Boycott Watch
August 6, 2006
Caribou Coffee Boycott In The News -
Ownership Name Change May Be Meant To Mask Islamic Ties
Summary: Atlanta Journal Constitution Quotes Boycott Watch in an article
The following article was printed in the Atlanta Journal Constitution on July 30, 2006, and is repinted with permission. The original AJC article is available here: and the original Boycott Watch article is available here.

Branching out, with limits
Peralte C. Paul, Shelia M. Poole - Staff
Atlanta Journal Constitution
Sunday, July 30, 2006

In many ways, the 2005 initial public offering for Caribou Coffee was like any other.

It contained information about the popular coffee chain's growth strategy, an industry overview and its financials.

But Page 16 of its prospectus may have left some would-be investors scratching their heads:

"Our compliance with Shari'ah principles may make it difficult for us to obtain financing and may limit the products we sell."

Sha what?

Arcapita Inc. in Atlanta, a majority owner of Caribou Coffee, is the U.S. arm of Bahrain-based Arcapita Bank, which makes investments based on Islamic law, known as Shari'ah. Shari'ah prescribes how individuals and businesses should act.

For companies, that means not investing in financial firms that offer credit or charge interest, or companies peddling pornography or alcohol. Even pork is off-limits.

"We've got a pretty good sense of where the boundaries are," said Charlie Ogburn, Arcapita's executive director and global head of corporate investment, in an interview from the company's Midtown offices in the Four Seasons hotel building. "Most media businesses, because of R-rated movies or lyrics or Internet content, anything that involves gaming, casinos, lotteries --- we would avoid that."

Case in point: The company passed on buying a call center firm that activated credit cards because Shari'ah prohibits charging interest or dealing with businesses that do.

But log houses, fried chicken and notebooks are OK.

Arcapita's diverse holdings, which include Southland Log Homes, Cypress Communications, Church's Chicken and American Pad & Paper, show that a company with strict investment guidelines can succeed in the United States, the world's biggest --- albeit secular --- economy.

Arcapita Bank, founded in 1997 as First Islamic Investment Bank, had $2.3 billion in assets at the end of June.

Arcapita's story also illustrates some of the dynamics of operating in global markets:

International investment capital remains free-flowing, even during periods of world unrest.

And public sentiment and nationalism can produce controversy in day-to-day business operations.

"We certainly had a fair amount of attention after Sept. 11 because there were so many people who knew so little," Ogburn said.

Coffee clash

For example, Caribou Coffee, which Arcapita acquired with little fanfare in 2000, ignited a controversy on the Internet after the 9/11 terrorist attacks.

Fred Taub, president of Cleveland-based Boycott Watch, an organization that monitors and reports on boycotts, said some people objected to Muslim ownership of the popular U.S.-based coffee chain.

"A lot of people were upset about it," he said. "They basically said we're not going to drink there anymore."

But Taub said it's difficult to gauge what, if any, impact the controversy had on Caribou's sales. Many companies don't like to acknowledge boycotts are successful for fear of encouraging others.

"I would call it a low-level boycott," Taub said, explaining he thinks it eventually stabilized or died down. "I don't see many e-mails about it anymore."

Michael Coles, Caribou's chief executive, said the threats never materialized into a major cause for panic.

"It's pretty much gone away. The company has more than doubled its size since then," he said, explaining that Caribou has grown from 175 stores when he took over in January 2003 to more than 400 today.

"Since then, [Arcapita's] business track record speaks for itself," Ogburn said. "We've done a large volume of transactions all over the U.S. and Europe with reputable counterparts and banks."

Four-person board

Earlier this month, for instance, Arcapita sold its Loehmann's business for $300 million after adding the off-price retail chain to its portfolio in 2004 for $190 million. Arcapita's return on equity --- not including borrowings for the initial purchase transaction --- was a little more than 100 percent.

Arcapita executives say such transactions show that, like any other private equity firm, their main objective is to make money.

Indeed, Arcapita's "sweet spot," Ogburn said, is making an investment of $50 million to $150 million in a given company and holding onto it for four to six years before selling.

