- JAB seen bringing Keurig system to Europe after purchase
- Competition to rise in one of Nestle's most profitable units
Nespresso’s failure to dominate the U.S. and a deal that brings together two of its main rivals are set to cost Nestle SA its global single-serve coffee crown.
With about 28 percent of the world’s portioned coffee market, Nestle will be overshadowed by the Reimann family’s investment company JAB Holding Co. After the latter’s $14 billion takeover of Keurig Green Mountain Inc., JAB’s share of coffee sold in prepacked pods or capsules will rise to almost 41 percent, according to Euromonitor estimates.
The emergence of rival systems and copycat capsules are denting sales growth at Nespresso, one of Nestle’s most profitable businesses. While JAB is likely to focus initially on consolidating its hold over the U.S., the planned takeover of Keurig raises the possibility that the Luxembourg-based group may eventually take fuller aim at Europe, Nespresso’s main market, according to Alain Oberhuber, an analyst at MainFirst Bank AG.
“In the mid-term there will be a price war,” said Oberhuber. “JAB is showing itself to be aggressive.” He estimates that Nespresso and Dolce Gusto, Nestle’s main single-serve businesses, have an operating margin of about 25 percent, compared with about 15 percent for Nestle as a whole.
Keurig said Monday it agreed to be purchased by a group of investors led by JAB in the industry’s biggest-ever deal. The takeover caps a shopping spree by JAB, which entered the coffee market in 2012 with Peet’s Coffee & Tea and spent more than $15 billion to snatch up D.E Master Blenders 1753 NV and later combine it with Mondelez International Inc.’ s coffee unit.
Keurig’s K-Cup system allows users to choose capsules from 75 brands, such as Folgers, Swiss Miss or Krispy Kreme, and makes up to 10-ounce cups. Nespresso machines are generally used with the namesake capsules, though copycats have gone on sale. They make coffees as small as 1 ounce.
A spokesman for Nestle declined to comment. The company’s sales growth of powdered and liquid beverages has slowed since 2011, when it reached 13 percent. In the first nine months of 2015, sales rose 5.8 percent on the weakest volume growth in about a decade. Nestle shares slipped as much as 1.1 percent to 73.70 francs.
Keurig dwarfs Nestle in North America, controlling 61 percent of the market compared with the Swiss company’s 4 percent, according to Euromonitor. Keurig’s coffee system has taken a hold over U.S. consumers who prefer paying 62 cents for its K-Cups compared with as much as $1.10 for Nespresso VertuoLine capsules. Nespresso sells its products in its own boutiques, where consumers can become club members, and which are modeled after luxury stores.
In the longer term, JAB may expand Keurig machines into Europe, according to Pablo Zuanic, an analyst at Susquehanna Financial Group. The appliances start at about $79.99, while the least expensive model on Nestle’s U.S. web-page sells for $149.
Nestle has made several attempts to boost its popularity in the U.S., where tiny espressos remain a niche market. They include the Dolce Gusto machine, which makes more American-style coffees, and VertuoLine, a revamped Nespresso machine that uses centrifugal force to make bigger cups of joe. In October, Nespresso ran ads featuring George Clooney in the U.S. for the first time. Last year, Nestle even introduced K-Cups for the Keurig system containing Coffee-Mate creamer.
“Nestle is starting to realize they need to change their mindset,” said Jonny Forsyth, a beverage industry analyst at Mintel Group. “They can’t just rely on leadership anymore, it’s now much more of a fight.”