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DECEMBER 5, 2019
ALEXANDER MACKAY
RAMON CASADESUS-MASANELL
Commonwealth Joe Coffee Roasters
December 2016—It had been a busy year for Robert Peck, Chase Damiano, and Jeremy Martin, the
leadership team of Commonwealth Joe Coffee Roasters. The company had begun an ambitious retail
expansion strategy in the Washington, D.C. metropolitan area, hiring top designers and architects to
create a unique specialty coffee experience that would be scalable. That October, they had opened their
first custom-designed store in a brand-new luxury apartment building. The new store was an
immediate success, even though a Starbucks had recently opened across the street.
Preparing to open a custom-built location brought all kinds of challenges, but the successful
opening afforded the leadership team some time to reflect. The next phase of the plan called for an
additional three locations in the region. Retail expansion had been a successful strategy for specialty
coffee companies elsewhere in the country. However, potential competitors were planning to expand
their presence in D.C., so Commonwealth Joe might have to move aggressively.
At the same time, a review of the company’s performance showed that the office channel yielded
higher margins than the retail locations. In this business-to-business channel, Commonwealth Joe sold
kegs filled with cold brew coffee to offices, which the offices provided as a perk to their employees.
The office business had grown unexpectedly that summer, with many new accounts being added even
as the team promoted the new retail store. Now, as Peck, Damiano, and Martin prepared for the next
capital raise—targeted for February 2017—they began to re-evaluate the retail expansion strategy. To
stay ahead of the competition, they wanted to make a strong move. They thought that focusing on one
business would be a key element to successful growth, as it would allow them to optimize their limited
leadership bandwidth and better motivate investors. Should Commonwealth Joe stay with retail, or
should they shift their strategy to focus on the office business?
A Brief History of Coffee
Legend has it that coffee was discovered by an Abyssinian goatherd, who came upon his goats
cavorting next to a tree with peculiar red berries. The Abyssinians used the leaves and the cherries of
this coffee plant to make stimulating snacks and drinks. This practice had spread to Persia sometime
before 900 CE. Coffee as we know it today, where the dried pits of the coffee cherry (the “beans”) are
roasted, ground, and infused in water, was likely invented in the fifteenth century, and the same basic
Professors Alexander MacKay and Ramon Casadesus-Masanell prepared this case. It was reviewed and approved before publication by a company
designate. Funding for the development of this case was provided by Harvard Business School and not by the company. HBS cases are developed
solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or
ineffective management.
Copyright © 2018, 2019 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-5457685, write Harvard Business School Publishing, Boston, MA 02163, or go to www.hbsp.harvard.edu. This publication may not be digitized,
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Commonwealth Joe Coffee Roasters
steps in production remained largely unchanged for over 500 years. Typically, hot water was used to
extract caffeine and flavor from the beans a few minutes before consumption. 1
Coffee quickly became a cultural phenomenon, spurring the growth of coffeehouses throughout
Europe and Asia. Coffeehouses were frequented by members of all classes, serving as centers for the
spread of information and forums for debate. 2 They became known for attracting the literati (Paris and
Vienna), merchants (Lloyd’s of London), and seditionists (Constantinople). Several ruling governments
banned coffeehouses, fearing revolution (or indecency). In 1777, Frederick the Great of Germany issued
a manifesto on the subject, noting: “It is disgusting to notice the increase in the quantity of coffee used
by my subjects. . . . My people must drink beer. His Majesty was brought up on beer, and so were his
ancestors.” 3
Following the industrial revolution, machines were increasingly used to harvest coffee cherries,
roast them, and grind the coffee into powder. Since freshness was an essential component of coffee
quality, these large-scale production processes resulted in lower-quality coffee, though at a much lower
cost. Coffee became a commodity, and several producers started to use beans from the inferior robusta
plant, which came at a lower cost than the better-tasting beans from the traditional arabica plant. The
grounds were packaged and shipped around the world. Mass production dominated the coffee market
through the 1950s, led by brands such as Folgers and Maxwell House. 4
In the U.S., the foundations for a reemergence of higher-quality coffee were laid in the 1960s. In
1966, a Dutch immigrant named Alfred Peet opened a coffee shop in Berkeley that sold whole beans
for home consumption and brewed much stronger coffee than the U.S. consumer typically drank. 5 In
1971, three college friends relied on Peet’s generosity and expertise to launch the first Starbucks in
Seattle. In Harvard Square, George Howell opened the Coffee Connection in 1975 after finding the local
coffee unsatisfactory. The move toward higher-quality coffee accelerated in the 1990s. Under the
leadership of Howard Schultz, Starbucks installed espresso machines and began serving Italianinspired drinks, including the cappuccino and the latte. Starbucks expanded rapidly for many years;
by 2015, it had over 22,000 locations around the world. 6
In 2016, there were an estimated 32,700 coffee shops in the United States, with combined sales of
$21.6 billion. Since 2010, sales had grown by 36 percent, while the number of locations had increased
by 21 percent. 7 Starbucks and Dunkin’ Donuts owned roughly 40 percent and 25 percent of U.S. coffee
shops, respectively, and about 25 percent were operated by businesses with fewer than ten locations. 8
In addition to the on-premise coffee market, retail sales of packaged coffee—which consisted of roasted
coffee, single-cup coffee (e.g., Keurig), instant coffee, and ready-to-drink coffee—were estimated to be
$13.7 billion and had grown steadily since 2011 (from $9.5 billion). The largest segment was roasted
coffee, but the recent growth in packaged coffee had come almost entirely from increased sales of
single-cup coffee and ready-to-drink products. 9
The Specialty Coffee Market
The recent growth in coffee shops had been accompanied by increasing premiumization and the
rise of specialty coffee companies that put a singular emphasis on quality. Consumers of specialty
coffee cared primarily about the quality of the beans, the flavor, and the artisanal aspects of the
experience. 10 To cater to these tastes, specialty coffee companies provided information about the source
of the beans, roasted beans in small batches, and arranged the store layout to showcase the barista and
the brewing process. Changing tastes and the increasing education of consumers led to growth in
demand for premium coffee. The National Coffee Association estimated that, in a given day, 31 percent
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of consumers drank “gourmet” coffee in 2016, compared to only 9 percent of consumers in 1999. The
same survey found that gourmet coffee constituted 48 percent of all coffee consumed. 11
Specialty coffee consumers tended to be less price sensitive and less concerned with convenience.
