The coffee business continued its consolidation mode December 17 with Germany's Reimann family announcing its holding company, Joh. A. Benckiser, was paying $340 million for Caribou Coffee (Nasdaq:CBOU), only weeks after completing its $1 billion deal for Peet's Coffee. The coffee business continues to shrink and the Reimann's appear to be leading the charge. What does this mean for Starbucks (Nasdaq:SBUX) and the rest of the industry? I'll have a look.

Guide To Oil And Gas Plays: We've got your comprehensive guide to oil and gas shales in North America.

Reimann Family
Not much was known about the Reimann family until this year's aborted $10 billion takeover bid for Avon Products (NYSE:AVP). With the backing of Berkshire Hathaway (NYSE:BRK.A, BRK.B), Coty, the Reimann's 80% owned fragrance company offered to buy the troubled cosmetics company in March for $10 billion, upping the offer by $700 million in May only to be completely snubbed by the New York-based Avon. Joh. A. Benckiser's three major investments in addition to Coty: Labelux Group, which owns Jimmy Choo and Bally shoes, amongst others; 15.5% of Reckitt Benckiser (OTC:RBGPY) and its coffee investments which include Peet's, 15% of D.E Master Blenders 1753 (Senseo brand) and the tentative addition of Caribou Coffee. The four Reimann family members holding Benckiser stock are said to have a combined net worth of $20 billion. While law firms in the United States might be protesting the $16 share price agreed to by Caribou's management, the employee's should benefit from this deep pocketed ownership.

SEE: Analyzing An Acquisition Announcement

New Kid on the Block
Up until July the Reimann family had no visible connection to coffee. Now it looks to enter 2013 with industry investments totaling $2.3 billion if you include the Caribou acquisition with revenues of $1.2 billion and an operating income of $103.8 million. It's clearly not as big as Avon, but it's cobbled together three businesses that when combined have operating margins at least 200 basis points (BPS) higher. With the addition of its coffee business, Joh. A. Benckiser has become a holding company with incredible brand power. While it's not the family's style, it would attract an awful lot of attention were the Reimann's to take Benckiser public. Whatever the family decides to do with its holdings, coffee has clearly become an important part of its future. While it's not enough to scare Starbucks, it might make them sit up and take notice.

Grocery Business
Where Starbucks will see some competition is in the grocery store aisle where all three of the Benckiser coffee investments (again assuming it completes the Caribou deal) generate significant revenue and profitability. In fiscal 2011, Caribou generated $72 million in commercial sales to grocery stores, mass merchandisers and food service providers. Its operating margin for commercial sales was 19.4%, about two-and-a-half times higher than its retail stores. Peet's generates about 42% of its annual revenue from its specialty business, which includes grocery, food service and home delivery. Its specialty revenue comes with operating margins of 22%, a little more than double the retail stores. Finally, with the exception of its cafes in the Netherlands, D.E Master Blenders 1753 generates almost all of its revenue in two ways: first, by selling to all kinds of small, medium and large businesses that want to provide customers with a fine coffee experience; secondly by selling its coffee to grocery stores and other food retailers in Europe. In 2012, that side of its business accounted for 72% of its $3.5 billion in revenue. Interestingly, the other two pieces of Joh. A. Benckiser's coffee puzzle operates primarily in the U.S. While I'm not suggesting it's going to happen, the Reimann's transfer of its two North American coffee interests into D.E Master Blenders 1753 would give it somewhere around 30% of the world's third biggest coffee roaster. CEO Michiel Herkemij's goal is to overtake Kraft (Nasdaq:KRFT), the number two player behind Nestle.