Before a deal is consummated, it has to get a nod from Arcapita's four-person Shari'ah advisory board, which consists of a retired judge from Saudi Arabia's Supreme Court and religious scholars from Pakistan and Bahrain.

But beyond ensuring a potential acquisition is Shari'ah-compliant, the board does not play a role in the company's operations or decide the financial merits of a particular deal. Nor does it dictate who can be hired or promoted, said Ogburn, an Episcopalian.

Arcapita has a separate two-man international advisory board that provides advice on international relations and political issues. Its members are Wyche Fowler, a former U.S. senator from Georgia and U.S. ambassador to Saudi Arabia, and Samuel L. Hayes, investment banking professor emeritus at Harvard University.

"The business people we interact with, it's no mystery to them that capital is sourced from the Middle East, and the people we do business with understand global economic trends and capital flows," Ogburn said. "My experience has been that business people focus on the business and not anything else."

Mideast investments in the United States rose to $8.2 billion in 2004, according to the most recent figures available from the Commerce Department's Bureau of Economic Analysis. About half that amount, $4.1 billion, came from Israel, with Kuwait, Qatar and the United Arab Emirates making up the bulk of the rest.

It's a small share of the total $1.5 trillion in foreign investments in the United States each year. But inflows from the Mideast are growing, increasing by 26 percent between 2000 and 2004. That outpaced investment growth from Europe in the same five-year span.

Ogburn said Arcapita's investors are eager to be in the United States. U.S. investments represent about 48 percent of its total. The oil-rich Middle East is a "vital" source of investment capital, he said.

"And that capital is going to be redeployed somewhere, so we are a channel for that capital to be redeployed back into the economies in the U.S. and Europe," he said.

Lingering questions

Though the company says it got past the boycott threats, it still has had to deal with several lingering questions. Chief among them: Did Arcapita adopt a low-profile corporate name to hide its roots? Do Mideastern cultural practices prevent women from holding positions of authority in Arcapita's family of companies?

Arcapita officials said the company changed its name to a single unifying brand last year because potential business partners were confused about the relationship between First Islamic Investment Bank, the Bahraini parent's original name, and its U.S. arm, Crescent Capital. Adding to the confusion, its London-based operations had a different name.

Ogburn, 51, who joined the company in March 2001 after 15 years at Robinson Humphrey, said some investors also wanted a more secular name.

"First Islamic was not the right name because we are not a religious institution," he said. "Some of our investors didn't like the name because they were uneasy that we were sort of taking commercial advantage out of the name of the religion.

"We're almost five years after Sept. 11. It certainly was not a reaction to that or we would have done it a long time ago."

Even so, executives at some of their holdings sometimes have to explain what being Shari'ah-compliant means and dispel some misconceptions. They say the status of women is one of them.

Women hold key posts in the Arcapita group of companies including the CEO position at Working Rx, which processes workers' compensation claims for chain and independent pharmacies.

Some 60 percent of Caribou Coffee's core management team is female, while at Church's the chief marketing officer is a woman, officials said.

And women hold several key spots in Arcapita's senior management team.

"My experience with Arcapita has been extremely different than whatever the rumors may say," said Farnaz Wallace, an Iranian woman who heads Church's marketing department.

Ogburn said he thinks the focus on his company stems from mistaken attitudes about Islamic beliefs and Arab culture.

Billions involved

But he said he's found surprisingly few cultural differences between working for a Western firm and one with a strong Middle Eastern and Islamic culture.

"We all work hard, and we feel essentially the same way about business," he said. "Are there people in the United States who are uninformed or ignorant about what Islam really is? Of course there are. It's really not our job to re-educate everybody in the United States."

Khaled Abou El Fadl, a law professor at the University of California at Los Angeles, said Islamic financial institutions represent a multibillion-dollar industry that is merely trying to make ethically and morally sound business decisions.

Abou El Fadl has served on several Shari'ah advisory boards in the United States and elsewhere.

