Consolidation in the coffee industry is only just getting started

the coffee industry is becoming more consolidated
  • In 2017, Nestlé acquired a 70% stake in Blue Bottle Coffee for a reported $700 million
  • Other acquisitions in recent years have seen JDE Peet’s, Lavazza, and Coca Cola increase their presence in the market
  • Increased consolidation within the segment could leave coffee producers with fewer opportunities – but greater scale could be beneficial for sustainability programmes

IT’S NO secret that specialty coffee companies have been driving innovation in the wider industry – and that this is something larger coffee brands are looking to capitalise on.

“Most innovation is linked to high risks, and small organisations will typically drive such trajectories before being acquired by big companies with deep pockets,” says Frederik de Vries, partner at Ethos Agriculture.

His statement reflects a trend in today’s coffee market. While by no means a new phenomenon, consolidation is becoming a defining characteristic of the industry. As smaller companies try to recover following the pandemic, an energy crisis, and ongoing inflation, acquisition opportunities could become more appealing than ever before.

The International Trade Centre calculates that “the 10 biggest roasters control more than 35% of all coffee sales”. At the same time, it notes that these companies are increasingly acquiring specialty coffee brands “as part of a strategy to establish a presence in all quality segments of coffee”.

In 2015, there were a series of milestone acquisitions that have been decisive for the coffee industry. Peet’s Coffee and Tea – itself part of JAB Holding Company – acquired Intelligentsia and Stumptown Coffee Roasters; and Lavazza bought Carte Noire and Merrild, following that up in 2017 with their acquisition of Kicking Horse.

Larger multinationals realised the value of smaller specialty coffee companies and began to follow suit.

In 2017, Nestlé acquired a 70% stake in Blue Bottle Coffee for a reported $700 million, as well as securing a majority stake in Chameleon Cold Brew. Last November, Lavazza went on to acquire French coffee company MaxiCoffee.

“They are basically purchasing innovation and research, but as already proven concepts in the market,” says Frederick. “As such, they’re outsourcing the risk of R&D and buying effective models when established.”

This also shows that when one large corporate in a market begins to diversify its portfolio and increase market share, it can serve as an impetus for others to follow suit. And we’re seeing evidence of this across the industry – in a number of areas.

what will increased consolidation in the coffee industry mean?

Coffee traders are following a similar pattern

Alongside roasters, large coffee traders have also started consolidating their supply chains by acquiring smaller organisations.

Over the last two years, Sucafina Group has acquired majority stakes in Complete Coffee Limited and TB Brown. In February of this year, its North American subsidiary secured a 100% stake in the equity shares of green coffee importer Sustainable Harvest.

Olam Food Ingredients is also accelerating its growth strategy in the coffee sector. In 2022, they bought Canada’s largest coffee roaster, Coffee Club, at an enterprise value of CA $150 million.

With the global supply of coffee under continued strain, there is particular pressure on trading companies to continue sourcing from different origins at stable prices.

“There is a strong competition in coffee origins – so the better you are represented in these regions and countries, the better,” says Frederik.

He explains that commodity traders try to differentiate themselves from other competitors by acquiring small, innovative companies that allow them to essentially buy brand value and market share.

Following a similar pattern to the acquisitions in the roasting and retailing segment, large trading companies are leveraging the market position of smaller companies and taking full advantage of the new territory specialty coffee traders have claimed.

“In order to cater to the roaster and retailer needs beyond commercial grades, companies like Olam and Sucafina buy specialty traders or importers who have the relationships in place they need,” says Frederik.

As the specialty coffee segment continues to increase in value at a greater rate than the wider industry, it is no wonder that large traders are pursuing the segment demonstrating the most growth potential.

consolidation in the coffee industry could be restrictive for coffee producers

What does market consolidation mean for long-term sustainability?

Smaller coffee trading companies are still recovering from the impact of Covid-19, and the conflict in Ukraine continues to disrupt logistical operations. The investment from larger organisations can allow them to stay afloat, and continue to innovate within the industry.

Similarly, larger companies are not immune from the global impact of the Russo-Ukrainian war. The recent pattern of acquisitions in the segment demonstrates a willingness to consolidate supply networks and procure long-term trading security.

However, in the long term, mergers and acquisitions may reduce competition and make the market more monopolistic.

New ideas often begin with small, creative enterprises. If consolidation continues, their success could well actually be a catalyst for a longer-term downturn in creativity and innovation within the sector – as they become bait for larger companies wishing to capitalise on their progress.

There are other issues, too. In some cases, larger buyers can put existing agreements regarding reinvestment, sustainability, or payment terms on hold or change them entirely. This could in turn become more restrictive for producers.

“Basically, the producers have increasingly fewer buyers to sell their coffee to, which reduces negotiation space considerably,” says Frederik. “A few big players determine the market conditions and requirements, protecting their own benefits first and foremost.”

On the other hand, large multinationals have the resources that smaller trading companies need to invest in R&D and upscale sustainability practices.

“If these big players are front runners and willing to do good, progress can be reached at scale,” says Frederik. “With the sustainability landscape cracking down with regulations, their size means they cannot get away with ignoring sustainability requirements and expectations.”

It remains to be seen whether the scale of multinational operations means that the efforts of smaller specialty coffee companies will be stifled in the future if the market becomes more monopolistic, or if it is a pathway to continued innovation within the industry.