Demographically, the typical specialty consumers were affluent millennials living in urban areas. 12
They made up a significant portion of the coffee market, and they tended to be loyal to a particular
brand. A 2016 survey found that 27 percent of all coffee consumers picked their most recent location
based on superior coffee quality, whereas 50 percent indicated that convenience was an important
factor. 13 The price for a cup of specialty coffee was typically $3 to $5, compared to $2 for drip coffee at
Starbucks and $1 at McDonald’s.
Leaders of the U.S. specialty coffee movement included Intelligentsia (Chicago), Counter Culture
(Durham), and Stumptown (Portland), all of which were founded in the latter half of the 1990s. 14
Specialty coffee companies bought green coffee beans, roasted them, and sold the whole beans for
home consumption or used them to make coffee on-premise in retail stores. (Exhibit 1 illustrates the
supply chain for Commonwealth Joe, which reflects that of a typical specialty coffee company.)
Specialty companies often formed direct relationships with growers to obtain the best beans. Certain
climates and altitudes were known for better quality and for particular flavor profiles, much like the
production of wine grapes. Experts tended to rank Ethiopia, Kenya, and Colombia as consistently
producing the highest-quality beans. 15 In contrast to mass-produced coffee, specialty beans were
usually picked and sorted by hand to ensure the appropriate ripeness.
The next phase of production was roasting, which required skill, experience, and a sensitized palate
to consistently produce high-quality coffee. The roasting process could greatly affect the final product
and was sensitive to hard-to-control factors, such as ambient temperature and humidity. Moreover, it
was important to match the roasting profile to the type of bean. Lighter roasts brought out fruity and
floral notes, whereas darker roasts brought out robust and bitter flavors. To ensure freshness, specialty
coffee was often roasted locally so it could be used within a couple of weeks, and beans were typically
ground just before brewing. For home consumption, specialty coffee was almost always sold as whole
beans (instead of grounds) so that it would stay fresh longer.
Roasters and retailers experimented with different ways to brew coffee. Increasingly, consumers
drank coffee served cold. This was prepared as traditional coffee served over ice or as “cold brew,”
which was produced by letting coffee grounds sit in chilled water for several hours. The cold brew
process led to a smoother, less acidic taste. According to one survey, one third of consumers had tried
cold brew by 2015. 16
In 2007, Intelligentsia and Stumptown opened their first retail locations outside of their home cities
(in Los Angeles 17 and Seattle, 18 respectively). Blue Bottle, an Oakland-area company that was founded
in 2002, expanded outside of the San Francisco Bay Area with a location in New York City in 2010.
These companies paired retail expansion with a wider distribution network for their whole bean
business. Continued growth in consumer demand led to large acquisitions and investments in the
market. From 2012 to 2016, JAB Holding Company acquired Peet’s, Caribou Coffee, Stumptown,
Intelligentsia, and Keurig Green Mountain, paying over $15 billion for the five companies. (Exhibit 2
lists acquisitions of coffee companies in the U.S. during this period.) Between 2012 and 2016, Blue Bottle
raised $121 million in capital, Philz (San Francisco) raised $71 million, and La Colombe (Philadelphia)
raised $29 million. (See Exhibit 3 for venture capital activity in U.S. coffee, 2012–2016.) Starbucks
responded to the premiumization trend by selling a line of premium beans and by opening its first
Reserve Roastery in 2014. 19
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Commonwealth Joe Coffee Roasters
Commonwealth Joe: Origins
In 2012, Peck and three of his friends started Commonwealth Joe with equal ownership shares. The
four had gone to college together and had subsequently taken different paths: Peck joined Accenture
to do consulting, while the others pursued careers in software development, law, and real estate. They
had each grown up in Virginia, and they stayed close to home, taking jobs in the D.C. area. After a few
years in their respective fields, they all decided they wanted to start a company and learn about running
a business. They were inspired to pursue coffee. Before college, Peck had worked as a barista at a local
coffee shop in Virginia. His mother, Julia, was the manager and an apprentice roaster. When the shop
closed in 2005, Julia bought the roasting equipment. From her home, Julia continued roasting coffee to
sell to family and friends. By 2012, she had extensive roasting experience, and, by all accounts, she
made great-tasting coffee. Commonwealth Joe partnered with Julia and set up an online store to sell
the roasted coffee beans directly to consumers. The family connection was important to Peck:
I was purposeful in thinking about what mattered most to me. I wanted to help people
pursue their passions through business, including my mom. Consider someone that has
a skill, a gift, or a product, but who lacks the business background to take it to market. I
wanted to provide the necessary knowledge, resources, and connections to help them
reach their potential.
