Can TOMS break into the coffee business?

March 12, 2014, 12:47 AM UTC

Howard Schultz, be warned.

Blake Mycoskie has already gone from a reality TV contestant to the world’s most benevolent shoemaker and a trendsetting social entrepreneur. And yet by any measure, he’s about to make his boldest move to date — getting into the coffee business.

When he takes the stage at South by Southwest Tuesday, the founder and CEO of TOMS — which made beachy canvas slip-ons a fashion sensation and pioneered the “one for one” model, donating a pair of shoes to children in need for every pair sold — will announce that TOMS is bringing that model to the coffee business. And it isn’t just opening a pop-up café or two. TOMS Roasting Co. aims to be an ambitious new brand with a chain of coffee bars, a wholesale roasting business, and a subscription coffee club online.

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Like the shoes that made TOMS famous, the coffee comes with a built-in plan for doing social good. In this case, the “give,” as TOMS employees call it, is water: For every bag of TOMS beans sold, a person in Rwanda, Malawai, Guatemala, Honduras, or Peru — the areas where TOMS is sourcing beans — will get clean water for a week; for every cup, someone gets water for a day. As with the shoes, an outside partner will handle the giving — Water for People, an international charity based in Denver, which is also where TOMS Roasting Co. will be roasting its beans. The coffee company’s simple tagline: “Coffee for you, water for all.”

TOMS says it’s not targeting Starbucks so much as “third wave” artisanal roasters like Blue Bottle, Intelligentsia, and Stumptown, cult coffee brands that keep cropping up in places like San Francisco and Portland. But TOMS Roasting Co. will have one major distribution channel most of those niche brands don’t: Outside of its own cafés and website, the beans will only be available in Whole Foods . Not too shabby for a brand-new entry to a hyper-competitive market.

Today’s announcement represents almost a year of tedious planning, trips to Rwanda, barista-hiring, and secret-keeping. (The initiative’s internal code name was “project burlap.”) But it also represents something bigger — an ambitious plan you might call TOMS 2.0. Beginning with coffee, Mycoskie plans to enter a new product category under the TOMS name every year, always with a “one-for-one” model. If succeeding in coffee isn’t enough of a tall (grande?) order, consider the other markets Mycoskie says he has his eye on: hospitality, banking, transportation, education, and more. Picture, for example, a TOMS hotel where for every room booked the company gives a homeless person shelter for a night; a TOMS publishing imprint that donates a book to an underserved school for every book sold; a TOMS credit card that helps sign up the unbanked with every charge; you get the idea. “When we think about product, we don’t think, ‘What can we make and sell,’” COO Joe Scirocco recalls Mycoskie telling him when they first met. “We think, ‘What does the world need, and how can we address it with a commercial endeavor?’”

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TOMS has departed from shoes before; it launched a line of sunglasses in 2011 (for each purchase, TOMS performs a cataract surgery or donates prescription glasses in developing countries). It also sells other branded apparel like tank tops and hats, plus leather-bound journals clearly inspired by the one Mycoskie carries with him everywhere.

But these initiatives pale in comparison to TOMS’ new venture, which represents not just a major departure for the company but the return of Mycoskie to the business after stepping out of the day to day in 2011. In exclusive interviews with Fortune at TOMS Los Angeles headquarters and in New York City, Mycoskie and other executives spoke about the process of building a new coffee brand from scratch and about the company’s ambitious next chapter — and his own.

The new venture is all the more significant considering that two years ago, Blake Mycoskie left the company he created. The 37-year-old from Arlington, Texas, who made Fortune’s 40 under 40 list in 2011, had decided things were going well enough that he could, and should, take a break from the business. In May 2011, TOMS installed former Burton CEO Laurent Potdevin (now CEO of Lululemon) as president; Mycoskie soon moved to Austin, married his fiancée Heather Lang, a former TOMS employee, and planned to stay. He remained involved — he still owned 100% of the company — but from afar. Sitting in an Italian restaurant in New York, reflecting over a glass of red wine, he now says the sabbatical was a mistake. “Society tells us, ‘Sell your company, hire a CEO.’ And I bought into all that,” he says. “After working and bootstrapping and grinding away for six years, I bought into this idea that if I don’t have to work, I shouldn’t be working. That was the beginning in a series of wrong decisions.”

For the first handful of months in Austin, Mycoskie and Lang were in heaven. He hit the golf course; she spent time with local friends. Together they mapped out plans for a beautiful new house. Mycoskie says he spent so much time designing it that he felt as if he took an architecture class.

