Has The Coffee Roasting Business In The U.S. Taken Its Last J.A.B.?
Unless you have been hiding in an unmarked oil well over the past few months, you already must have realized there has been a significant change in the coffee roasting industry. The $40 billion U.S. market has another bully on the block and watch out Nestle, these gentleman are playing for all the marbles.#entrepreneurship
Coffee beans, which is the second largest traded commodity in the world is apparently a target of one of the richest families in Europe. The Reimann family has not so quietly, been actively targeting U.S roasters and using a “price is not an issue" formula!
The cash is there, and they are clearly not afraid to be buying based on future earnings projections. This isn't a strange occurrence for J.A.B., they purchased D.E. Master Blenders, Douwe Egbert for a cool $10 billion. Many analysts refer to this transaction as, "a pure play coffee company".
Their coffee portfolio now includes the following names, and they are all major players in their respective markets. Douwe Egbert, Keurig/Green Mountain, Peet's Coffee & Tea, Caribou Coffee, Intelligentsia, Espresso House, Stumptown Coffee, and Baresso Coffee. That is a pretty impressive list!
The questions based on the activities of J.A.B. Holdings, has now become when and who, not the why and where. The landscape is changing rapidly in the business and, in my mind it is long overdue.
So what is the plan? I can tell you this, that based on the deals that have been recently closed, money is not an issue. Let’s take a quick look at what J.A.B. paid for its growing stake in the global coffee market.
They acquired a controlling stake in Peet’s Coffee & Tea, and in doing so paid 21 times EBITDA to close the deal. Then they turnaround and make a play for Keurig/Green Mountain Coffee Roasters. The final numbers are staggering. The total price was $13.9 billion which was a whopping 78% premium, based on the trading of the stock upon acquisition. That makes this the richest, highest premium ever paid for deal of a beverage company that had a valuation of over $5 billion. To put that in perspective, until this transaction the biggest premium ever paid was just under 60% for Pepsi/Pepsi Bottling.
Obviously J.A.B. is focused on becoming the leader in the global coffee business. One analyst, Pablo Zuanic from Susquehanna International was quoted as saying, “their goal is to be the Budweiser of coffee.” He might just be on to something.
This firmly puts the Reimann family solidly into the No.2 position worldwide. Nestle S.A. is still Number 1 holding approximately 22.7% of the total market share. When the smoke clears and everything settles, most analysts expect J.A.B. to be right on their heels owning approximately 17-19%.
This chart gives you an indication of the market share.
J.A.B. has other holdings such as, Bally Shoes, Jimmy Choo, Coty Fragrances and the parent company of Einstein Brothers Bagels, Einstein Noah.#coffeetips
Many analysts throughout the industry believe the next big play will be Dunkin Brands. Don’t be surprised if talks haven’t already started between the 2 entities.
Although you aren’t going to get a lot of talking out of the Reimann family. As a matter of fact, it is widely known that the family members, once they reach 18 have to sign an agreement to “stay out of the public’s eye”. It is all stealth and low profile at J.A.B. which in turn, hides their super aggressive deal making strategy. “It’s clear that pricing models don’t matter when it comes to coffee acquisitions for J.A.B.” I would certainly have to agree with that assessment.
I have valued 100’s of companies, and these premiums are astronomical. This isn’t your standard 4-8 times EBITDA, or a multiple of cash flow or Sales or Gross Margin formula. It is basically pay the price for global domination. Consolidation is the only goal.
Which brings me to the next matter in this article. This market, estimated at $40 Billion is still highly fragmented. What happens to the mid market guys, or the even smaller regional guys? Well I have been preaching this on deaf ears for well over a decade, but here it goes again.
There are several companies out there in the U.S. and Europe that fall in the $150-$350 million range. If 4 or 5 of them aren’t at least talking to each other, they are missing the opportunity of a lifetime.
Generally businesses such as J.A.B. will not want to do all the dirty work and wheeling and dealing to merge that many “smaller businesses” together. They simply sit back and let that take care of itself. What these companies need to do is get the merger’s done and then sit and wait for the phone to ring. Oh and mark my words it will ring. Further consolidation is obvious, it is just a matter of what businesses have the foresight to start the discussions and get these deals in place. After they successfully do that, and the new company is $1 billion plus, then they could potentially reap the benefits of another 21 times EBITDA deal. If they can’t see that, then they need a real push or a sit down to really look into the future and understand that you should be positioned for an acquisition. The time is now. I could sit here and name 15-20 of these companies, but they know who they are.#kcups
Now on an even smaller level. This is where it gets interesting. There are 1,000’s of small roasters throughout the United States. These companies are generally $500,000 to let’s say $40-50 million. They sit in their same regional markets beating each other over the head for business. It is one of the most frustrating things about this business.#howtobuyacompany
Most of these are 2nd, 3rd generation family owned and operated businesses that steal accounts from each other on a daily basis. You know you lose an account from xyz company today and then you steal one from xyz company two days from now. That is truly how this business has worked for decades! Isn’t it time to stop? Well I certainly think it is.
