The decision to buy Keurig Green Mountain by the German owners of Peet’s Tea & Coffee, Caribou Coffee Co., Stumptown Coffee Roasters, Intelligentsia Coffee, Einstein Bros. Bagels, Mighty Leaf Tea and Tea Forte signals a major escalation of European interest in the U.S. coffee and tea market.
This is the third major U.S. acquisition in a month by JAB Holding (JAB) a Luxembourg-based investment company that paid $13.9 billion — a 78% premium — to acquire Keurig Green Mountain, a big bet that the transition to single-serve brewing still has steam. Not many companies spend $30 billion acquiring a string of coffee and tea companies with the stealth and speed of privately held JAB which is 95% controlled by four adopted siblings of the Reimann family. Senior member Wolfgang Reimann ranks 25th on the list of German billionaires, according to Forbes.
JAB Chairman Bart Becht said the acquisition is a “major step forward in the creation of our global coffee platform. It is a fantastic company that uniquely brings together premium coffee brands and new beverage dispensing technologies like the famous Keurig single serve machine. Keurig Green Mountain will operate as an independent entity to ensure it will further build on its coffee & technology strength and continue to serve all its partners to the best of its abilities.”
Single-serve usage continues to grow. Consumers pushed the “ready to brew” button 2 billion times last month. The National Coffee Association’s monthly consumption report showed a 15.6% increase in single-cup consumption (compared to November 2014). Contrast that with total coffee industry growth of 2.4%. Household penetration is nearing a third of American homes and exceeds 40% in Canada. This is not all good news for Keurig where brewer sales have declined for the past year and sales of its own brand of capsules have declined the past six months. Less expensive brewers from BUNN and other established manufacturers as well as private-label capsules continue at a brisk pace and sophisticated second generation tea brewers including the T.O from Lipton and Special.T brewer made by Nespresso are driving premium tea sales.
The JAB acquisition was strategic as the price was calculated to recoup for Coca-Cola $1 billion in lost value (with no impairment charges). Coke owns 17% of the company and retains a strong interest in the development of Keurig’s KOLD brewer. KOLD has a long way to go. It is costly, available only online and in limited regions where it is sold at fewer than 300 retail outlets. Lackluster sales of the Keurig 2.0 and KOLD are responsible for depressing Keurig’s stock price by a third making acquisition practical but hardly a bargain. It will take more than 10 years for JAB to recover its investment at Keurig’s current rate of return.
“The Coca-Cola Company is fully supportive of this transaction,” said Muhtar Kent, chairman and CEO of The Coca-Cola Company. “We have enjoyed a strong partnership with Keurig Green Mountain, and will continue our collaboration with JAB in order to capitalize on the growth opportunities in the single-serve, pod-based segment of the cold beverage industry. We look forward to working with JAB, an experienced operator with a successful track record of investing in and growing consumer companies.”
The big buy signals a strong interest in North America where JAB has been on a shopping spree, last month purchasing both Stumptown Coffee Roasters and Intelligentsia, two premium roasters with a national reputation for excellence. Each will operate under the management of Peet’s Coffee & Tea but retain their identity. All seven of JAB’s coffee franchises (including Jacobs Douwe Egberts in Europe, Espresso House in Scandinavia and Baresso Coffee in Denmark) share a premium tier. Combined in a joint venture with the brands owned by Mondelēz International, JAB is now the largest pure-play fast-moving consumer goods (FMCG) coffee company in the world, second only to Nestle/Nespresso in global market share.
Irene Rosenfeld, Chairman and CEO of Mondelēz, called Keurig “a strategic asset that provides immediate access to the U.S., the largest coffee market in the world, and to on-demand, the fastest growing segment of the market. By leveraging our existing investment in JDE (Jacobs Douwe Egberts) and not contributing incremental capital, we have the opportunity to diversify our participation in the global coffee category, while continuing to invest in our core snacking business to deliver significant value for our shareholders over the long term.”
The 2014 Jacobs Douwe Eberts joint venture with Mondelez was valued at $7 billion. The agreement brought together $3.9 billion in former Kraft properties Gevalia, Jacobs, Carte Noire, Kenco, Tassimo, Millicano and Maxwell House (outside the U.S.). JAB contributed $3.4 billion in annual sales from its DE Master Blenders acquisition adding Douwe Egberts, L’OR, Pilao and Senseo. JAB paid $10.5 billion for DE Master Blenders then spent $340 million for Caribou and $974 million for Peet’s in 2012. Einstein Noah sold for $374 million. The price paid for Mighty Leaf last year and Stumptown and Intelligentsia last month was not disclosed.
How does this impact the world of tea retail?
Expect a renewed push for single-serve. JAB now owns both the largest capsule format brewer manufacturer in North America (with 575 licensed offerings) and Senseo the world’s largest tea and coffee filter pod brand. There have been reports for the past year of bringing Senseo back into the U.S. market propelled in part by the eco-friendly benefits of easily disposed and composted coffee and tea filter pos.
Another advantage is scale. Mighty Leaf in the year since it was acquired has expanded distribution and benefitted from substantial investment. A favorite in foodservice, the brand has a reputation that enables it to face-off with Teavana (offered in coffee shops owned by Starbucks) and in grocery where Peet’s has surprisingly strong distribution. Tazo is the $1.4 billion brand Starbucks re-positioned to grocery following the 2012 purchase of Teavana.
Teavana reported an amazing 15% gain last year that single-handedly lifted same store sales by a percentage point at Starbucks coffee shops. Tea is proving a much stronger contributor to profits than premium juices and Starbucks is only beginning its expected overseas push to promote Teavana loose leaf and ready-to-drink in tea drinking countries.
JAB is wisely retaining the identity of its coffee ventures. Yet to be decided is the fate of tea brands including Kilogram which is sold at Intelligentsia. Tea Forté remains at the very top of the pyramid as a gifting option. In Europe Pickwick Tea is a major brand from the Netherlands popular in foodservice and now available in the U.S. from a limited number of suppliers in 20ct boxes that sell for $5.99.
The Financial Times reports that “JAB appears to be following a model pioneered by 3G Capital, a private equity firm founded by three Brazilian billionaires who were involved in all three of those deals in various capacities. They are known for buying high-profile consumer brands, stripping out costs and acquiring competitors to build market share and increase profits.”
Source: JAB Holdings, Mondelēz International, The Financial Times, Seeking Alpha, Forbes