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For comparison: Thoughts on the Specialty Coffee Industry from one of the bigger players in Germany


1: The Blue Bottle story and the impact on the Specialty Coffee industry

It was in late 2017, when Nestlé made its mark in Specialty Coffee by acquiring Blue Bottle. We have seen acquisitions before, especially by JAB (Intelligentsia, Stumptown, others), but Nestlé brought it to a new level.

Nestlé bought a majority stake for a valuation of 14 x revenue, the equivalent of around 20m USD per Blue Bottle Coffee Shop. This is the valuation of a Tech-Company. That is significant, and a bit insane. It’s too early to know whether this investment pays off for Nestlé, but the strategy behind the acquisition was different than the usual coffee market consolidation strategy of players like JAB. I read the following two effects out of the acquisitions:

a) It is a great sign for the industry. With this investment, Nestlé commits to the attractiveness of Specialty Coffee for an upcoming generation of coffee drinkers. I expect this to bring more investor money into the industry, which will ultimately open up better opportunities for Specialty Coffee Roasters.

On the one hand, established specialty roasters will have it easier finding investment for their growth. On the other hand, it will bring up a new generation of roasters which will be much more customer centric, more inclusive with their consumers and better educated in all functions from the start (green, roasting, serving, marketing, sales, business, etc.). They will be younger and thus more tech-savvy.

I believe that more investment in the industry will speed up the growth of Specialty Coffee roasters and make them financially more solid companies. I expect this to lead to better products, faster market growth, better user experiences, more transparency, more impact for farmers and also better career prospects in the industry.

I also expect this to create a new industry leader in Specialty Coffee in 10-15 years, similar to Starbucks today. I believe there will be a disruption in the industry which will be driven by a significantly better consumer experience in coffee overall, strongly facilitated through technology. I believe we will see a first Specialty Coffee company preparing for IPO in the next 5 to 7 years, which will be confident enough not to be bought by Nestlé or JAB.

b) One downside of the ongoing industry consolidation is the increasing pressure on importers, exporters and ultimately coffee farmers. If Specialty Roasters like Stumptown, or Intelligentsia become part of a powerful green coffee buyer like JAB or Nestlé, the first thing they do is negotiate payment terms with their green coffee supplier. They pushed their payment targets from 30 days up to 270+ days, meaning an extended free credit line of eight plus months. The more coffee you buy, the higher the accumulated free credit. Economically this is a smart move, but it significantly increases pressure on the credit line of suppliers, so they find ways to compensate that… and shit flows again down the value chain. There is a great re:co talk on this by Sara Morrocchi on Youtube!

I also believe that the acquisitions will slow down innovation. I believe that Intelligentsia, Stumptown and now also Blue Bottle didn’t finish their job. Half-way through forming the industry, they kind of left the game. Why is that? You can argue that with more financial capacity, the acquired companies have more power to finance coffee research, do more crazy experiments and projects with farmers at origin etc… That is a valid argument, but I think highly unlikely, at least on a larger scale (beyond CSR stuff). Nestlé and JAB acquire companies to ultimately generate higher profits. So I expect all available resources to be invested in economic growth. Further, I believe that it will be harder for them to hire the greatest talent to drive innovation in such a strongly profit and growth driven environment.