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. Investing

    Where to Ride Out the Volatility

    The one word that characterizes financial markets today: volatile. Take a look at these three considerations.
  2. Stock Analysis

    Dow Chemical: An Activist Investment Analysis (DOW)

    Read about how an activist hedge fund demanded changes at Dow Chemical. Learn about deal structure of the proposed merger between Dow and DuPont.
  3. Term

    What's a Vertical Merger?

    A vertical merger occurs when two companies that produce goods or services for the same finished product merge operations.
  4. Fundamental Analysis

    Consumer Discretionary Vs. Consumer Staples in 2016

    Learn why understanding the seasonal tendencies of consumer discretionary and consumer staple sectors will help improve investors' portfolio performance.
  5. Stock Analysis

    The World's Top 10 Restaurant Companies (MCD,SBUX)

    Read about the world's top 10 restaurant companies, complete with a brief summary of each and its corresponding ticker symbol.
  6. Stock Analysis

    3 Consumer Stocks for Income Seekers in 2016 (AAPL, CALM)

    Learn about the current environment facing consumer stocks and where to search for yield and capital gains within the consumer sector for 2016.
  7. Fundamental Analysis

    4 Reasons Small Cap Companies Are Actively Engaged in M&As

    Read about the reasons why smaller-cap companies actively take part in mergers and acquisitions (M&As). In addition to new synergies, they also access new markets.
  8. Investing

    AirBnB Home-sharing is Good for the Planet

    New Airbnb study claims home-sharing is greener travel and can contribute to COP21 commitments for reduced GHG emissions in the United Stated and Europe.
  9. Stock Analysis

    Has Chipotle Hit Bottom? (CMG)

    Chipotle has suffered from a public relations nightmare. Can its stock recover?
  10. Entrepreneurship

    5 Boston Startups That Emerged This Century

    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.
  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 >>
Hot Definitions
  1. Presidential Election Cycle (Theory)

    A theory developed by Yale Hirsch that states that U.S. stock markets are weakest in the year following the election of a ...
  2. Super Bowl Indicator

    An indicator based on the belief that a Super Bowl win for a team from the old AFL (AFC division) foretells a decline in ...
  3. Flight To Quality

    The action of investors moving their capital away from riskier investments to the safest possible investment vehicles. This ...
  4. Discouraged Worker

    A person who is eligible for employment and is able to work, but is currently unemployed and has not attempted to find employment ...
  5. Ponzimonium

    After Bernard Madoff's $65 billion Ponzi scheme was revealed, many new (smaller-scale) Ponzi schemers became exposed. Ponzimonium ...
  6. Quarterly Earnings Report

    A quarterly filing made by public companies to report their performance. Included in earnings reports are items such as net ...
Trading Center