Peck and his co-founders sought to expand the business. In 2013, Peck left his job at Accenture to
aggressively pursue wholesale customers and cater events to build the brand. He and his co-founders
sold twelve-ounce bags of roasted coffee to boutique grocery stores, attended farmers’ markets to gain
additional customers, and sold beans in bulk to local coffee shops. The wholesale business grew
quickly, eventually landing them an account with several Whole Foods locations in the D.C. area.
The business faced a growing set of opportunities, but the other three co-founders were not willing
to leave their careers to commit to coffee full-time. In 2014, Peck brought in Chase Damiano as the
second full-time member of the team. Damiano had worked with Peck at Accenture, where they were
co-leads on an entrepreneurial project. They had bonded over coffee, and Damiano had been
Commonwealth Joe’s first customer for its online store. Their shared passion made the business fun
and motivated them to work hard.
Throughout this period, Peck and Damiano focused on building relationships within the local coffee
community. They formed a close connection with the owner of The Java Shack, a coffee shop that was
a neighborhood institution and a Commonwealth Joe customer. Toward the end of 2014, the owner of
The Java Shack asked if Commonwealth Joe would like to acquire the store. The team was excited about
the opportunity to jump into retail. However, they recognized that the acquisition would involve a
significant commitment. Peck reflected:
We knew that acquiring The Java Shack would be a game changer for our business. It
would require raising capital and putting a personal guarantee on the lease. It would also
mean that the focus, at least in the near-term, would shift from wholesale to retail since
management bandwidth was low.
The team decided to go forward with the acquisition. Running The Java Shack gave Peck and
Damiano extensive hands-on experience in the retail coffee industry. Peck recalled: “We took
ownership of The Java Shack in January 2015. For much of that year, Chase and I were in the store all
the time.” Though they were busy, the store fueled the team’s passion for the business. Damiano
reflected, “Many of the employees of The Java Shack just loved coffee. For them, The Java Shack was a
platform to express their passion.” Revenues at The Java Shack grew by 17 percent in its first year under
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Commonwealth Joe’s ownership. The experience influenced the team’s vision for the future of the
company. Peck recalled:
We knew we wanted to be in the specialty coffee game, but we didn’t know in exactly
what way. We were open-minded and looking for patterns. We believed that the winners
in specialty coffee would be those who could build a strong brand, and we realized it was
essential to control the quality of the product and the customer experience. That’s what
led us to retail. With wholesale, you do not have the same control over the final product
or the customer experience.
Like other specialty coffee companies, Commonwealth Joe operated within the latter half of the
coffee supply chain: roasting, wholesale, and retail. By the summer of 2015, they were in a good
position financially. The Java Shack had already been profitable under its previous owner, and its
acquisition had been supported by a limited fundraising round from friends and family. One of these
investors, Jeremy Martin, caught the passion for the business. He left his job as an associate at an
investment bank to join as Director of Finance. Prior to completing the acquisition of The Java Shack,
the co-founders renegotiated the ownership structure, making Peck the majority owner of
Commonwealth Joe. The renegotiation also allowed Damiano and Martin to obtain a meaningful
portion of the remaining ownership.
Retail Expansion Strategy
At the end of 2015, Peck, Damiano, and Martin (pictured in Exhibit 4) developed a strategy of
building a strong retail presence in the D.C. metropolitan area, which would serve as a springboard for
national expansion. They were inspired by coffee companies such as Blue Bottle and Intelligentsia, food
companies such as Sweetgreen, and the craft beer industry. The expansion plan consisted of a hub-andspoke network centered around a roastery (see Exhibit 5 for an illustration of this network). They
wanted to create a customer experience that was innovative, comforting, and high quality. The roastery
would increase customer awareness and the appetite for premium coffee, much like breweries with
retail fronts in the craft beer industry. Customers could go on tours and taste different varieties of
coffee. Additionally, the roastery would create economies of scale by centralizing the production
needed for the spoke locations.
To initialize the strategy, Commonwealth Joe would open a new location and invest in retail
branding that could be scaled across the network. Damiano explained:
We wanted our first store to be a slam dunk. We put our best foot forward and strove
to create the best customer experience possible. We knew we could reduce build-out costs
in future stores, but, for the first store, we wanted to demonstrate to current and future
investors what was possible.
