Happy blend

Marty Koessel is a fledgling coffee shop owner, a career born of love as well as necessity.

Koessel, 50, who has worked in education and business, was laid off as a technology support worker for Lawson Software nearly three years ago. That's when he decided it was time to take the future into his own hands.

"At Lawson, I was tired of cubicles and computers, and my area had become less of a priority and we didn't have the resources to do what we needed and solve all the problems," he said. "I wanted to do something where I could put a smile on people's faces."

For Dunn Bros.' corporate owners, Koessel's experience is a familiar one. Unlike competitors Starbucks and Caribou, which are both publicly held, 20-year-old Dunn Bros. remains privately held and relies almost exclusively on franchisees like Koessel for expansion.

After some investigation, Koessel in 2005 put up about $60,000 in franchise and training fees to become the owner of two Dunn Bros. shops that are showing early signs of success in downtown Minneapolis; a store in the new Minneapolis Central Library and one on 3rd and Washington Avenues N. in the Warehouse District.

"My business plans are coming out the way I planned," said Koessel, who employs up to 25 part-time workers and pays himself about minimum wage for up to 12 hour days. "The Dunn Bros. corporate people are great, and they know the coffee business. Most importantly, there's tons of freedom to run my business. I feel like it's my place. I think that's the Dunn Bros. way."

Franchisees will typically invest or borrow up to $300,000 in the first year to outfit and stock a 35-seat store, including the ubiquitous coffee roaster, which has become the Dunn Bros. signature and key to bragging rights that it has the best coffee.

Koessel had to invest a lot of savings and, backed by Dunn Bros., borrowed an unspecified six-figure sum to get his businesses going. After more than two years of hard work and long hours, he can see the day within a few years when the loan is paid and the stores throw $80,000 or more of income his way.

"At this point, I'm taking out just enough money to keep myself going," he said. "Everything else goes back into the business. This is a lifestyle decision that I made to get where I need the business to go."

Dunn Bros., with about 95 stores in eight states, is a force in the Twin Cities but just one-fifth the size of local rival Caribou, the 15-year-old chain that has undergone numerous management changes. Caribou, which went public at $14 a share in September 2005, now trades below $6 per share and remains unprofitable.

And then there's Starbucks, the industry titan that has become something of national retailer of lots of stuff from Bob Dylan CDs to branded ice cream to iTunes from Apple (coming next month). Starbucks 2006 sales reached $7.8 billion, while Caribou did $236 million in sales last year.

The much-smaller Dunn Bros., which is growing sales systemwide at a 20 percent-plus clip, expects to hit $35 million in sales from nearly 100 stores this year. Sales of coffee, cookies and sandwiches from stores open at least a year, or "mature store sales," are rising this year at a better-than-industry 10 percent clip, according to the company, public reports from the likes of Starbucks and Caribou, and industry-research firm Mintel.

"Dunn Bros. has the best dark-roasted coffee in town," said Joanna Furnass, a regular patron of Koessel's N. Washington Avenue store as well as several independent shops. "And the experience at Dunn Bros. is more relaxed [than the larger chain outfits]."

Brewing success

Dunn Bros. success seems at least partly rooted in its unique, neighborhood-based stores, each designed a little differently and targeted at locals, and often featuring the works of local artists and musicians. The coffee beans are roasted in the stores, an approach started by Dunn Bros. founder Ed Dunn, who opened the first of two St. Paul shops featuring on-site coffee roasters in 1987.

In the early 1990s, Chris Eilers, 47, and Skip Fay, 44, were casual acquaintances increasingly confiding that they were tired of their corporate jobs. Eilers was working for a big McDonald's franchisee, burned out on the sameness and staffing problems of the low-wage, fast-food industry. Fey was a forklift salesman.

"Skip came up with the idea of a coffee shop," Eilers recalled. "There were a few independents and they were smoky places. Starbucks hadn't gotten to the Twin Cities yet, and Caribou was just starting."

The pair scouted the territory and decided Ed Dunn's business was what they liked best; a comfortable, clean environment with weathered furniture that fit its neighborhood.

Dunn agreed to make Eilers and Fay the first Minneapolis franchisees. They opened several local shops that achieved early success. In 1998, Eilers and Fey negotiated with Dunn to buy the franchise rights to the entire company and the remaining assets and trademarks by 2001; essentially acquiring the company from Dunn, who has sold his two stores, although he still shows up once in a while to brew coffee at the Roseville Dunn Bros.

A bigger business was on its way.

"Between 1994 and 1998, we helped Ed develop the business, opening five Minneapolis stores and we did things like develop operations and training material," Eilers recalled. "We had people walking in ... asking us about 'opening one of these.' We saw an opportunity to grow Dunn Bros. in a way that Ed wasn't interested. We negotiated with Ed to become the franchisors."

Franchising has allowed Dunn Bros. to grow without having to sell ownership to raise expansion capital from outside investors or the public. Franchisees receive raining from the 20-person corporate office at Mill Place, a restored building in downtown Minneapolis on the Mississippi River. A block away is the corporate-owned Dunn Bros. store in a restored storage building near the old Milwaukee Depot.

Each franchisee also gets a trip to Central America to visit with local coffee growers and gain insight into environmental sustainability and negotiations on a fair price for a crop.

Fifteen years after Eilers and Fay started thinking about opening a neighborhood shop on 34th St. and Hennepin Av. S. in south Minneapolis, they are sitting atop a growth company in which all but several franchisees have met success, according to documents filed with the Minnesota Department of Commerce.

Dunn Bros. has tried not to dilute its brand; it sells coffee only in its shops and not in supermarkets and other retailers.

Dunn Bros. Franchising, owned by Eilers and Fay, last year reported a healthy profit of $643,006 on revenue of $3 million from coffee, related products, royalties and franchise fees, according to the company's audited financial statements.

Entrepreneurs from as far as Dallas and college towns in Kansas have opened successful Dunn Bros. as the coffee shop trend continues, replacing to some extent the neighborhood bars that dot main streets.

Eilers and Fay, unassuming, jeans-wearing entrepreneurs who have enjoyed growing the business and seeing some prosperity in recent years, say one day they may consider selling some of the company to investors. But not yet.

"At some point, we'll want to take some of our money off the table," Eilers said. "But we're not planning anything. We're still in an aggressive growth phase. There's a lot of opportunity."

Neal St. Anthony • 612-673-7144 • nstanthony@startribune.com