Mondelez and DE Master Blenders 1753 have jointly announced the decision to combine their respective coffee businesses to create the world’s leading pure-play coffee company, with annual revenues of over US$7 billion. The new company will be called Jacobs Douwe Egberts (JDE) and will be based in the Netherlands. Euromonitor International believes that this will be one of the most significant deals in the global coffee market in years and is likely to reshape the competitive landscape.
According to Euromonitor, if the deal is approved JDE will assume the number one place in the world’s coffee market by retail volume with a 15.3% share, overtaking market leader Nestlé (11.8%). However, in value terms JDE will be placed second with a 16% share, overshadowed by Nestlé (22.7%). Nestlé’s high value positioning is underpinned by its strong presence in coffee pods, and its wide coverage in instant coffee, particularly in emerging markets.
The deal is a strategic fit and highly complementary for both Mondelez and DE Master Blenders, particularly in terms of coffee brands and geographic profile. JDE would have a much wider brand portfolio than the two companies have at present containing Jacobs, Carte Noire, Tassimo, Kenco, Douwe Egberts, L’OR, Pilao and Senseo, and these brands will potentially have immediate access to an established network in key markets. For example, Mondelez is absent from Brazil’s coffee market and can leverage DE Master Blender’s strong leadership in Brazil to make a relatively smooth entry. DE Master Blenders can also use Mondelez’s strength in China to expand.
From a competitor’s point of view, the deal is a threat to Nestlé as it must face not only JDE (global) but also already Keurig (in the US). The Coca-Cola Company’s acquisition of a 10% stake in Keurig has made the situation even more challenging as Keurig strengthened its financial position. It may have to expand aggressively into the US coffee pod category and strengthen its position in major emerging markets.
Be Part of the Brazil Story
JDE’s future movement and the opportunities in Brazil form a key part of the deal. Brazil has a concentrated coffee market, with the top three players making up over half of retail value sales. DE Master Blender’s comfortable lead will be a natural barrier to impede Strauss, Melitta and Lavazza. DE Master Blender’s strength in Brazil lies in fresh ground coffee, where it has been leader for many years. Standard fresh ground coffee dominates coffee sales in Brazil and will continue to do so over the forecast period. However, the coffee pods category is advancing rapidly and has attracted growing interest from both consumers and industry players. Nestlé dominates coffee pods and Melitta has introduced pods; however, sales and distribution remain limited.
DE Master Blenders ranks second in coffee pods with a 2.9% value share in 2013, up from 0.6% in 2012. In view of the category’s anticipated rapid growth, DE Master Blenders could build a solid platform for L'OR and Senseo to grab share from Nespresso, as consumers are already aware of its corporate offering and familiar with its standing in fresh ground coffee. Mondelez’s Tassimo may well have a chance to leverage DE Master Blender’s network in Brazil and establish a foothold accordingly.
Short Term Disruption
The risks for both companies are that Mondelez and DE Master Blenders are in a transitional period and some employees and their collaborators are still in the mind-set of Kraft and Sara Lee’s old corporate environment. The formation of JDE will be a second organisational change within three years. Understandably, there will be further short term disruption caused by this latest restructuring.
JDE needs to be highly sensitive as to which brands will be given priority to grow and develop in certain geographies. It could be a highly sensitive issue when allocating resources to different brands in such a big coffee family. However, despite these potential risks and uncertainties, JDE will be a strong force and very real threat to Nestlé.