M&A IS BREWING IN THE COFFEE INDUSTRY

©Five Senses

Coffee is one of the most widely consumed beverages worldwide. There are thousands of independent coffee bars in the streets, serving different varieties of the drink. At a first glance, the industry might seem highly diversified, but large players are in a rush to rapidly consolidate. The two largest players are the Swiss giant Nestlé and Luxembourger JAB, which hold together more than a third of the marked for coffee roasters according to Euromonitor.

A recent trend in the coffee industry is the attempt to make the drink an alternative to traditional sodas to turn coffee into an alternative for every time of the day, rather than a source of energy only for when one is tired. This would make coffee an all-day consumption option and explains the rise in ready-to-drink coffee (“RTD”). The current wave of “health-consciousness” is leading to a reduction in the consumption of sugary and fizzy drinks, and therefore to an increase in the consumption of healthier products such as coffee. Consumers have moved from viewing coffee as merely a pick-me-up to an indulgent, experience-driven occasion.

Companies of medium size have been striving to become more relevant at an international level and leading brands are trying to extend their dominance across the industry, which is worth more than USD 165 billion. Latest acquisition follows wider consolidation trend across market leaders, mid-sized chains and specialist independents in the coffee shop segment. Lavazza, for instance, has acquired international brands in an effort to go from a predominantly Italian brand to a global one. Major deals such as Coca-Cola’s acquisition of UK market leader, Costa Coffee, and JAB’s acquisition of Pret A Manger, which previously acquired 90-strong high-street rival, EAT have introduced unprecedented foreign investment into the UK branded coffee chain segment. In January 2019, the UK’s third-largest coffee chain, Caffè Nero grew its market share to 10% following the acquisition of a majority stake in Coffee#1, which has more than 90 stores.

The soft drinks giant Coca-Cola has bought the Costa Coffee chain for almost GBP 4 billion underlining the scale of the global coffee revolution. The takeover has turn Coca-Cola into the UK’s biggest coffee shop player and give it a foothold in what is one of the world’s fastest-growing drinks categories. Coffee is one of the strongest growing categories in the world and Coca-Cola needs to expand into coffee and hot drinks. Alison Brittain, the chief executive of Costa Coffee’s owner Whitbread, said the coffee chain had been approached by a number of potential buyers but Coke’s desire to snap up the 4,000-store chain was a “dream deal” for investors. “Hot beverages is one of the few drinks segments where Coca-Cola does not have a global brand,” James Quincey, Coca-Cola’s British-born chief executive, said. “Costa gives us access to this market with a strong coffee platform.”

Since 2012, Luxembourg-based holding group JAB Holding has been quietly consolidating international coffee and bakery businesses under its umbrella. JAB serves as the investment vehicle for the Reimann family, the descendants of businessman Johan A. Benckiser who founded industrial chemicals company Benckiser in the 1820s. JAB began its coffee shopping spree by acquiring Peet’s Coffee and Tea in 2012.

The company went on to acquire Mighty Leaf Tea in 2014. Peet’s then dove into premium third-wave coffee, a movement marked by the desire to produce high-quality coffee, and acquired both Stumptown and Intelligentsia in 2015. Both brands emphasize artisanal coffee and transparent sourcing. More recently, in August 2017, Peet’s made its first equity investment — into Revive Kombucha, a bottled kombucha start-up which signifies a departure from Peet’s core business. Kombucha has grown as a trend over the past several years, often catering to similar demographics as artisanal coffee does, and Revive had even launched a coffee-kombucha crossover product prior to the Peet’s deal.

Six months after its Peet’s acquisition, JAB acquired Caribou Coffee. The Minnesota-based chain operates over 400 coffee shops and franchises in the US, concentrated in the Midwest, as well as international franchises in 10 countries. Caribou Coffee has a strong brand and culture that fits perfectly with JAB’s investment philosophy of investing in premium and unique brands in attractive coffee market.

