On the heels of the monster merger of Mondelez and DE Master Blender’s coffee businesses into Jacobs Douwe Egberts (JDE), European competition laws have forced the new company to sell off its L’Or and Grand’Mère brands. After months of interest from private equity firms, as well as Israel based coffee company Strauss Group, Italian manufacturer Lavazza is rumoured to be the company most likely to acquire both brands. This purchase would quickly make L’Or a vital part of Lavazaa’s continued growth into coffee markets outside of Italy – and give the company a true player in the fast growing fresh ground coffee pod category.
Nestlé Faces New Global Competition
The new JDE group is well positioned to challenge Nestlé on a global level. Based on Euromonitor’s forthcoming 2014 coffee data, the combined retail sales of DE Master Blenders and Mondelez’s coffee brands (excluding L’Or and Grand’Mère) would eclipse US$13 billion, closing in on Nestlé’s US$18.8 billion figure. JDE also immediately becomes a major player in the key markets of China (thanks to Mondelez’s strengths there) and Brazil (due to DE Master Blender’s strong leadership).
Nestlé, JDE, Lavazza Retail Sales 2014, Pre and Post Merger
Source: Euromonitor International
JDE essentially out of “hard” pod market
While the merger immediately makes JDE into a major player in key emerging country growth markets, the loss of L’Or is significant. The merger combines Mondelez’s Tassimo system with DE Master Blenders Senseo system –single serve coffee brewers that use soft pods as opposed to the hard pods popularised by Keurig Green Mountain’s Keurig/K-Cup machine and Nestlé’s Nespresso coffee brewers. Sales of Senseo and Tassimo pods have done fairly well, with combined sales growing from US$1.2 billion in 2013 to US$1.4 billion in 2014, but these pale in comparison to the growing popularity of the hard pods system. Nestlé’s fresh ground coffee pods sales (for both its Nespresso and Nestlé Dulce Gusto machines) exceeded US$3.6 billion in 2014 and Keurig (through its own K-Cups and several licensed brands) grew to US$3.9 billion. The L’Or brand, which works with Nestlé’s Nespresso coffee machines, accounted for US$423 million in 2014 – a 27.5% increase from 2013. Sales of L’Or should continue to do well in the European market as Nestlé’s repeated attempts to prevent competitors from creating pods for its machines have failed in many patent courts. With the loss of L’Or, JDE suddenly finds itself without a hard coffee pod brand in the increasingly popular fresh ground coffee pod category. Conversely, the acquisition of L’Or by Lavazza suddenly gives the Italian company a known competitor to Nestlé’s Nespresso system – something they can leverage to expand its sales beyond its core markets of Italy and Germany. Already positioned as a high quality espresso brand, Lavazza should be able to expand sales of L’Or behind a pricing and product model that focuses both on pods for the Nespresso system as well as pods for its own Lavazza Blue espresso machines.
Strategies beyond legislation
On its surface, the sale of the L’Or and Grand’Mère brands seem to be a direct effect of Europe’s anti-trust/anti-monopoly laws – a necessary loss in order to push through the approval of the new company. However, while losing a growing brand in Western Europe’s mature coffee market may seem like a blow to future sales, JDE may simply have its eyes on the larger prize. Nestlé and Keurig are firmly entrenched in the hard pod market. Keurig has achieved success via a strategy of licensing with any and all partners in the US, while Nestlé has relied heavily on its patents and exclusive selling model to attract affluent consumers. Rather than directly compete with those companies, the move out of the hard coffee pod model could demonstrate both JDE’s commitment to its soft pods as well as a focus on emerging markets where the Nespresso and Keurig systems often price out many consumers. In the meantime, Lavazza becomes a stronger competitor for Nespresso, creating yet another battlefront for Nestlé. While JDE brings the fight in Asia Pacific and Latin America, this sale to Lavazza creates another formidable opponent for Nestlé in the high value region of Western Europe.