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Three Thoughts on JAB’s Keurig Green Mountain Deal

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JAB Holding’s US$13.9 billion buyout of Keurig Green Mountain represents a further statement of intent regarding the investment group’s ambitions in the coffee space. While the company has focused its efforts on the US in 2015, with the Keurig deal following the acquisitions of third-wave coffee players Stumptown Coffee Roasters and Intelligentsia Coffee, the long-term goal is clearly to build a presence everywhere consumers are paying a premium for coffee.

Rich valuation suggests lofty ambitions, yet questions remain

The US$13.9 billion price paid for Keurig Green Mountain (KGM) represented an 80% premium over the latter company’s share price, which has tumbled over the last year. Whilst KGM remains the leading player in US coffee pods by some distance, growth has slowed in recent years, while competition from private label manufacturers has grown. What’s more, KGM’s recent success is due in part to its stable of licensed pod brands such as Starbucks—with KGM’s parent company active across a range of US coffee categories, some of these partnerships could be reevaluated.

This suggests a long-term global strategy, with KGM one of the few pod manufacturers with the scale to potentially take on Nestle’s Nespresso and Dolce Gusto brands. Yet this strategy carries risks as well—KGM has little presence outside of North America. In both the US and Canada, KGM’s USP has been decent-quality filter coffee in a convenient format, at per cup prices which are competitive with away-from-home coffee players such as Starbucks or Dunkin’ Donuts. Outside North America, this strategy is less relevant. In Western Europe, the coffee pod market is both more mature and more competitive than North America’s, while encompassing markets such as Spain, France, and others where the preferred style of brewing is espresso, an area KGM has yet to compete. Outside of Western Europe and North America, meanwhile, pod coffee largely remains a super-premium format in markets like Brazil and those of Southeast Asia, with Nespresso’s luxury branding and retailing strategy likely to maintain traction among those consumers able to afford a pod machine. Meanwhile, Nestle’s lower-priced Nescafe Dolce Gusto pod system has gained share in instant coffee markets where Nescafe is a dominant brand.

Is further integration in the cards?

In the deal’s announcement, JAB Holdings officials indicated KGM would continue to operate independently from its headquarters in Waterbury, Vermont. The holding company has thus far pursued integration of its various coffee holdings on a case-by-case basis—while the formation of Jacobs Douwe Egberts (JDE) earlier this year represents a major consolidation in the retail packaged coffee space, its parent company has rejected any potential integration with JDE and its coffee-shop brands such as Peet’s, maintaining there are few synergies to be had. That said, the company did convert 80 underperforming Caribou Coffee outlets to Peet’s Coffee outlets in 2013, suggesting a willingness to leverage its portfolio as needed.

If Keurig is to become a global play, it could serve as a vehicle for JAB Holdings’ large and growing portfolio of coffee brands, particularly in markets where pod machine adoption remains low. Given the company’s recent track record, more acquisitions could be on the way, providing further raw material for this approach. In the US, there is significant potential for JAB to grow its portfolio of coffee shop brands through retail—Stumptown in particular has proven a powerful innovator in the packaged coffee space with its cold-brew line, while both Peet’s and Caribou Coffee have strong regional followings. Some of this could take the form of a further expansion of Keurig’s portfolio of pod brands. Likewise, the workplace channel, where KGM has a strong presence, could provide a further boost. That said, a portfolio of strong brands is a necessary but probably not a sufficient condition for growing sales of Keurig machines outside the US, where significant adaptations to local brewing styles will be necessary.

More acquisitions to come

If JAB Holdings’ goal is to secure positions in as many high-value, high-margin segments of the global coffee industry as possible, further acquisitions seem inevitable. Much of the early commentary in the wake of the Keurig deal has centred on a possible move for doughnut chain Dunkin’ Donuts, a deal which would radically expand the company’s global outlet footprint, while also providing yet another growing, high-value brand in US retail coffee. However, if JAB Holding’s recent acquisitions are any indication, further moves in the premium coffee shop space could be forthcoming. UK-based Costa Coffee would give the company a strong foothold internationally, with nearly 3,000 coffee shops across 30 countries. What’s more Costa Coffee’s nearly 1,800 UK outlets and more than 3,500 Costa Express vending machines represent a powerful footprint in one of Europe’s fastest-growing markets for fresh coffee, one where the new Jacobs Douwe Egberts continues to trail Nestle. Given their interest in strong local players, a move for a local player in a high-growth coffee shop market like South Korea is also a possibility.

Looking ahead, the continued emergence of JAB Holdings as a force in global coffee will likely combine a host of strong local brands with a select group of global brands, not unlike the approach championed by AB InBev or a luxury conglomerate like LVMH. As noted in this article, the continued evolution of the global category with draw inspiration from both mass CPG and the luxury industry, making JAB Holding’s moves to control both the product and the experience especially compelling.

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