SEE: The Real Cost of Drinking Coffee

The Bottom Line
The Dutch business has big, hairy, audacious goals. Many analysts think it's virtually impossible for D.E Master Blenders 1753 to overtake the maker of Maxwell House given the 7.1% market share differential between the two companies. I think the Reimann's involvement might just speed up the process. Heck, it might even look good inside Reckitt Benckiser, whose food segment (French's Mustard, Frank's RedHot Sauce) only accounts for 4% of its overall net revenue. Therefore, I'd look for more coffee acquisitions by the Reimann's in the future. Whatever happens, Kraft definitely should be worried - Starbucks, not so much.

At the time of writing, Will Ashworth did not own any shares in any company mentioned in this article.

Related Articles
  1. Stock Analysis

    Net Neutrality: Pros and Cons

    The fight over net neutrality has become an amazing spectacle. But at its core, it's yet another skirmish in cable television's war to remain relevant.
  2. Investing

    Top Cities Where Airbnb Is Legal Or Illegal

    Thinking of subletting your apartment on Airbnb? Make sure that you meet your city's regulations first.
  3. Markets

    Why Gluten Free Is Now Big Business

    Is it essential to preserving your health, or just another diet fad? Either way, gluten-free foods have become big business.
  4. Stock Analysis

    5 Reasons Thoratec Corp. Keeps Impressing Investors

    Learn about Thoratec Corporation and its position in its industry. Understand five key factors why the company has impressed investors.
  5. Entrepreneurship

    Top 5 Startups That Emerged in Boston

    Learn why Boston is a hot market for startups, and familiarize yourself with a few of the top startups that have emerged from the city.
  6. Entrepreneurship

    How to Prep Your Business for a Sale

    Once you have a clean, stand-alone business with solid finances, it's time to put a price on it. Here are the steps needed to prepare for a sale.
  7. Investing News

    How 'Honesty' Could Pay off for Jessica Alba

    Is it possible that Jessica Alba is one of the savviest businesswomen on the planet?
  8. Stock Analysis

    This Is Why Instagram Is Winning Over Flickr

    Learn about Instagram's and Flickr's business models. Understand why Instagram has been winning over Flickr and why that trend is likely to continue.
  9. Professionals

    Career Advice: Management Consulting Vs. Investment Banking

    Compare the career opportunities available in management consulting and investment banking. Learn about salaries, skills needed and work-life balance.
  10. Stock Analysis

    Lockheed Martin to Buy Sikorsky. Is It the Right Move?

    Discover more information on the Lockheed Martin acquisition of Sikorsky, and learn why this move makes good strategic business sense for Lockheed.
  1. Weighted Average Cost Of Capital ...

    A calculation of a firm's cost of capital in which each category ...
  2. Runoff Insurance

    An insurance policy provision that provides liability coverage ...
  3. Hunting Elephants

    The practice of targeting large companies or customers.
  4. Precedent Transaction Analysis

    A valuation method in which the prices paid for similar companies ...
  5. Poison Put

    A takeover defense strategy in which the target company issues ...
  6. Assented Stock

    A share of stock owned by a shareholder who has agreed to a takeover.
  1. How long does it take to execute an M&A deal?

    Even the simplest merger and acquisition (M&A) deals are challenging. It takes a lot for two previously independent enterprises ... Read Full Answer >>
  2. What are some common accretive transactions?

    The term "accretive" is most often used in reference to mergers and acquisitions (M&A). It refers to a transaction that ... Read Full Answer >>
  3. What are some ways to make a distribution channel more efficient?

    While there are many ways to make a distribution channel more efficient, the three high-level ways to increase the efficiency ... Read Full Answer >>
  4. How is a tender offer used by an individual, group or company seeking to purchase ...

    A tender offer is made directly to shareholders in a publicly traded company to gain enough shares to force a sale of the ... Read Full Answer >>
  5. How does a company record profits using the equity method?

    A company that invests in another company and has majority control of it would record profits using the equity method. This ... Read Full Answer >>
  6. How does horizontal integration allow companies to share resources?

    In a horizontal integration, a company either acquires another company or merges with that company. This allows the resulting ... Read Full Answer >>

You May Also Like

Trading Center

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!