It wasn’t to be. He eventually realized that for months he hadn’t been feeling right. “I had lost my purpose,” he says. “I didn’t feel like the business was mine anymore, even though it was still mine.” He says he became depressed — “nothing clinical … but I was probably drinking more than I should be. I felt like I wasn’t contributing to the world anymore.” Finally, one day last fall, only a week before they were set to break ground on the house, he woke up so unhappy he couldn’t get out of bed. It was his wife who pulled him out of it and told him that they needed to go back to L.A. All told, his hiatus was almost two years. “I think what kept me in Austin, forging ahead with building this house, was my pride,” Mycoskie says now. “I didn’t want to turn back and say, ‘Man, I fucked up.’” But the idea to take TOMS into a new chapter was also a reason to come back — he’d had the idea for branching into coffee in April 2013, and had starting thinking even bigger than that. “During my quiet time, I began to see a bigger vision for TOMS,” he says.

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While the founder was away, Potdevin, with his years of global retail experience, effectively took the business to another level. Under his leadership the company upgraded its technology platform to SAP , consolidated many distribution centers into a single logistics operation in nearby Mira Loma, and aggressively expanded into international markets. Potdevin (employees called him “LP”) hired most of the leadership team still in place today, including seasoned executives from Starbucks , Pfizer , and Tommy Hilfiger. Things were cranking.

In November, Mycoskie moved back to L.A. to rejoin the company full-time. The transition was difficult for him and for employees. When he first came back, he took on the role of CMO, but that meant letting go of CMO Nils Peyron. (“That was hard for me because I really liked him,” Mycoskie says.) Potdevin stayed a month and then left for Lululemon, clearing the way for Mycoskie to become CEO again. “We’re all kind of still settling in from the departure of Laurent,” says HR head Amy Thompson.

Mycoskie concedes that, “Over time, I think probably my being back caused a lot of disruption.” But TOMS execs say Mycoskie brings something different than Potdevin did. “His job is to inspire and lead in a very unique way, as only he can do,” says COO Joe Scirocco, former CFO of Tommy Hilfiger.

Indeed, while Mycoskie has had to roll up his sleeves and has gotten more involved with the day-to-day operations of the business, conceiving and driving the overall vision for TOMS and cultivating the company’s culture is where he shines.

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That comes through clearly on the last day of February, a rainy Friday at TOMS Marina Del Ray headquarters. Like on any morning, employees line up for coffee from the counter where a barista serves it up for free. 320 of the company’s nearly 400 employees work here. The large, open space is surrounded by conference rooms named for important places in TOMS history: South Africa, Ethiopia, and “The Barn,” a reference to the hut in Argentina where Mycoskie first worked on his idea. Two giant blue plastic tubes inside headquarters spiral from the second floor to the first; employees slide down them to avoid the stairs.

Mycoskie has called the staff together to reveal “project burlap” to them for the first time. Once everyone’s seated — many in the back in stadium-style bleachers — Mycoskie bounds onto the stage. His dog, Gypsy — one of two Goldendoodles Mycoskie and his wife have, along with a Golden Retriever — barks with excitement at the back of the room. Even for this internal gathering, a series of inspirational PowerPoint slides pop up on a screen. Mycoskie declares, “What Richard Branson did with Virgin, that’s what we want to do with giving.” People cheer. Mycoskie eventually passes the mic to Elan Lieber, a coffee nut from Ohio whom TOMS plucked out of public health grad school to work on the coffee launch. Lieber runs through the most minute details of each of the six TOMS roasts, from flavor profile down to their individual logos. (It wouldn’t have been that hard to predict coffee as the next TOMS product. TOMS was already serving coffee in its only brand store, on posh Abbot Kinney Boulevard in Venice. It will use the store as a model for the cafés, the first of which opens March 12 in Austin, followed by New York, Portland, and San Francisco.)

Even devoted fans of TOMS will be skeptical that the maker of those colorful slip-ons can be trusted to provide their morning cup of Joe. Mycoskie designed the look of the coffee bean bags to call out that very doubt. Each says on one side: “TOMS makes coffee?” and responds: “When we started as a shoe company, we knew nothing about footwear. But starting from scratch only made us work that much harder.”

No matter how hard it works, TOMS may find the $30 billion U.S. coffee industry a crowded sandbox. Mycoskie says he isn’t looking to take on Starbucks, but if the cafés take off, don’t expect TOMS to hold back on expanding. The TOMS Roasting Co. sweet spot is high-quality beans (single-origin, free-trade) at a lower price ($12.99 per 12-oz. bag compared with $16 to $18 for cult coffee brands). Rachel Halliburton, the TOMS marketer who led “project burlap,” says the hope is to play somewhere between Starbucks and Stumptown. “I’m intimidated to walk into Intelligentsia,” she says. “We want you to feel okay about walking in and saying, ‘I just want a cup of coffee, and yes, I’m going to put sugar in it.’”