It was easy to attract investors for the new store. The passion that the team brought to the business
was contagious, and customers loved the coffee. Additionally, the hub-and-spoke model was proven
in retail food, where some companies operated from a centralized kitchen, and the analogy of the
roastery to a craft beer brewery made it possible to visualize its potential. The growth of specialty coffee
shops elsewhere, along with recent acquisitions and investment in the market, suggested that it could
be a great bet. Furthermore, Starbucks’ recent investment in higher-end coffee indicated that the market
trends were favorable. Damiano explained:
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Commonwealth Joe Coffee Roasters
Starbucks, by creating Starbucks Reserve, acknowledged that premiumization was
occurring in coffee. They developed a craft brand and opened a roastery to connect
emotionally with consumers. We knew we could do the same, but better. It was a
localization game. In more mature coffee communities, such as San Francisco and New
York, the local players were winning. Consumers were moving away from large corporate
chains and toward experiences they could better connect with. There was no home team
in the D.C. area that focused on coffee quality; we thought that could be us.
Peck was not worried about competition from Starbucks:
We thought: “There’s no way Starbucks can compete with us locally. There’s no way
that they can have the passion we have. There’s no way they can hire better people.
There’s no way they can beat our product.” A lot of our friends weren’t going to Starbucks
anymore. They were looking for more artisanal shops.
One potential competitor in D.C. was Compass Coffee, which had opened its first shop in July 2014
and a second store in September 2015. The Commonwealth Joe team felt that they beat Compass Coffee
and the other competitors in the region on quality, whereas potential high-quality rivals Intelligentsia
and Blue Bottle did not have a D.C. presence. (See Exhibit 6 for a summary of the competitive landscape
faced by Commonwealth Joe in Q1 2016.) Consumers preferred local brands and could be loyal
customers. One survey found that 24 percent of coffee consumers would pay more for a local brand
and 49 percent had visited two or fewer locations within a three-month window. 20 (Exhibit 7 provides
Q1 2016 financial forecasts generated by Commonwealth Joe management).
The Pentagon City Location
In the first quarter of 2016, the team raised $950,000 in convertible notes to invest in the brand and
construct the first new location. They hired a top brand agency and a top architecture and design firm
in the region. For the location, they partnered with local developer (and customer) Vornado, who was
constructing a new luxury apartment building targeted toward millennials. The building would have
two retailers: Whole Foods and Commonwealth Joe. To Vornado, Commonwealth Joe would attract
tenants by providing a premium experience and a sense of community, 21 helping them compete against
the apartment building opening on the next block, which would have a Starbucks.
For inspiration, Damiano visited dozens of coffee shops in Japan, where the specialty coffee scene
was more developed than in the U.S. For the grand opening of Blue Bottle in Tokyo, over 200 customers
lined up before the store opened, and many customers waited over three hours to be served. 22 Damiano
visited the store a few weeks later and still had to spend over an hour in line. Peck and Martin also
visited several specialty coffee shops across the U.S.
Based on their research, Commonwealth Joe designed the new store to use wood and brass-based
materials that had a premium look, felt warm and comfortable, and would be cost-effective to scale.
The layout was optimized for efficiency, based on their experience at The Java Shack and what they
had observed at other shops. Since a “pour over” (an on-demand premium drink) could take four
minutes to brew, it was important to eliminate potential delays to keep the coffee flowing and the
customers happy. The brand was meant to be high-end, professional, and customer-oriented for quality
and service.
The team had planned for a June 2016 opening to capture the peak demand season. Unfortunately,
construction and permitting delays pushed the opening back several months. Martin recalled:
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People kept asking when the new café was going to open. Our employees didn’t know,
and, frankly, we didn’t know either. Our completion dates kept getting pushed back
despite having permit expediters and other experts to help us throughout the process.
Even with these resources, we ran into several roadblocks that seemed like minor details
but caused delays. For example, every sinkhole that went down into the municipal septic
system required an additional permit.
Though the delays burned cash, the team was optimistic. They hired the new store staff before the
grand opening to make sure that operations were smooth from day one. They used The Java Shack
location for training and for testing out new ideas for the Pentagon City location. Peck explained:
The Java Shack gave us an opportunity to understand the ins and outs of the retail
coffee business. We designed our menu and refined our drink recipes. We did price
testing. We learned a lot and created standard operating procedures along the way. We
were building the ship as we were sailing it, and we were designing the new store at the
same time.
The grand opening of the Pentagon City location in October 2016 was a tremendous success.
Compared to The Java Shack, the new store had a trendier feel. It appealed to the local demographics,
which primarily featured millennials. (See Exhibits 8 and 9 for photos of the two locations.) Sales soon
outpaced nearby Starbucks stores in the number of transactions and the average revenue per
transaction. This direct test was a huge boost of confidence to the team and their investors.
Nitro Cold Brew and the Office Opportunity
The Commonwealth Joe team began experimenting internally with cold brew coffee in 2013. In 2014,
they made it a part of their business. The previous owner of The Java Shack let them rent the kitchen
after hours to infuse cold water with Julia’s roasted coffee, a practice which they continued after taking
over the shop. Through a laborious process, they would hand bottle the cold brew, which they sold to
retailers, including The Java Shack. Damiano explained the typical production process:
A local coffee shop serving cold brew likely brews it on premise. It makes sense to do
so, since you have access to the roasted beans and the labor. If you have multiple locations,
however, this process can lead to variability in quality, which makes it challenging to
build a cold brew brand.
