Coffee economics

Jacobs Douwe Egberts aims for global domination

Jacobs Douwe Egberts

A joint venture between DE Master Blenders and Mondelēz International looks set to shake up the global coffee landscape.

The Jacobs Douwe Egberts (JDE) joint venture, which was created in 2015, is now in a position to challenge the global dominance of the world’s largest coffee company, Nestlé.

Analysts from the Russian Association of Tea and Coffee Producers say the deal between Mondelēz and Master Blenders has become the largest in an industry that has rapidly consolidated in the past five years, with more than 100 deals worth almost US$23 billion.

To add to the grandeur of the deal, at the end of 2015, JDE closed a deal for the acquisition of Keurig Green Mountain, a leading US coffee maker and specialty packaged coffee company. This move will allow JDE to significantly expand its presence in the North American market and strengthen its positions in the EU.

JDE is currently controlled by JAB Holding Company, a privately held investment firm based in Luxembourg that manages the Reimann family’s $16 billion. It has ambitious plans to make JDE the world’s largest coffee company.

Chairman of JAB Holding Company, Bart Becht says JAB will continue to look at acquisition opportunities in the global coffee market. In addition to this, the company puts hopes on further organic growth.

“Coffee is our bread and butter,” Becht says. “Further consolidation in the coffee industry offers possibilities for us, so we will continue to look at opportunities down the road.”

With a market share of 16.3 per cent, the newly formed JDE is now the world’s second largest player in the $81 billion global coffee market. With the addition of Keurig’s brands and products to its portfolio, the company is set to increase its share to 20 per cent.

That falls just shy of Nestlé’s market share, which currently sits at around 23 per cent, according to predictions by analysts at the Russian Association of Tea and Coffee Producers. In this tight race, the company could lose its leadership in the global coffee market by as soon as the end of the current year, as the pressure from competitors keeps growing.

Business analyst Euromonitor forecasts that the acquisition of Keurig will allow JAB to increase its share in the pre-packed pods and capsules market to 41 per cent, and even more if it is successful in implementation its plans to further expand its range in the pod and capsules category.

This move will be helped by the use of Keurig’s strong partnerships with companies such as  Starbucks and Dunkin’ Brands, which make these brands available with its coffee machines.

Part of JAB’s plans is the expansion of Keurig machines into Europe. It is planned that they will be priced at $79.99, which is significantly cheaper compared to those of Nestlé, which are around $149. According to Euromonitor, Keurig holds around 61 per cent of the North American single-serve coffee market, which is significantly higher than Nestlé’s 4 per cent share. However, the latter has traditionally concentrated on the European market and has been working to increase its popularity in the US.

Currently Nestlé continues to dominate in the global instant coffee market with its Nescafé brand, which accounts for about 17 per cent of the global instant coffee market. However, the positions of its Nespresso brand in the coffee pod and capsules segment could be threatened after JDE’s acquisition of Keurig.

In addition, Nestlé may find it difficult to compete with the newly established joint venture even in the European continent, taking into account Mondelēz’s leading market position in the coffee market in 10 regions, including France, Ukraine, and Sweden. The same applies to D.E Master Blenders, which has a leading market position in six countries, including the Netherlands, Norway, and Belgium.

At the same time, Mondelēz’s position in China remains relatively strong, where it holds 50 per cent of the local market and plans to further expand its presence over the next several years. Expansion to emerging markets A spokesman for Becht says that, in addition to Western markets, particular attention will be paid to further expansion into emerging nations, such as China and Russia, as well as some countries in the Asia Pacific region, where the demand for coffee is steadily growing.

In the case of Russia, the current financial crisis in the country and the declining purchasing power of the local population have not resulted in a significant fall in the demand for coffee (both instant and ground), which at present remains relatively stable. Mondelēz’s coffee brands – among which are Jacobs, Maxwell House, and Pilão – have always been in high demand among Russian consumers.

The JDE joint venture plans to increase its share in the Russian ground coffee segment, which, according to predictions by analysts from the Russian Ministry of Industry and Trade, will continue to grow over the next several years. The preferences of local consumers have significantly changed in recent years in favour of ground coffee from the traditionally popular instant analogue.

