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Coffee consolidation percolates as hipsters drink up

Coffee consolidation percolates as hipsters drink up
From Reuters - September 15, 2017

LONDON/LOS ANGELES (Reuters) - Nestles (NESN.S) high-priced purchase of a majority stake in California-based coffee bar chain Blue Bottle this week, highlights how big companies are seeking exposure to fast-growing premium brands driven by millenials.

Industry experts are predicting more deals will follow in the highly fragmented coffee market, which provides richer profit margins than mainstream packaged food and drink.

Since 2015 there have been nine coffee deals by JAB Holding Co, owned by Europes billionaire Reimann family. With brands like Douwe Egberts and Tassimo sitting alongside Blue Bottle rival Intelligentsia, JAB now owns the second-biggest packaged coffee business behind Nestle, owner of Nescafe and Nespresso.

There are certainly going to be further purchases at all levels of the price tier, said Matthew Barry, beverage analyst at Euromonitor International, adding that any company that is not doing acquisitions risks falling behind.

Earlier this month, Italys Massimo Zanetti (MZB.MI) bought a majority stake in Indonesian roaster Caswells and in August, Italys Lavazza bought a stake in Frances Espresso Service Proximite, its third acquisition in less than two years.

In May, Lavazzas chief executive told Reuters the company could put together more than 1.5 billion euros ($1.8 billion) for acquisitions.

THIRD WAVE

Switzerlands Nestle announced its deal with Blue Bottle late on Thursday. Its few dozen coffee bars are part of the so-called third wave coffee movement in the United States, which emphasizes quality beans and expertly-made drinks.

Analysts see the deal as evidence that an energized Nestle, under its new chief executive, is taking steps to reconnect with consumers, particularly young ones.

It emphasizes the wish to actively work on the portfolio and build on attractive growth areas, said Patrik Schwendimann, analyst at Zuercher Kantonalbank.

The deal gives Nestle entrance to high-end bars that are part refreshment and part theater, with space-age siphon or vacuum brewers. While niche, these outlets are seen as testing labs for new trends that may eventually go mainstream, such as cold brew, single-origin beans and nitro coffee.

High street chains such as Starbucks and Costa (WTB.L) are already moving in that direction and a front-row seat could help Nestle innovate more quickly.

BIG MARK-UP

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