By the summer of 2014, Commonwealth Joe had several office customers that paid for pop-up cafés
in their offices for a couple of hours each week. At one of these events, the customer’s CEO asked Peck
how they could have cold brew in the office all the time. The next week, Commonwealth Joe showed
up with a keg full of cold brew in a bucket of ice. They added nitrogen to the coffee, which allowed the
cold brew to flow out of the keg and gave the drink a smooth texture, akin to Guinness. Shortly
thereafter, they agreed on a six-month contract for cold brew and installed a kegerator (a refrigerator
with a tap connection for a keg) to keep the coffee cold and available on demand. This was the first
product of its kind in the D.C. area. Commonwealth Joe soon began selling kegs to retailers and added
a couple more office accounts. They provided branded kegerators and cups, though some customers
preferred to use existing tap connections and provide their own cups for consumption.
In the summer of 2015, the team put a kegerator on wheels and hauled it to local events to promote
their brand. They would park outside of Metro stops and meet people as they were going to and from
work, serving nitro cold brew and handing out coupons to The Java Shack. They stopped during the
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Commonwealth Joe Coffee Roasters
winter, but they escalated the campaign in the summer of 2016, purchasing three tricycles that were
fitted for kegerators and could be wheeled around D.C. (See Exhibit 10 for pictures of an office
kegerator and the tricycles.) They planned to use the kegs to promote the Pentagon City store, which
would prominently feature nitro cold brew. The campaign worked, but in a surprising way. Martin
recalled:
We invested in three tricycles and employed a street team to cover the D.C. area,
primarily around Metro stops. We sold cold brew by the cup and did marketing events to
promote the new store, which had not opened yet. But the biggest question we were asked
was, “How do I get this in my office?” We would give them a soft sell: “We’ve outfitted
other offices, we can potentially do it for yours as well.”
These marketing efforts led to unexpected growth in the company’s office accounts.
Commonwealth Joe began 2016 with three office customers. That summer, they added 25 new
accounts, with no sales team. Damiano reflected, “Our office business was growing organically while
we were heads down, focused on opening the new store.” To increase capacity, they moved cold brew
production from the back of The Java Shack to a 600-square-foot facility they leased downtown.
The team was surprised by the sudden growth. Peck recalled:
We asked each other, “What is the problem we are solving?” Chase and I remembered
hating the coffee at the office . . . it was old, stale, and dead. Millennials want high-quality
coffee in the office, and they want a cold option, too. With cold brew, you could get the
same quality you get at the café, on tap, on demand. We could control the experience and
the quality of the product. Starbucks rolling out cold brew in March 2015 was one of the
best things that ever happened for us. That answered the question of, “Is this just a fad?”
And they helped educate the market on what cold brew was, along with its benefits.
Nearly every office in the area provided coffee for its employees, but almost none had a cold coffee
option. The typical office setup had a machine that pushed hot water through a pre-packaged single
serving of coffee grounds. The most common brand was Keurig, which brewed lower-quality coffee.
A few offices offered Nespresso, which provided a higher-quality product, though it was not
considered by many coffee enthusiasts to be on par with specialty coffee. Employees valued the
convenience of these machines and the variety of options, as offices typically stocked several flavors of
single-serving coffee.
Operational Challenges
At the end of 2016, the growing office business presented several operational challenges. The first
was delivery. What was most important to the team was getting the product to customers by any
means. They would use personal vehicles or the Metro to move the product to the office. They tested
out a partnership with a last-mile deliverer of automobile parts to deliver the kegs. The customers were
not always happy with this arrangement. Cold brew would spoil if not refrigerated, which ruined the
taste and created a health risk. Transporting the product outside of a refrigerated container could
trigger spoilage, which was especially a concern in the hot D.C. summers. Due to the rate of
consumption, most offices required replacement keg deliveries once or twice per week.
The distribution model for delivering refrigerated kegs to offices was nascent and unproven.
Commonwealth Joe could not rely on large office suppliers, like W.B. Mason, for delivery because these
companies did not have the infrastructure to distribute products that needed refrigeration or the
training to service kegerators. Moreover, no other coffee roaster was distributing kegs to offices, so
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they couldn’t learn from an existing model. Stumptown had tried delivering cold brew kegs to offices
in D.C., but their buyers were not happy and had switched to Commonwealth Joe earlier in 2016.
Troubleshooting issues with the kegerator was a significant challenge. At The Java Shack, the team had
found that experiencing all aspects of the business generated positive learning spillovers for
management. They had the same approach toward the office business. Damiano explained why this
was a problem:
Most of our team had experience in retail coffee shop environments, but nothing as
mechanically taxing as kegerator repairs. We were inundated with issues, especially from
new customers. Within hours of dropping off kegs and kegerators, the customer would
call to say they were not working. So, we would drive out and fix them. On one occasion,
we visited the same customer three or four times in a single day. We weren’t bringing the
right equipment with us to repair the issues we’d discover, so we’d have to make another
trip to buy the necessary equipment. No individual team member was responsible for
overseeing maintenance. Essentially, every person in our company was on call, at all
times. It became an enormous distraction from our core business.
When they did land new customers, scaling up was troublesome. Damiano recounted:
We found our keg shell vendor on Craigslist. We would meet him at a gas station and
buy individually packaged stainless steel kegs. We bought individual kegerators from a
vendor across the country, which was expensive on a per-unit basis. We purchased
branding materials from a local graphic designer and manually applied them to every keg
and kegerator. Our tap handles were hand-carved by a vendor on Etsy. In terms of
streamlined purchasing, we had none of it, because we were buying whatever we could
to get our product to customers.