Mycoskie points out that the artisanal makers represent only a small portion of the coffee market. “The big part of the market is all the people drinking from these mass chains,” he says. The TOMS brand, he reasons, is mass enough that those customers will instantly know it. “If we can use our brand to get them to taste this premium coffee for the first time, we have a really big opportunity.” In trendy areas like the West Village store in New York City, Mycoskie expects celebrities to patronize the cafés. Ever the marketer, during his speech to employees he holds up the pale blue TOMS cup and says that when famous folks are seen holding it in a photo in People, it will help propel recognition. (Mycoskie is extremely press-savvy. The launch of TOMS Roasting Co. is a highly calibrated exercise in public relations maneuvering, complete with television blitzes, a media offensive and the onstage performance at South by Southwest, for which he hired the consulting firm Duarte to help him prepare.)

That sure sounds like pie-in-the-sky, big-coffee-chain thinking. But anyone who knows Mycoskie is used to it. HR head Amy Thompson, who spent six years at Starbucks, says that out of all the CEOs she’s worked with, as a leader, “Blake most resembles Howard [Schultz]. Their passion for using business to improve people’s lives around the world, their leadership traits, their focus on the customer.”

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So, what if TOMS coffee gets burned? As it launches more businesses, it risks biting off more than it can chew. Mycoskie’s idol Richard Branson, for one, doubts a failure would damage the brand. “People love people who try things,” Branson tells Fortune. “In fact, if you’re too smarty-pants, and every single thing you do is successful, in some ways the public isn’t as endeared to you as if you sometimes fall flat on your face.”

If TOMS truly does try a new business every year, there almost surely will be a few duds. Mycoskie says TOMS spent very little on the coffee launch. It was “capital-light,” will end up requiring less than 30 new hires (three at headquarters, plus five or six baristas at each café), and getting Whole Foods wasn’t too hard since the juggernaut already sells TOMS shoes. He thinks the key is to fail fast, and to launch new businesses frequently, rather than taking more time: “If you’re doing one a year, then the company brand gets known not as any one product.”

And TOMS is a brand well-versed in social media thanks to its hardscrabble early days. Back in 2006 when the company operated out of Mycoskie’s apartment, “We had no money for marketing, but we had a great story, we had a ton of interns, and all they did all day was post on social media,” he says. TOMS has 2.2 million followers each on Twitter and Facebook. Though TOMS is private and won’t share revenue, it says it will have donated 20 million pairs by the end of 2014. (That’s at least 20 million pairs sold.) Estimates in the press of annual revenue have ranged from $100 to $350 million, but a TOMS spokesperson says, “Our sales are higher than what’s been reported.”

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Launching a new venture now is far different from when Mycoskie was a little-known founder with a slip-on shoe (the “alpargata”) and an idea. As TOMS has grown and evolved, so too have Blake’s persona and reputation on the broader public stage. He’s a bestselling author. Through charitable partnerships, he’s become close with Charlize Theron and Ben Affleck. The housewares designer Jonathan Adler recently feted Mycoskie at his home, where he gave a speech from a tiny balcony in Adler’s bedroom that overlooks the living room. He counts both Branson and Whole Foods CEO John Mackey as close personal friends and mentors. He’s the youngest member of Branson’s “B Team,” a high-profile club for corporate good that includes big names like Arianna Huffington, Ratan Tata, and Unilever CEO Paul Polman.

His perch among these titans of business might be what sparked Mycoskie’s big idea for taking the giving model even further. Sitting in his office — a large loft-like space on the ground floor of headquarters adorned with salvaged-wood counters, a kitchen nook, a walk-in closet, and a framed photograph of Mycoskie and Branson — he starts talking about Haiti, where he’s become active lately. TOMS recently opened a shoe factory there, and he’s become close with Haitian prime minister Laurent Lamothe. Mycoskie mentions that Haiti’s new tagline is “open for business,” and says it’s a motto that fits TOMS, too. He believes the next evolution of TOMS will involve partnering with corporate giants — say, Bank of America , P&G , and the like — to develop custom giving-oriented, TOMS-branded products. “We can create the TOMS credit card, or TOMS soaps, whatever it is,” he says. “We say to the big business world: We can be the engine that you need to incorporate giving into your business.”

Welcome to TOMS 2.0, and perhaps Blake Mycoskie 3.0. Both are open for business — to coffee swillers, corporate titans, and do-gooders all.

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