Now it doesn’t take a Rhodes Scholar to figure out that type of business model isn’t really set up for long term success and prosperity. I am shocked that these companies continue to hold on to these practices that are archaic in nature, and completely against any kind of real growth strategy you could possibly have.
What’s it going to take? Well it is going to take someone to take the lead and start a non threatening dialogue with other businesses they are directly competing against regionally. The problem I have found whenever I have had this discussion, which is quite often, is egos. Family run businesses are very complicated usually and many of them haven’t changed all that much in the last say 20 or 30 years! That’s why it makes perfect sense to see massive smaller level mergers and acquisitions in the near future. We will see this in the next 3-9 months. I for one, am getting a lot more inquiries about valuations and looking at shining up the balance sheets and financials than anytime in the last 3 1/2 years.
I believe that this business will radically change in the next 5 years. It has too. If you are the owner of 1 of these businesses I am talking about, you should start thinking about this right now and start conversations with others in your region or state or whatever it is that you provide coverage and service to.
The ones that are the first in will benefit the most. I just don’t understand why it is taking so long. Maybe this will start to make owners and boards assess the long term growth plan of their company. If that growth plan doesn’t include buying other coffee companies, I would run out the front door of that business now!! The future in this business is consolidation. Growth through consolidation, hey it happens in every industry and the coffee roasting industry is long overdue for a total makeover.
Will there be room for the really little guys? Of course there will, there is always a small market to have a niche driven business, but that isn’t where the real money is. The real money is gaining growth and traction through mergers and acquisitions. I hope roasters across the country realize this. If they don’t they are very quickly going to be looking from the outside in. Not where you want to be when all the fun begins.
We will see though. I was in the business for over 20 years and had several conversations about this very topic. Most of the time it was like talking about a root canal to someone. No one would listen. Well take a look at J.A.B.'s last few acquisitions. Maybe that will change your mind. I really see this happening.
This market again is perfectly positioned for further consolidation. We will see in the coming months if this prediction will continue to happen. It has all of the classic factors and there are quiet transactions happening on a smaller level more frequently. I believe there will be significant consolidation in the near future. It has all the classic signs.
Let's face it, it is estimated that almost 90% of all coffee roasting facilities in the U.S. are operating at 60% capacity or less. That is a significant statistic. The market remains extremely fragmented. My role as a consultant, especially in the Food & Beverage sector has provided me with the opportunity to meet and mingle with many M & A players. I have found myself moving further and further into that niche because of my direct knowledge and experience in that sector. I can tell you, the distant rumblings of a massive consolidation in this business for many years, is rapidly becoming an ongoing tremor. Exciting times for someone like myself, who is actually considering re entering this market with both feet in the near future.
Who will be the mid market company that moves first? There are plenty of them out there. Time will tell. I certainly have my list of can't lose mergers. It will be very interesting times, moving forward.
The other thing about this business is, its not getting any younger. In other words there are a lot of older generation, family owned operators out there. Let's face it, there is a major problem with succession plans. Many of the family owned businesses might have children, but the problem is, a lot of them just aren't interested in the coffee roasting business. They are coming out of colleges and are more interested in the trendy careers with huge upsides like dot com businesses, technology and even start ups. I don't see a lot of stability within the market from that standpoint. So, that is another reason that consolidation continues to make sense.#mergers
Time will tell. It is a very interesting time in the coffee roasting business. J.A.B. is clearly not done. Again, if I was lucky enough to get 5, 6 or 7 mid sized roasters in a room for a few hours, hopefully I could convince them to consider merging, or acquiring other smaller entities and then systematically focus on the larger moves. This is all about timing and who has the resources and foresight to lead the charge. I have approximately 5 roasters that come to mind immediately.#coffeenews
We will see who gets it. I certainly believe that once the smaller consolidation starts to happen it will cause a domino effect. It is already happening quietly and on a smaller scale. Let's see what the next 5 or 6 months brings. It will certainly be interesting to watch. Stay tuned for further updates. Thank you for reading this post.