Despite these operational challenges, Commonwealth Joe had yet to lose a single office customer.
The team attributed this in part to their customer-centric mindset. However, by the end of the year, the
cold brew business was approaching a crisis. The lease for their cold brew production space was
expiring, and they had yet to find a replacement location at a comparable cost ($40 per square foot per
year). At the volume they were now brewing, they would not be able to do it at their two retail
locations.
Preparing for the Next Capital Raise
At the end of 2016, Peck, Damiano, and Martin took some time to reflect on their plans for retail
expansion. In two years, they had grown from two to 35 employees and had started two new business
lines in retail and office cold brew. They looked ahead to their next capital raise, which was planned
for February 2017. They needed investor capital to continue to grow the company.
The Pentagon City location generated a lot of buzz and won “Best Coffee Shop in D.C.” from the
local paper. 23 It had quickly become profitable. This “slam dunk” made the investors happy and
generated additional interest from Vornado and other developers. The D.C. real estate market was
booming, and developers were looking to include coffee shops in new residential and office buildings
targeted toward millennials. The team was touring potential sites. They were first on many developers’
lists for new neighborhoods, and, in several cases, they were essentially granted the right of first
refusal.
9
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719-451
Commonwealth Joe Coffee Roasters
In October 2016, the company was hit by a surprise: Blue Bottle announced plans to open a retail
location in D.C., along with two locations in Miami and one in Boston. 24 These would be the first Blue
Bottle shops outside of California, New York, and Tokyo. Blue Bottle had opened six stores in the past
six months and had several more planned in its home territories. Though other market players had a
D.C. presence, Blue Bottle would be the first competitor with a comparable commitment to quality. The
runway that the Commonwealth Joe executive team had anticipated was now shorter. To make the
retail expansion strategy successful, some re-organization would be necessary. They would need to
hire construction managers and retail specialists to smoothly and quickly deploy future locations.
However, the team was intrigued by the growth of the office business. Given the expiring lease for
the cold brew facility, the question of how much space they needed had become even more pressing.
They considered whether they should focus on selling cold brew to offices rather than retail expansion.
This would require, among other things, a different approach to customers. Martin explained how
pursuing the office business might affect their brand strategy:
We knew that retail helped to drive brand awareness. With the office channel, that was
something we would have to sacrifice, because in some locations all we had to represent
the brand was the tap handle. Also, the form factor of the cold brew kegerator limits the
available customer base. Not everyone was comfortable with a kegerator in their office.
Moreover, Damiano wondered if the business-to-business office model fit with their vision:
In the office channel, we could reach a segment of customers that were neglected when
it comes to coffee quality. I was intimately familiar with the opportunity because I saw it
myself. I was an office worker. I brought in my own French press because our corporate
coffee was terrible. . . . But there is something magical about working at a café. It’s a
humbling experience. You interact with the end consumer on a day-to-day basis. You
literally see them face-to-face. It’s different in the office channel. You don’t always see
them or know them.
Martin put together a detailed profit-and-loss statement by business line for 2016. Exhibit 11
provides annualized performance figures based on this analysis, and Exhibit 12 provides monthly
performance for The Java Shack. (The annualized figures for the office business used data from June to
November to account for recent growth.) Exhibit 13 provides a comparison of typical costs for
individual servings of hot coffee (pour over) and cold brew at the Pentagon City location, as well as
the costs for cold brew through the office channel. Though the retail locations were profitable, the
operating margins from the office business were higher. The wholesale channel also had appealing
margins, but competition in wholesale was high, and the team did not think that continued growth in
the channel would be viable.
The executive team considered their next move. The capital required for the next phase of retail
expansion was approximately $3 million, which would allow for the roastery and two additional
“spoke” stores. The team thought they could raise a similar amount to invest in the office cold brew
business, but they could not pursue both options. They realized the importance of leadership
bandwidth, as revenue at The Java Shack had flatlined while the executive team focused on the
Pentagon City location. They believed that managerial focus was essential to drive the future growth
of the company. They had communicated to investors that the next capital raise would begin next
month, so they needed to decide on a strategy. What would be next for Commonwealth Joe?
10
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Commonwealth Joe Coffee Roasters
Exhibit 1
Source:
719-451
Specialty Coffee Supply Chain
Company documents.
11
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719-451
Commonwealth Joe Coffee Roasters
Exhibit 2
Acquisitions of U.S. Coffee Companies, 2012–2016
Target
Acquirer
Peet’s Coffee & Tea, Inc.
JAB Holdings B.V.
Caribou Coffee Company, Inc.
Date
Closed
Price
($ Million)
Jul 2012
1,010
JAB Beech Inc.
Dec 2012
339
New England Tea & Coffee Co., Inc.
Reily Foods Company, Inc.
Dec 2013
Undisc.
Cameron’s Coffee and Distribution Company
Goldner Hawn Johnson & Morrison Inc.
Dec 2014
Undisc.
Biff’s Coffee Roasting Co.
Ronnoco Coffee, LLC
Nov 2014
Undisc.
