The Year of Self-Evaluation
by Richard C. Hampson
Over the last two years, the coffee roasting industry has been undergoing a period of significant consolidation. Since this trend is continuing and appears to be accelerating, roasters, both privately-held and public, are faced with the following decisions: should they grow through acquisition, should they do nothing, or should they consider a sale of the business. Each roaster must evaluate the trends in the industry and determine the strategy that will provide the best possible return to its shareholders. For the well-positioned company, which will act as one of the surviving “platform consolidators” in the industry, consolidation provides the opportunity to grow and gain market share. For other companies, today’s market timing may provide an exceptional opportunity to increase shareholder wealth and liquidity by divesting a major asset and realizing its maximum value.
While consolidation has been taking place in the industry since the late 1980s, recently the pace of the activity has increased. Additionally, there have been a number of large, high-profile, transactions that are permanently altering the roaster industry landscape. The consolidation trend appears likely to continue for the following reasons:
1) Excess Roasting Capacity
The growth in the number of companies in the industry has occurred very quickly while coffee consumption has remained fairly stable, resulting in significant over-capacity. In the early 1980s, the industry comprised a few hundred roasters, whereas now there are over 1,000. As a result of the excess capacity and the increased competition, margins are being squeezed as the competition becomes more desperate for volume. Only those roasters with a well-planned growth strategy, a defensible value-added position, or those focused on a niche market will ultimately survive and succeed.
2) Efficiencies and Economies of Scale
Consolidation allows for operating efficiencies. Those merged or consolidated companies can now put more pound volume through the same or lower cost structure and are therefore better positioned to compete for business. Simple costs, such as energy, packaging, and film, can be materially reduced through more economic purchasing power. Additionally, green coffee purchasing (the roaster’s largest operating cost) can be done more efficiently as the consolidated company is able to make bulk purchases which allow for substantial savings over the smaller volume bag buyer. Unless a roaster has a lock on certain customers (due to loyalties or long-term contractual relationships), is in a niche business, or provides a considerably higher level of service, the key to competing for sophisticated customers remains in providing the highest quality product at the lowest possible price.
3) Synergies and Diversification of Product Line
The roaster that can provide its customers with innovative services, better/less expensive packaging, and improved delivery capabilities (all of which are typically traits of the larger, well-capitalized roasters) is in a stronger competitive position. Smaller roasters find it difficult to provide this diversity of products cost effectively and may find themselves unable to compete. Many customers wish to limit the number of vendors they use and therefore, are forced to purchase from the diversified larger roaster. Additionally, the smaller roaster typically does not have the available capital and resources to match the delivery capabilities of the larger players in the industry.
4) Strategic Acquisitions
Another reason for making acquisitions is to acquire geographically desirable sites or brands which diversify existing product lines. Some strategic acquisitions are made for the simple purpose of eliminating a competitor in the market. In recent transactions, the corporate parent which owned a roaster or coffee brand has determined that the business did not fit with the institutions’ overall strategic direction. While in some industries financial buyers will enter the consolidation activity with capital for acquisitions, the merger and acquisition activity among roasters has been dominated by strategic buyers (i.e. already existing roasters or complimentary businesses). This is due to the fact that the acquiring company is typically seeking to improve overall profitability by increasing throughput and maximizing synergies. Such economies of scale cannot be realized by a financial buyer unless it intends to create a platform company for an industry roll-up.
Some of the recent, highly-publicized transactions have been done to increase market share in a category are as follows: Proctor and Gamble further increased its gourmet market share by acquiring Brothers Gourmet, or, to expand into a new market sector; Sara Lee’s acquisition of Chock full O’ Nuts allowed Sara Lee to enter the U.S. retail market. More recently, Sara Lee has made an even stronger statement about its intention to compete in the retail coffee arena through its acquisition of several of Nestle’s U.S. brands. The coffee industry will be watching these companies closely to see how well these acquisitions are integrated by the larger corporations and how the competitive landscape is affected by these growing dominant players.
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