Rabo Securities1
Sintercafé 2017
Jim Watson – Senior Beverages Analyst
Coffee Consolidation Accelerates
2 Rabo Securities
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EUR
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• Pork
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Beverages
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Themes from the ABI model that will impact coffee
A path of aggressive M&A can take a regional company to global sector leadership very quickly
This kind of aggressive M&A is contagious
Increased financial pressure on suppliers will drive a separate wave of consolidation upstream
Best practices of the ABI/3G model spread rapidly
Local platforms become a base for distribution of select regional/global premium brands.
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Coffee consolidation to mimic beer consolidation?
0%2%4%6%8%10%12%14%
2007 Global Beer Volume Share
§ All top-15 beer brand owners (outside of China) made major acquisitions (Blue) or were acquired (Red) in the last 10 years
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What consolidation looks like in financial terms
Source: Company Filings
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
45,000
50,000
Revenue Gross Profit EBITDA
The growth of AB InBev (USD m)
2007 2016
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Numerous coffee players between 1-3% share
Source: Euromonitor
0%
5%
10%
15%
20%
25%
Hot Coffee World Value Share
§ A “buy or be bought” environment is coming to coffee – and those with 1-3% retail share won’t be able to stay on the sidelines
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Coffee markets are still very regional
JM Smucker,
12.6
Starbucks, 12.4
Kraft Heinz, 12.3
Keurig , 11.6
Nestlé, 4.2Tata , 2.8
Dunkin' Brands,
2.2
Peet's, 1.3
Massimo Zanetti,
0.9
Other, 39.7
N. America hot coffee $ share 2016
Nestlé,24.3
JDE,20.9
Lavazza,8.2
Tchibo,3.7Alois
Dallmayr,1.9Melitta,
1.8
MassimoZanetti,1.4
Paulig,1.1
Other,36.7
W.Europehotcoffee$share2016
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2016 sales breakdown by coffee segment
Instant vs fresh vs pods: Who drinks what?
Source: Euromonitor
6% 4% 5% 7%3% 3%
9% 9%
18%
1%
17%
3%8%
3%
37% 34%
39%
25%
11% 35%
57%
43%
47%
37%
36%
69% 67%
55%
32%
51%
7%
20%
World Asia Pacific Australasia Eastern Europe Latin America Middle East and Africa
North America Western Europe
Fresh Coffee Beans Coffee Pods Ground Coffee Instant Coffee
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What consolidation looks like across the industry
Source: Euromonitor
0%
20%
40%
60%
80%
100%
Asia Pacific Australasia Eastern Europe Latin America Middle East and Africa
North America Western Europe
% r
etai
l sal
es g
ener
ated
by
top
com
pani
es
At-home coffee market share consolidation
Top 3 Top 10
0%
20%
40%
60%
80%
100%
Bottled Water Beer Spirits Wine Carbonated Soft Drinks
Juice RTD Coffee Coffee
% r
etai
l vol
ume
gene
rate
d by
to
p co
mpa
nies
Beverage market share consolidation by segment
Top 3 Top 10
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Roasters will be under pressure to increase efficiency and scale
As third wave roasters take ownership of premium coffee, mainstream roasting becomes increasingly commoditized
Premium brands with the potential for regional/global expansion will become increasingly valued
“Kicking Horse Coffee represents one of the ‘local jewels’ the Lavazza Group continues to seek as part of its globalization and premium positioning strategy,” Antonio Baravalle, CEO of the Lavazza Group
We see pressure on trading houses to expand outward
M&A is clearer path (vs organic growth)
Only limited options to get closer to production
What 2017 deals show us across the supply chainSucafina takes minority stake in Brazil farm JV
Farmer Brothers grows with West Coast Coffee acquisition
Lavazza acquires 80% stake in Kicking Horse Coffee
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Consumers will accept large scale third-party roasting
For consumers - the brand story matters more than production ownership
For brand owners - the flexibility, scale, QC of third-parties are the benefit
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What does an asset light model mean for coffee?
“Over the next six years, PepsiCo Europe will increase the size of its contract manufacturing business six-
fold without increasing our number of suppliers and without a significant increase in internal management
resources…The company may want to test a product in a market seen as high risk … initially using a resource-
light contract manufacturer model, before possibly brining production in-house following market tests”
§ Going asset-light is a core strategy across beverages
§ Not just production, even innovation has been outsourced
§ Brand-owner expertise is in growing and leveraging brand equity
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Global brands: Blue Bottle already has a bit of international presence with a few shops in Japan – but, like Kicking Horse, see themselves as a global brand eventually.
Build out a portfolio: Blue Bottle slots in very nicely with Nestle as a true ultra-premium brand to sit at the top of the portfolio.
RTD coffee is a young category: is so small relatively, that paying a big premium now will likely seem very reasonable if the category takes off. Buying a top player early in the game gives a lot of upside.
An e-commerce play?: Blue Bottle had previously bought Tonx(subscription coffee start-up) and Perfect Coffee (start-up focused on grinding and preserving coffee). Every beverage company (coffee through spirits) is trying to figure how to get an edge in online shipping. Or more accurately – they are all investing money to prevent missing the boat and getting left behind.
We didn’t forget about Nestle – Blue Bottle
The drivers behind the deal