In 2015, JAB acquired Nordic coffee chain Espresso House, one of the region’s largest coffee chains and in 2017, Espresso House acquired German coffee shop chain Balzac Coffee, which is one of Germany’s premier gourmet coffee outlets, serving customers handcrafted coffee from 43 retail locations. Espresso House has become one of the leading coffee shops in the Nordics, serving over 90,000 guests per day across over 310 shops. Continuing its focus on Nordic coffee chains, JAB purchased Baresso Coffee, Denmark’s largest coffee shop chain, shortly after its acquisition of Espresso House.

Starting to bite into bagels and baked goods, in September 2014, JAB spent USD 374 million to take Einstein Noah private. At the time of the deal, Einstein Noah operated 857 stores selling coffee and bagels, signifying a new focus area for JAB. In May of 2016, JAB acquired Krispy Kreme Doughnuts for USD 1.35 billion, which had previously gone public in 2000. A few months later, Krispy Kreme re-acquired its UK business, which had been sold to PE firm Alcuin in 2011. Continuing its push from coffee into baked goods, JAB acquired cafe and bakery chain Panera Bread in July 2017 for USD 7.5 billion. Panera had also acquired a majority stake in Tatte Bakery and then bought smaller rival bakery chain Au Bon Pain in November 2017. Caribou Coffee acquired coffee and bagel chain Bruegger’s Bagels in August 2017 including its more than 270 locations. Most recently in 2018, JAB announced its acquisition of British coffee, salad, and sandwich chain Pret A Manger for approximately USD 2 billion, which it acquired from its previous owner, investment firm Bridgepoint Advisers.

Blue Bottle Coffee, one of Silicon Valley’s favorite coffee projects, is selling a majority stake to Nestlé in a big semi-acquisition this morning that’s no doubt going to validate a lot of interest in the potential of coffee markets. The Financial Times reported that Nestle is paying up to USD 500 million at a valuation north of USD 700 million. The company has opened up shops in San Francisco, New York, and Tokyo among other cities, and the experience is kind of like walking into an Apple Store. Following the investment in Blue Bottle Coffee, one of the most notable recent deals was Nestlé’s purchase of Starbucks’ retail products for USD 7.15 billion. The move brought Starbucks, Seattle’s Best Coffee, Starbucks Reserve, Teavana and Starbucks VIA to the CPG giant's beverage segment. Nestle will now start selling Starbucks labelled coffee beans, roast and ground coffee and single-serve capsules for its Nespresso and Nescafe Dolce Gusto coffee makers, as well as Starbucks Nespresso capsules that shall help the company return to double-digit growth.

In addition to Blue Bottle’s design-focused approach, Australian-style Bluestone Lane Café is trying to bring Aussie coffee and avocado toast to the States and around the glob. The recent USD 19.5 million capital raising led by RSE Ventures will value New York-based Bluestone, which is undertaking aggressive expansion plans, at about USD 100 million. Bluestone currently has 30 stores and plans to be operating at least 100 stores in the next three years after expanding into densely populated cities in Canada, the UK and Asia. It’s seeking to be the first premium, independent coffee brand that achieves global scale.

In Europe, the Italian coffee company Lavazza has bought Mars Drinks, including Flavia and Klix vending systems, for USD 650 million. It is the latest acquisition by family-owned and privately held Lavazza which two years ago bought French coffee brand Carte Noire. It has also bought smaller brands Kicking Horse Coffee of Canada, and Blue Pod Coffee in Australia as it seeks to rival big groups like Nestlé and JAB. Antonio Baravalle, chief executive of Lavazza, said the acquisition fitted with Lavazza’s international expansion strategy and its “pursuit of having an even closer relationship to consumers”.