He said most advisers don't get involved deeply in scrutinizing a deal for its economic feasibility, instead leaving that to the experts. "You don't meddle with the judgment of professional investors. Banks where the Shari'ah board has been aggressive and controlling have never gotten off the ground."

He said people who say Islamic-based institutions support terrorism are "socially irresponsible" and "Islamophobes."

"They're trying to hit Islamic institutions in the knees. ... The vast majority of Islamic businesses are entirely respectable and professional and run within a sound economic profit-and-loss logic."

Caribou's Coles, who is Jewish, agreed, saying that he researched the coffee chain before joining it to ensure the corporate environment wouldn't be at odds with his own principles.

"It turned out to be a great company," Coles said.

Initial concerns

At Church's, franchisees expressed concerns after being acquired by Arcapita in December of 2004.

"There were initial concerns by our franchise board," said Harsha Agadi, Church's CEO. Some of those concerns stemmed from changes Arcapita made such as substituting turkey for pork in its red beans and rice side dishes.

Pork comprised less than 1/2 of 1 percent of sales for less than 250 stores out of 1,600 outlets, Agadi said.

Church's foreign ownership isn't an issue with franchisees, he said, since the company has had annual same-store sales growth of 5 percent to 7 percent. The company surpassed the $1 billion sales mark for the first time in February.

"When you start demonstrating those kinds of sales increases, you would expect franchisees to be pleased," he said, explaining franchisees haven't made Arcapita's ties to the Middle East an issue.

Agadi, who hails from Mumbai (formerly known as Bombay), India, said the globalization of world economies are making such concerns less of an issue.

"Long term they do not have a lasting impact," he said. "It will be common for a lot of companies overseas and here in the U.S. to have multinational interests."


> Ampad --- Richardson, Texas-based provider of paper-based office products.

> Bijoux Terner --- Miami-based supplier of watches, jewelry, handbags and other retail soft goods to airports, cruise ships, hotels and entertainment locations.

> Caribou Coffee Co. --- Second-largest non-franchised specialty coffeehouse chain in the U.S.; based in Minneapolis.

> Church's Chicken --- Atlanta-based fast-food, franchised chicken restaurants.

> Cirrus Design Corp. --- World's second-largest maker of single-engine, piston-powered, aircraft for general aviation; headquartered in Duluth, Minn.

> Cypress Communications --- Atlanta-based telecommunications provider to small and midsize businesses.

> Meridian Surgical Partners --- Nashville-based company that operates ambulatory surgery centers nationwide.

> Roxar --- Stavanger, Norway-based firm that helps manage reservoir problems in the oil and gas industries.

> Smart Document Solutions --- One of the world's largest health document processors; headquartered in Alpharetta.

> Southland Log Homes --- One of the largest log home manufacturers in the United States; based in Irmo, S.C.

> Tensar Corp. --- Atlanta-based provider of site development and transportation infrastructure services for properties.

> Tender Loving Care Health Care Services --- Home health care and hospice service providers; based in Lake Success, N.Y.

> Transportation Safety Technologies --- Indianapolis-based manufacturer of specialty electrical components and safety products for vehicles.

> Vogica --- Paris-based retailer and wholesaler of kitchens and bathrooms in France.

> Working Rx --- Salt Lake City-based manager of workers' compensation claims for retail pharmacies.

> Yakima Products --- Beaverton, Ore., manufacturer of multisport racks and accessories for automobiles.


> Based on Islamic law, Shari'ah is a set of religious principles that prescribes how its followers should act in their personal, social and business lives. A key tenet: Businesses may not pay or earn interest on borrowed money, which is viewed as usury. So how does a financial business like Arcapita do business and stay compliant? To finance a commercial project, the bank invests in specific assets, such as a piece of property or building, which the borrower leases. At the end of the lease, the borrower can acquire title to the assets for a fee.

> Money Weekly magazine says more than 250 Islamic financial institutions operate worldwide and that Islamic banking is estimated to be managing about $550 billion.

Illustration of a tree with the bank's customers "branched out."
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