Laughing Man Coffee and Tea Brand
Keurig Dr Pepper Inc.
Dec 2014
Undisc.
Stumptown Coffee Roasters, Inc.
Peet’s Coffee & Tea, Inc.
Oct 2015
Undisc.
S&D Coffee, Inc.
Cott Corporation
Aug 2016
355
Keurig Green Mountain, Inc.
JAB Holding Company
Mar 2016
13,900
Source:
Capital IQ.
Note:
Undisc.: undisclosed.
12
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For the exclusive use of Y. AlHarrasi, 2020.
Commonwealth Joe Coffee Roasters
Exhibit 3
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Venture Capital Activity in U.S. Coffee, 2012–2016
Company
Date of
Last Raise
Cumulative Capital
Raised ($ Million)
Chesapeake Bay Roasting Company, LLC
Jun 2012
0.4
La Colombe Torrefaction, Inc.
Aug 2014
28.5
Blue Bottle Coffee, Inc.
May 2015
120.7
Jul 2015
4.0
High Brew Coffee, Inc.
Aug 2015
8.4
KonaRed Corporation
Dec 2015
2.9
Jammin Java Corp.
Mar 2016
3.3
Chameleon Cold Brew, LLC
Artis Coffee Inc.
Mar 2016
3.1
Philz Coffee, Inc.
Aug 2016
70.6
Source:
Capital IQ.
13
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719-451
Commonwealth Joe Coffee Roasters
Exhibit 4
Source:
The Commonwealth Joe Leadership Team
Company documents.
14
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For the exclusive use of Y. AlHarrasi, 2020.
Commonwealth Joe Coffee Roasters
Exhibit 5
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Hub-and-Spoke Retail Expansion Strategy (as of Q1 2016)
Source:
Company documents.
Note:
The markers for “satellites” in the figure represent Nitro Cold Brew tricycles and pop-up events.
15
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719-451
Commonwealth Joe Coffee Roasters
Exhibit 6
Source:
Competitive Landscape (as of Q1 2016)
Company documents.
16
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For the exclusive use of Y. AlHarrasi, 2020.
Commonwealth Joe Coffee Roasters
Exhibit 7
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Financial Projections for Retail Expansion Strategy (as of Q1 2016)
Source:
Company documents.
Note:
A: actual, E: expected, P: projected. In this exhibit, Retail includes sales from Mobile Carts, Office, Online, and Events
& Catering in addition to sales at retail storefronts.
17
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For the exclusive use of Y. AlHarrasi, 2020.
719-451
Commonwealth Joe Coffee Roasters
Exhibit 8
Source:
The Java Shack
Company documents.
18
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Commonwealth Joe Coffee Roasters
Exhibit 9
Source:
719-451
The Pentagon City Location
Company documents.
19
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719-451
Commonwealth Joe Coffee Roasters
Exhibit 10
Source:
Kegerator and Kegerator Tricycles
Company documents.
20
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For the exclusive use of Y. AlHarrasi, 2020.
Commonwealth Joe Coffee Roasters
Exhibit 11
719-451
Annualized Profit and Loss by Business Line, 2016
The Java Shack
Pentagon Citya
Officeb
Hot Coffee
256,013
395,970


Cold Brew
39,736
57,790
220,570
25,637
Whole Bean
42,345
47,719
4,492
102,440
Food & Other
72,622
105,637


410,716
607,116
225,062
128,077
Coffee
50,904
70,657
3,878
66,558
Cold Brewc
15,411
29,434
96,744
17,814
1,468
2,434
10,024
1,505
Wholesale
Revenue
Total
COGS
Nitrogen
Branded Cups and Straws
923
1,739
4,156
535
96,454
142,642


Total
165,160
246,906
114,802
86,412
Gross Profit
245,556
360,209
110,260
41,665
8,214
12,148
4,500
2,562
123,735
154,669
8,282
2,554
Food & Other
Operating Expenses
Merchant Fees
Payrollc
Repairs and Maintenance
2,530
2,530
268

Rentc
37,800
50,892


Utilities
11,364
23,203


Shipping and Delivery
2,863
3,982
40,782
3,755
Other
1,247
2,714


187,753
250,137
53,832
8,871
Operating Profit
57,803
110,072
56,428
32,794
Margins
14.1%
18.1%
25.1%
25.6%
Total
G&A
Payroll
D&A: Cold Brew
Totald
Source:
215,856
13,952
435,059
Company documents.
a Estimates for Pentagon City correspond to annualized forecasts based on revenue and costs relative to The Java Shack. Rent
includes an abatement for the first twelve months of operation.
b Estimates for Office are annualized based on data from June through November 2016.
c COGS for Cold Brew are the all-in production costs for a full keg, including labor and the lease of the production facility.
Customer experience and sales are captured in Payroll.
d Other General & Administrative expenses include Depreciation & Amortization, Accounting & Legal, Other HR, Taxes & Fees,
Facilities & IT, Advertising & Marketing, and Coffee (employee consumption).