The UK’s mid-size and independent operators have also under significant consolidation, with Department of Coffee and Social Affairs (“DCSA”) which has 25 UK sites and four in Chicago, USA, acquiring a string of UK independent cafes in 2018. These including three-strong London-based independent, Tap Coffee, three-strong Beas of Bloomsbury and single site Bristol-based specialty coffee shops, The Crazy Fox and Tradewind Espresso. In early 2019 DCSA, acquired Café2U, which has around 85 sites and Brighton-based specialty roaster, Small Batch Coffee Roasters, which also operates nine coffee shops along the south coast. London-based specialty coffee chain, Black Sheep Coffee, has announced it will acquire artisan coffee business, Taylor St Coffee. The acquisition comes as Black Sheep embarks on ambitious expansion plans for Europe, the US and the Middle East after receiving GBP 13 million investment in June 2019. Black Sheep currently operates 22 cafés and kiosks in the UK and a single site in the Philippine capital, Manila and is targeting a global portfolio of 70 stores by the end of the year. As smaller specialist chains seek further UK growth, crowd funding has also proved a lucrative method for expansion. In June 2018, London-based specialty coffee and wine bar concept, Notes Coffee, raised GBP 1 million to fund its expansion and now operates 10 sites. In August 2018 fellow London food-focused chain, Daisy Green raised GBP 2 million to grow its business and now operates 13 stores. In July 2018, specialty roaster and coffee shop Ozone Coffee Roasters acquired fellow specialty roaster Hasbean.

Looking at the Asian market, Fraser and Neave has entered into an agreement to buy Starbucks Coffee Thailand’s business, aiming to strengthen F&N's regional footprint and extend its presence into the retail coffee segment of the beverage market. The acquisition will allow F&N to leverage Maxim's long-standing partnership with Starbucks and its extensive experience in running outlets in multiple markets as well as other food and beverage operations to expand Starbucks Thailand's footprint of 372 cafes.

In the Philippines, Jollibee Foods, the biggest restaurant company, has spent USD 350 million to buy the money-losing Coffee Bean & Tea Leaf. Jollibee will invest USD 100 million for an 80% stake in a Singapore venture set up with Vietnamese partners to acquire Coffee Bean. The Coffee Bean acquisition is Jollibee’s largest to date and follows Jollibee’s USD 210 million takeover of American fast-food chain Smashburger last year. Jollibee said these deals will boost contributions from international businesses and move them closer to their goal of becoming one of the top five restaurant companies in the world in terms of market capitalization.

In Australia, the largest multi-brand retail food franchisor and wholesale coffee roaster, Retail Food Group had acquired the global business and intellectual property assets of the Di Bella Coffee Group for USD 30 million. The acquisition is providing the Retail Food Group with a reputable specialist coffee brand to scale amongst each of its coffee and allied beverage distribution channels including franchisee and contract roasting. Furthermore, the Italian coffee group Massimo Zanetti has agreed to buy Melbourne-based company, The Bean Alliance in a move to strengthen its presence in the Australian market, which is an interesting market with a well-established high quality coffee culture and with the preference of independent roasters.

In the end, it is difficult for slow-moving CPG giants to stay on the cusp of ever-changing consumer coffee trends and achieve this level of product innovation in-house. That has major food companies racing to snap up the players at the epicenter of this creativity, which are retail coffee chains. Coffee shops realize that there is an appetite to try something different, and consumers trust coffee shops to get it right. Evolving consumer tastes have spurred the creation of powerful mega trends such as, butter coffee, probiotic and protein-infused CPG coffee products, as well as mission-based claims including authentic international flavors and ethical, sustainable sourcing. Coffee chains have a daily connection with many customers, a touchpoint that is largely unparalleled in the packaged food space. Trendy brick-and-mortar coffee locations also give acquirers built-in product branding with store design, ambiance and signage creating a strong foundation for product identity and differentiation. By pairing their large distribution networks and R&D pipelines with cult coffee favorites, CPG food and beverage companies can gain a first-mover advantage in the coffee aisle, as well as valuable insight into consumer spending habits. This strategy has proven to be one of the most successful ways for large manufacturers to up their coffee game.