Diedrich Chairman Leaves Ailing O.C. Coffeehouse Chain

John Martin, architect of an ambitious plan to transform Diedrich Coffee Inc. from a regional player into a national coffeehouse chain, has resigned as chairman, leaving behind a struggling company in a cutthroat industry.

Martin had quietly eased himself out of the Irvine company’s executive suite in October, reducing his role to “nonexecutive” chairman and giving up his $100,000 salary.

Paul Heeschen, the company’s largest individual shareholder and a Diedrich director since 1996, has been tapped as the new chairman. He holds a 14.5% stake in Diedrich.

Martin could not be reached for comment. He said in a prepared statement that he believes the company has a bright future.

Diedrich executives would not comment on the change or discuss how the company will try to rebound from an expansion effort that elevated it to the nation’s second-largest specialty coffee chain but left it with hefty losses.

The company has 374 retail locations in 37 states and 10 foreign countries. In the fiscal year ended June 28, Diedrich lost $22.4 million on sales of $74.5 million.

In seeking to establish a national presence, Diedrich might have overestimated its appeal in new markets, said Orange County restaurant consultant Bob Sandelman. Coffeehouse patrons are among the most loyal in the food business, and Diedrich has had difficulty prying away customers from industry leader Starbucks Corp., which has more than 3,800 stores worldwide.

Some analysts trace the company’s troubles to its acquisition of a much bigger competitor, Coffee People Inc., in 1999.

Of the 278 stores added, some were poor performers that later were closed. Some stores had more problems than Martin was aware of, “and they’ve hurt the company big time,” said Hal Sieling, a San Diego restaurant consultant.

As its financial condition worsened, the company announced plans to shed some assets to satisfy its lender. Nasdaq officials also are threatening to delist Diedrich’s sagging stock.

Diedrich shares, which have lost more than 78% of their value in the last year, closed Friday at 81 cents, up 16 cents.

Diedrich traces its aggressive expansion strategy to the arrival of Martin, former Taco Bell chairman, in 1997. He brought along Timothy Ryan, also formerly with Taco Bell, as chief executive.

The company soon announced the goal of christening 1,500 coffeehouses nationwide over five years to challenge Starbucks’ primacy, and it signed deals with franchisers to open scores of stores from San Diego to North Carolina. But many of the plans stalled.

After Ryan retired as CEO, the company hired turnaround expert J. Michael Jenkins. The company since has scaled back, scrapping plans to build four company-owned stores in Southern California and opting against building three other stores elsewhere.