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The consolidation of coffee

From the January 2020 issue.

For nearly a decade, the global coffee industry has become increasingly concentrated as the big have gotten bigger. Experts and players weigh in on what it means.

Nearly eight years ago, German conglomerate JAB Holding Company acquired San Francisco-based Peet’s Coffee, kickstarting a coffee shopping spree for the company and within the greater coffee industry.

Three years later it would buy Keurig Green Mountain, which would then go on to purchase Dr Pepper Snapple. Within three more years, Nestlé would buy Starbucks’ retail division, and Coca-Cola would buy UK coffee shop chain Costa Coffee. Meanwhile, indie roasters were getting snatched up, coffee-adjacent brands entered the mix, and the acquired became acquirers themselves.

Global tech giant Amazon even joined the action in August 2017 through its purchase of Whole Foods, which owns the Allegro brand of coffee and its in-store coffee counters.

In the midst of all this activity two years ago, when Global Coffee Report first covered this rampant feeding frenzy, the industry was abuzz. Experts projected that the merger and acquisition activity would continue – and it did. In addition to the Dr Pepper Snapple, Starbucks, and Costa deals, other notable transactions since GCR’s first report in 2017 include JAB’s purchase of UK café chain Pret a Manger, Kraft Heinz’s purchase of Ethical Bean, Lavazza’s purchase of Mars Inc.’s drinks division, and Jollibee Foods’ purchase of Coffee Bean & Tea Leaf.

In recent years, there has also been an increasing number of transactions at more varied stages of the coffee value chain. In green coffee buying, Sustainable Harvest purchased Twin Trading in November 2019 after learning the UK business was closing its doors. Further down the chain, in-home espresso machine maker De’Longhi purchased a 40 per cent share of professional-grade espresso machine maker Eversys in 2017, with the option of acquiring the remaining 60 per cent within four years. De’Longhi, which is open to similar opportunities as part of its growth strategy, will finalise the deal in 2021.

Jeffrey Young, CEO of global research firm Allegra World Coffee Portal, was one of those aforementioned experts who expected the industry to continue consolidating. “The big are getting bigger, and so now we see this coalescence of four main entities that are really starting to control a huge amount of the world’s coffee,” he tells Global Coffee Report. “This is the rise of big business in coffee.”

What’s in it for me?
Not unlike two years ago, there are a few big factors at play. Coffee is currently one of the fastest-growing consumer spending categories right now, according to Euromonitor, and companies big and small are vying for their shares of the space. With its myriad of subcategories and extensions, from origins to formats to additives, the coffee space has massive opportunities for new entrants, partnerships and acquisitions. 

Additionally, over the years, coffee-adjacent businesses, such as cafés, baked goods, and complementary beverages, have become popular targets. Since 2014, JAB bought Mighty Leaf Tea, Einstein Brothers Bagels, Krispy Kreme, Panera, and Revive Kombucha (via Peet’s).

The other factor is that the big multinationals, which are often too slow to stay at the forefront of changing consumer trends, are looking for ways to both counteract their slowing volume growth and diversify their portfolios.

“The largest consumer packaged goods companies of the world are finding themselves needing new brands to put in their retail distribution systems, premium brands that are increasingly forming in other areas,” explained Euromonitor Global Lead of Food & Beverage Research Michael Schaefer in a podcast about the Coca-Cola and Costa deal. “For the biggest drinks companies and nonalcoholic beverage companies, because volume growth is slowing in a lot of their largest markets, value growth has become paramount and premiumisation has become paramount. So having a connection to high-margin, away-from-home channels and brands is going to become more important going forward, as is the need to innovate and the need to build new brands faster.”

For the acquirers, they gain access to the front line of the fast-moving industry through small, nimble innovators with loyal followers. For the acquired, they gain access to the resources and distribution networks of their massive parent companies, which can mean more money behind innovation and promotion and introductions to new markets.

Through Costa, Coca-Cola is making coffee a bigger part of its portfolio and gaining a global retail footprint through one of the top five coffee shop chains in the world. In return, Costa gains access to Coca-Cola’s bottled beverage prowess and distribution network.

“This acquisition will give Coca-Cola a strong backbone in the hot beverage business across parts of Europe, Africa, the Middle East, and Asia-Pacific. Costa brings us a brand, supply chain, roastery, retail network, vending system, and much more,” Coca-Cola CEO James Quincey said in a video announcement last year. “The opportunities to create more value are tremendous. For example, Costa has a vending operation with the potential for expansion with Coca-Cola customers worldwide. And the Costa brand can grow into ready-to-drink (RTD) products, which of course is one of the great global strengths of Coca-Cola.”

