from selling its L.A. site, a 20-acre plot that developers say could fetch a big price.

There are very few industrial parcels of that size so close to the ports of Los Angeles and Long Beach, Los Angeles International Airport and the Long Beach Airport, and industrial properties in the South Bay and Central Los Angeles markets are more than 97 percent occupied, according to real estate brokerage Jones Lang LaSalle Inc.

Eric Knirk, vice president of Torrance developer Fremont Associates, said several developers – including his firm – would likely be interested in buying the Farmer Bros. property.

“Because of the value and rare nature of the site, it wouldn’t surprise me if they’ve already received offers,” Knirk said. “There’s a very strong demand for that kind of a piece of property.”

Farmer Bros. hopes to sell the site for between $28 million and $35 million, which it said was based on comparable sales in the area. Knirk said that’s a reasonable estimate, and that the land alone is likely worth about $25 million.

However, he’s not sure if developers would pay that much because they would have to factor in the cost of razing several buildings at the site as well as the time it would take to get local permits and other approvals.

Likely tenants for the site would be businesses that provide port-related services, such as logistics businesses or freight-forwarders, said David Roberts, director of economic development and planning for Los Angeles City Councilman Joe Buscaino, whose district includes the Gateway area.

“It’s an initial disappointment (to lose the business), but we’re very bullish on opportunities for that site,” Roberts said. “We’re very optimistic someone may come in with more jobs.”

Farmer Bros. executives would not say whether they had received any offers yet on the parcel. Proceeds from the sale of the land and buildings will help offset the tens of millions the company expects to spend on moving, paying for a new manufacturing plant and buying new equipment, according to executives.

Cost savings

The company plans to start shutting down its plant this summer, and finish relocating to its new home by summer 2016. The only Farmer Bros. operations that will remain in California will be about 20 local branches of its coffee delivery business.

While company executives would not disclose the details of any offers they’ve received, both regions offer numerous incentives to companies looking to open locations. Those incentives are typically richer than those California and its cities can offer, Kosmont said.

Still, those incentives will likely be the deciding factor between Dallas-Forth Worth and Oklahoma City, not between staying in Los Angeles or leaving. Farmer Bros. apparently didn’t reach out to the state or to L.A. officials to ask for incentives.

Kosmont said that’s because the state and city couldn’t offer the company the kind of efficiencies and cost savings it should be able to realize by building a new plant in a lower-cost state, or by selling its valuable L.A. real estate and building on cheaper dirt elsewhere.

The costs of land, labor, electricity, insurance – most everything – is lower in America’s interior.

“In Farmer Bros.’ case, you need a whole new you,” Kosmont said. “That’s not what economic development programs can do. They could have made a call, but there’s no program that can underwrite operational cost efficiencies with economic development.”

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