AMDP Investment Proposal Memo

TO: Clark Hansen, CEO, AMDP

FROM: Bryan Wu, R&D Analyst, AMDP

DATE: March 11, 2022

SUBJECT: Investment Proposal: Philz Coffee

As per your request, I have conducted extensive research to find a company for AMDP to invest in. The company must encompass the goal of AMDP to operate not only in a financially profitable way but also while maintaining a socially responsible and environmentally sustainable baseline of operations. After careful consideration, I recommend Philz Coffee as a potential investment. Philz Coffee is a San Francisco-based coffee shop that dedicates itself to its green sourcing initiatives and generous donation programs. 

AMDP Investment Standards

Before I dive into Philz Coffee, I would like to revisit the basic criteria for AMDP’s consideration of investment. 

Triple Bottom Line

The Triple Bottom Line is a concept introduced by John Elkington that measures a company’s financial, social, and environmental performance (Hindle). The three separate bottom lines each encompass one specific goal:

• Profit: the traditional measurement that looks at the company’s monetary profit and loss

• People: the measurement that evaluates how socially responsible the company is through its operations

• Planet: the measurement that judges the environmental sustainability of the company

Corporate Social Responsibility

Corporate social responsibility (CSR) is the union of environmental and social considerations with a company's activities to reduce its adverse effects on the world (Edmondson). Using CSR, companies can increase their positive social impact and environmental sustainability while still satisfying business obligations. 

Social Enterprise

Social enterprises are businesses that operate through their commitment to the common good (Velez). In contrast to traditional nonprofits, social enterprises strive for profitability to uphold their social missions. Instead of sharing profits with shareholders, these companies reinvest the money earned into their social programs.

Carbon Footprint

A carbon footprint is the amount of greenhouse gases released into the atmosphere that individuals or entities produce through their actions (Osmanski). A company’s carbon footprint is measured by how much carbon dioxide and other noxious gases like methane are emitted every year. Because greenhouse gases contribute to global warming and the destruction of the environment, minimizing the carbon footprint is necessary to create a more sustainable planet.

Philz Coffee

Background

Founded in 2003 following the dot-com crash, Philz Coffee was the culmination of over 20 years of work by Faisal Jaber. Faisal started with a small San Francisco deli in 1978, where he tested coffee blends in his spare time. After serving customers his coffee in 2002, popularity spread, leading to the creation of the first Philz coffee location. In 2005, his son, Jacob, joined the operation, expanding the shop to over 5 locations by 2009. In contrast to the "yuppiness" of most third-wave coffee shops (think Blue Bottle or Counter Culture), Philz Coffee approaches coffee with a more informal vibe in both store design and brewing methods (Mac). Currently, Philz Coffee has expanded to having 69 stores that span not only throughout California but even in DC and Chicago. Jacob has greater plans to open in New York and Boston, hoping to “disrupt” the coffee industry.

Financials

Philz Coffee is a private company whose main product is drip coffee. Over the past few years, Philz Coffee’s revenue grew significantly, increasing from $19 million in 2014 to over $73 million in 2019 (Privco). This increase is due to the growing amount of locations opened in the past 8 years and the increasing popularity of Philz Coffee in popular media. But, Philz Coffee did receive a major hit following the COVID-19 pandemic. Forced to close its stores in March 2020 due to restrictions, Philz Coffee reopened with limited service and mobile ordering in late April 2020. These disruptions to the stores’ workflows caused revenues to drop to only $58.5 million in 2020. Without exact numbers from 2021, I am unable to estimate its recovery in the past year, but, with decreasing COVID restrictions, Philz Coffee is sure to make a comeback with its profits.

Mission & Actions

Philz Coffee expresses its commitment to sustainable business practices through ethical sourcing and a generous donation program to account for potential shortcomings in its practices (Mersch). The company sets three criteria for its suppliers to guarantee a standard of sustainability for coffee bean purchases:

• Traceability: Obtaining data from each step of the buying process to ensure that every part of the transaction is environmentally and socially responsible

• Commitment to Worker Safety and the Environment: Protecting both people and the environment through preventive measures like proper equipment for workers and restricted use of chemicals

• Active Commitment to Social Values: Guaranteeing active participation in social programs by mandating all parties along the supply chain to be committed to at least one “impactful and measurable” social program

Along with these conditions, Philz Coffee donates to two programs: Food 4 Farmers and World Coffee Research. Because Philz Coffee knows that its coffee bean sourcing is not foolproof, it implemented these donation programs that tie into its sustainable coffee purchases. Food 4 Farmers helps combat food insecurity in coffee farming communities, which is a critical issue for coffee sustainability. Philz Coffee works closely with Food 4 Farmers to ensure that the donations go towards positive initiatives. World Coffee Research seeks to provide solutions to the challenges of the changing climate on coffee bean production. Because of the growing environmental concerns, Philz Coffee considers its donations towards World Coffee Research to be investments into the future of coffee. 