Currently the segment of specialty coffee has the biggest potential for further growth in Russia and other Eastern European states, and is associated with the biggest profit margins, over instant coffee. In addition to Russia, JDE is placing particular hopes on China.

Being a traditionally tea-drinking country, China’s population consumes just 4.5 billion cups of coffee a year, which is significantly lower than the US and EU figures. China currently accounts for only 1 per cent of the global coffee market. However, according to predictions by Euromonitor, from 2016 to 2019 Chinese coffee consumption should rise by at least 18 per cent.

Latin America is also on the list of emerging regions that JDE will prioritise for further development. An official JDE spokesman says that Latin America will continue to experience a process of Westernisation over the next several years, something that will be reflected by a growth in demand for coffee.

According to a recent study by Euromonitor International, unlike China and Asia, the demand for coffee in the Latin American region has been traditionally high. Only in two countries does tea consumption lead the market, Chile and Bolivia. Euromonitor International predicts that the increasing middle class in the region, currently at about 87 million families, will create conditions for the growth of consumer demand for coffee.

According to US bank Wells Fargo, Brazil will continue to be the most attractive market in the Latin American region for global majors. This is due to an ever-growing middle class, which pays more attention to specialty coffee. The increasing demand for coffee in Latin America is also reflected by a strong growth of specialised coffee shops.

In general, out-of-home coffee consumption in the region has steadily grown in recent years: it currently accounts for 42 per cent of total coffee consumption. JDE has said that it will more actively expand in emerging markets, allowing it to significantly increase its global sales, which are currently estimated at $7 billion. The company expects that this figure could reach $10 billion over the next several years.

Analysts from the Russian Association of Tea and Coffee Producers say the establishment of JDE might result in further consolidation in the global coffee industry. It could actually strengthen the positions of other coffee majors, such as Nestlé, that may consider countermeasures, amid the ever strengthening positions of its main rival.

The deal will be also beneficial for Keurig, as the company has been struggling to grow its sales after having sold more than 20 million of its personalised brewing machines across the US. Nestlé Currently Nestlé has no plans to focus on other segments of the global food market, but to accelerate its expansion in the global coffee market.

Currently coffee is still considered by the Swiss company as one of the most profitable businesses. This is also due to traditionally stable growth rates of the global coffee market, which are observed even during the times of economic downturn.

Similar to JDE, Nestlé also considers emerging markets as a main growth engine in the medium to long term, as population and income per capita is growing, as well as the availability of white space.

According to Nestlé’s recent report, the company’s sales growth of powdered and liquid beverages, and in particular coffee, has slowed since 2011, when it reached 13 per cent. In the first half of 2015 sales rose 5.8 per cent on the weakest volume growth in about a decade. The results for the full 2015 have not yet been announced, however, sources close to Nestlé say they will be comparable to the results for the first half of last year.

Analysts from the Russian Association of Tea and Coffee Producers predict that the main battle between coffee majors will take place in emerging markets, which offer significant growth potential, in contrast to mature Western European markets.

Despite its traditional domination in the instant coffee segment, part of Nestlé’s plans is to increase its sales in the coffee pods segment and create conditions for the further popularisation of its Nespresso brand. This is reflected by recent statements by François-Xavier Roger, Nestlé’s Finance Director, who says the group is “really driving the premium portion coffee segment through quality, innovation, and direct consumer access”.

Nestlé might see a threat to its global domination not only from the consolidation of global majors, but also with the ever-rising competition from coffee shop operators entering the retail market. For example, Starbucks, the world’s largest coffee-shop operator, has been pushing into grocery stores with brands such as Via instant coffee, which competes with Nestlé’s Nescafe.

Although the race to the top might be a tight one, the good news is that there should be plenty of room in the market for everyone to grow. Overall, according to predictions by the International Coffee Organization, global demand for coffee will continue to grow and will likely rise by almost 25 per cent in the next five years. These companies are smart to focus on emerging markets, as the ICO pegs the biggest growth rates among emerging Asia Pacific and Latin American regions.

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