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.
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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.
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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.
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.
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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.