Philz Coffee also includes a community tab on its website, which provides updates for both its sustainability initiatives and more information about its social work. Recently, it has released articles about racial equity initiatives and food waste programs that the company has been working on. Although the updates are not scheduled, this page allows for greater transparency between Philz Coffee and its consumers in terms of sharing its commitment to social and environmental responsibility. 

Industry Opinions

Because of the lack of trusted industry opinions commenting on the practices of Philz Coffee, I will first cover the nature of the coffee industry.

Tatiana Schlossberg, a NYTimes environmental reporter, talks about how climate change is the single biggest issue surrounding coffee production. Each cup of coffee has a large environmental impact, needing around 39 gallons of water to make (Schlossberg). Climate issues such as increasing temperatures and long droughts take a heavy toll on the consistency of coffee bean growers. In a 2014 study, about 50% of suitable land for growing coffee is at risk of disappearing by 2050, because of the levels of greenhouse gas emissions. The greatest enemy to coffee today is climate change.

Philz Coffee commits towards the research of sustainable coffee production. The company ensures that its suppliers support environmentally sustainable practices and donates a portion of its proceeds to the World Coffee Research. Even if the coffee industry can’t be fixed with a few commitments made by one company, Philz Coffee is actively trying to mitigate its negative environmental impact.

But on the social side, Philz coffee has had some shortcomings.

Joe Rodriguez, a KQED reporter based in San Francisco, writes about the social controversy surrounding Philz Coffee. In the summer of 2020, Philz Coffee came under fire after the announcement that it would be laying off over 100 of its employees–a large proportion of its 800 person workforce (Rodriguez). This move comes after the employee strike that occurred in the weeks before, where they expressed their concerns over COVID safety and Philz Coffee’s statements on the Black Lives Matter movement. 

Following the backlash, Philz Coffee rededicated itself to providing a more equitable workplace. The first step Philz Coffee took was to reconcile with its employees. The company opened anonymous comment boxes, invested in bias training, and even removed discounts for law enforcement. Although the steps were small, Philz Coffee still provides updates on its website about steps it will continue to take to focus on diversity and inclusion within the company.

Recommendation

Despite the recent controversy, I still recommend that AMDP invest in Philz Coffee. Philz Coffee shows its dedication to environmental and social issues through its well-documented commitment towards sustainable sourcing practices. Furthermore, the upper management of Philz Coffee has shown a strong desire to learn from its past mistakes and move forward with greater social responsibility. Through extensive research, I have found that Philz Coffee aligns with the AMDP investment standards. I look forward to seeing Philz Coffee’s future growth and continuing transparency in its ethical business practices.

Works Cited

Edmondson, Brian. “What Is Corporate Social Responsibility?” The Balance, The Balance, 7 Mar. 2022, thebalance.com/corporate-social-responsibility-csr-4772443.

Hindle, Tim. “Triple Bottom Line.” The Economist, The Economist Newspaper, 19 Nov. 2009, economist.com/news/2009/11/17/triple-bottom-line.

Mac, Ryan. “Philz Coffee: Silicon Valley's Cup of Choice.” Forbes, Forbes Magazine, 22 Mar. 2016, forbes.com/sites/ryanmac/2016/03/20/silicon-valleys-cup-of-choice/?sh=7ce72077226e.

Mersch, Andi Trindle. Green Coffee Sourcing Commitment. Philz Coffee, 2018, philzcoffee.com/site/Philz%20Sourcing%20Commitment_March%202018.pdf.

Osmanski, Stephanie. “How Is Your Carbon Footprint Measured?” Green Matters, Green Matters, 27 Nov. 2019, greenmatters.com/p/how-is-carbon-footprint-measured.

PrivCo. “Philz Coffee, Inc.. Company Profile: Financials, Valuation, and Growth.” PrivCo, system.privco.com/company/philz-coffee-inc.

Rodriguez, Joe Fitzgerald. “Philz Coffee to Lay off 180 Employees Due to Covid-19.” KQED, 11 July 2020, kqed.org/news/11828630/philz-coffee-to-lay-off-180-employees-due-to-covid-19.

Schlossberg, Tatiana. “Coffee and Climate Have a Complicated Relationship.” The New York Times, The New York Times, 31 Oct. 2021, nytimes.com/2021/10/31/business/coffee-climate-change.html.

Velez, Henah. “What Is a Social Enterprise?” The Good Trade, The Good Trade, 16 Feb. 2022, thegoodtrade.com/features/what-is-a-social-enterprise.