The “global alliance” between Nestlé and Starbucks significantly strengthens Nestlé’s coffee portfolio in the North American premium roast and ground coffee business, as well as in the RTD sector. For Starbucks, it means expansion into other global grocery and foodservice markets through Nestlé’s expansive reach and reputation.

In the De’Longhi and Eversys deal, it meant an opportunity for De’Longhi to enter the professional market without having to invest the excessive time and resources into creating a new machine from scratch. It also meant that Eversys’s innovations would now extend to the lower end of the professional market, a space the company couldn’t access individually without compromising its brand quality, Eversys’s then Deputy CEO Kamal Bengougam told GCR in 2017.

Consolidation: opportunity or threat?
On the consumer side, Allegra’s Young says the positive to all the merger and acquisition activity is “the dissemination of more quality coffee to the mass market, so we’re all drinking better coffee than we were 20 years ago”.

This, in turn, is driving greater demand for higher-quality and specialty coffees, he says: “So the more people who want higher-quality coffee, the more opportunity there is for the farmers who grow it.” He speculates, however, that the opportunity is likely limited to the very best and most organised growers or those who have multinationals leading programs and pumping money into them.

Young also believes this is the case on a larger scale, with only a small share of industry players reaping the benefits of consolidation activity. Rather, he sees it as “a threat to the industry more than as an opportunity. There’s never been so much control over the coffee market and power has never been so concentrated, so we’re in uncharted territory. Regardless of whether we think we’re going to have cheaper or better coffee, usually in economics, it’s not healthy to have so much control across so few.”

And this seems to be the consensus from a growing number of people in the global industry.

In his keynote speech at the Ernesto Illy International Coffee Award in New York City in October 2019, Illycaffé Chairman Andrea Illy also expressed his concern for this threat and then introduced his precompetitive concept of “co-opetition”, where industry players first cooperate – and even collaborate – on economic, social, and environmental sustainability before competing.

“Co-opetition means cooperating with industry stakeholders and institutions that are involved in order to create a better coffee market, a more sustainable and dynamic market,” he said. “And then, co-opetition is about competing for our own specific missions and strategies, of which illycaffé is leading in quality.”

What’s the alternative?
Illycaffé CEO Massimiliano Pogliani emphasises the fact that illycaffé remains independent, something the Italian family-owned company takes pride in and intends to maintain. He echoed Andrea Illy’s sentiments regarding collaboration, pointing to illycaffé’s recent partnership with JAB to produce its compatible coffee capsules (different from illycaffé’s iperEspresso proprietary capsule system for home and professional use).

“Co-opetition doesn’t mean that we cannot collaborate with these giants, and one of the most evident examples is the partnership and licensing agreement with JAB,” Pogliani tells GCR. “We each remain independent, but we brought together our strengths in collaboration, and that is another way to grow a company, even in this competitive, consolidating environment.”

He says that remaining independent, as the alternative to merger and acquisition growth strategies, is not possible for all companies. “In order to do that, you need to have a proposition that stands out and is able to break through the clutter,” Pogliani explains. “You need to have certain characteristics, including strong and unique positioning, strong and unique product heritage, the capability of growing a business financially and sustainably without external support. These are all boxes we tick at Illy, allowing us to sustain our own growth. We are not a company that needs to consolidate with others or grow through acquisitions.”

Italy’s Lavazza and Germany’s Tchibo also tick many of those boxes and, thus, are able to remain independent.

Similar to illycaffé, Lavazza has a partnership with a beverage giant, PepsiCo, for its RTD division. However, Lavazza has been very active in the merger and acquisition space on the buying side. From June 2015 to October 2018, Lavazza acquired seven other operators.

“These are very long-established family businesses with a lot of family pride and presumably a lot of family funds with low debt, so there’s more conviction and they have a good chance [of remaining independent],” estimates Young. “They don’t have investors that are champing at the bit to maximise an exit, so there’s no absolute need to sell.”

At the end of the day, though, “I think everyone comes at a price,” he tells GCR. “With the broader trend of the industry, it’ll only be a matter of time before one or more of them succumb to what is a major offer.” Though on a smaller scale, he points to Nestlé’s purchase of indie roaster Blue Bottle as an example of selling when “the price is right”.

No different than two years ago, the experts forecast the consolidation activity to continue for the foreseeable future, with increased activity across different links of the supply chain and coffee-adjacent markets.

“I think in the next five to 10 years, we’re going to see more of these tie-ups with foodservice brands and away-from-home brands as a way to bridge the gap between production, marketing, and that consumer relationship,” Schaefer estimated in the Euromonitor podcast.

“Many of the very high-profile deals have happened, so now we’re going to be digging deeper into some of the smaller ones,” forecasts Young. “It’s only going to get more and more concentrated and the gulf between the small and the really big is only going to get wider and wider.”

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