21
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719-451
Commonwealth Joe Coffee Roasters
Exhibit 12
Revenue and Cost of Goods Sold: The Java Shack, 2016
Cost of Goods Sold
Cold
Brew
Total
COGS
Gross
Profit
5,710
9,546
17,339

7,375
12,246
15,237
652
136
10,174
15,108
19,587
883
163
6,872
11,840
23,219
5,218
1,389
150
11,023
17,781
19,504
4,304
2,221
177
10,471
17,174
21,840
40,984
4,218
2,232
198
8,977
15,626
25,358
Aug
39,765
4,371
2,023
198
7,751
14,343
25,421
Sep
36,649
3,893
2,182
163
8,478
14,715
21,933
Oct
34,932
4,943
1,350
79
6,309
12,680
22,252
Nov
30,708
4,344
938
79
7,119
12,477
18,231
Dec
27,257
3,448
977
79
7,122
11,624
15,632
Total
410,716
50,904
15,411
1,468
97,377
165,161
245,555
Period
Revenue
Coffee
Jan
26,885
3,524
265
48
Feb
27,484
4,573
299
Mar
34,695
4,145
Apr
35,059
3,923
May
37,285
Jun
39,013
Jul
Source:
Nitrogen
Other
Company documents.
22
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Commonwealth Joe Coffee Roasters
Exhibit 13
719-451
Price and Unit Cost Comparison in Q4 2016: Pour Over and Cold Brew
Pour Over (12 oz)
Cold Brew (12 oz)
Cold Brew (12 oz)
Pentagon City
Pentagon City
Office
3.50
4.50
2.16
Beans
0.28
0.28
0.28
Labor: Roasting
0.25
0.25
0.25
Bags
0.06
0.06
0.06
Labels
0.05


Miscellaneous
0.07
0.10
0.10
Labor: Cold Brew

0.20
0.20
Water

0.11
0.11

0.10
0.10
Labor
1.51
1.51
0.08
Rent and Utilities
0.70
0.70
0.00
Distribution
0.04
0.35
0.39
Kegs

0.16
0.16
Other
0.09
0.16
0.08
3.05
3.99
1.82
Price
Costs
Coffee Production
Distribution and Retailing
Nitrogen
Total (Unit Cost)
Source:
Company documents.
Note:
Coffee Production costs include the cost of green beans, water, labor, and other variable costs for roasted coffee used
in a pour over or a full keg of nitro cold brew, as well as the lease of the production facilities. Labor captures point-ofsale labor costs, which include customer experience and sales for the office channel.
23
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Commonwealth Joe Coffee Roasters
Endnotes
1 Pendergrast, Mark (2010). Uncommon Grounds: The History of Coffee and How It Transformed Our World. Basic Books.
2 Hattox, Ralph S. Coffee and Coffeehouses: The Origins of a Social Beverage in the Medieval Near East. University of
Washington Press, 2014.
3 Pendergrast (2010).
4 Ibid.
5 “About Peet’s Coffee,” https://locations.peets.com/ll/US/CA/Berkeley/2124-Vine-Street, accessed December 2018.
6 “Leading Coffee House Chains Ranked by Number of Stores Worldwide in 2015,” Statista.
https://www.statista.com/statistics/272900/coffee-house-chains-ranked-by-number-of-stores-worldwide/.
7 “Coffee and Tea On Premise – US, December 2016,” Mintel.
8 Ibid.
9 “Coffee – US, September 2016,” Mintel.
10 Ibid.
11 “National Coffee Drinking Trends 2016.” National Coffee Association of America.
12 Ibid.
13 “Coffee and Tea On Premise – US, December 2016,” Mintel.
14 Pendergrast (2010).
15 “The Definitive Top 10 Coffee-Growing Countries in the World, Ranked by Experts,” Thrillist.
https://www.thrillist.com/drink/nation/the-world-s-best-coffee-growing-countries-ethiopia-kenya-colombia-and-more#.
16 “The Strength of Cold Brew.” Mintel. July 29, 2016. http://www.mintel.com/blog/drink-market-news/the-strength-ofcold-brew.
17 Scattergood, Amy, “At Last, a Brilliant Brew”, LA Times, March 14, 2007.
http://articles.latimes.com/2007/mar/14/food/fo-clover14.
18 “Get perking: Portland’s highly-regarded Stumptown Coffee comes to Capitol Hill,” Seattle Pi.
https://www.seattlepi.com/lifestyle/food/article/Get-perking-Portland-s-highly-regarded-Stumptown-1255776.php.
19 “Seattle Roastery.” https://www.starbucksreserve.com/en-us/locations/seattle.
20 “Coffee and Tea On Premise – US, December 2016,” Mintel.
21 “More Details on Commonwealth Joe’s New ‘Flagship’ Location in Pentagon City.”
https://www.arlnow.com/2016/03/22/more-details-on-commonwealth-joes-new-flagship-location-in-pentagon-city/.
22 “Tokyo’s First Blue Bottle Draws Three-Hour Lines on Opening Day.” https://www.eater.com/2015/2/6/7992629/tokyo-
blue-bottle-3-hour-lines-opening-day.
23 “Best Coffee Shop 2017,” Washington City Paper.
http://legacy.washingtoncitypaper.com/bestofdc/poll/foodanddrink/2017/best-coffee-shop.
24 “Our Latest Geographic Adventures,” Blue Bottle, October 3, 2016. https://bluebottlecoffee.com/frequency/blue-bottlecoffee-new-cafes.
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