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Coffee sector faces consolidation wave, industry bosses say

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The coffee industry, which last year witnessed the merger of two of its three biggest players, will see more consolidation, in the face of tougher competition and tighter margins, the heads of two of Europe's biggest names said.

Andrea Illy, the chairman and chief executive of Italy's Illycaffe, said that the group was "expecting more deals" in the coffee sector, which has already witnessed a series of recent acquisitions.

These have included the creation of Jacobs Douwe Egberts last year, a group with some $7bn in annual sales, by the combination of DE Master Blenders and the coffee assets of Mondelez.

Besides potential tie-ups Illycaffe was aware, there "maybe others cooking we do not know of", Mr Illy told Agrimoney.com.

"We expect over the next two to three years to see more, although smaller than that which created Jacobs Douwe Egberts."

IllyCaffe in August raised E70m from bond markets to fund its expansion in the premium hospitality segment, after earlier in the year mulling a stockmarket listing.

'Getting a bunch of brands'

The comments follow a similar forecast by Giuseppe Lavazza, vice-president of Lavazza, who told the Global Coffee Forum that "we are going to see more consolidation of the coffee market", foreseeing a "great transformation" in the industry over the next 20 years.

However, with incumbents boasting high shares already of domestic markets, deals were likely to be done cross border, which would allow growth opportunities to groups in areas where growth has slowed.

In Europe, for instance, while the likes of Spain and the UK were seeing demand growth, the important French, German and Italian markets were succumbing to pressure from the "problem" of economic weakness.

While acknowledging that coffee consumption cultures between nations can be "very different", a fact which can hamper attempts to take labels abroad, foreign acquisitions overcame that hurdle, Mr Lavazza told Agrimoney.com.

"It's about getting a bunch of brands," he said, citing the takeover of US-based Peet's Coffee and Tea two years ago by German-based JAB, which bought the group, and US peer Caribou coffee, in 2012, for $1bn and $340m respectively.

Lavazza itself in July unveiled the E800m acquisition of the Carte Noire brand from Douwe Egberts.

Coffee after beer

Mr Illy said that consolidation was taking place against a backdrop of "more aggressiveness" within the industry.

"Margins are getting thinner," he said, a dynamic which meant groups achieving a "critical mass" to ensure the effective distribution of their brands.

However, the industry restructuring was also seeing the creation of small coffee houses, in a trend he compared with that already seen in the brewing sector, which had witnessed the emergence of a series of micro-breweries, even as industry giants merged.

"It is very similar to what was experienced in the brewing sector years ago."

Smallholder growers

Mr Illy, who is also chairman of the promotion and market development committee for the International Coffee Organization, said that both industry trends – the formation of larger groups and emergence of small roasters – were helpful for supporting the wellbeing of smallholder producers, which is one of the ICO's main concerns.

Biggers processors were in a better position to develop and fund programmes to promote the welfare of the growers, while smaller operators were finding new niches to expand consumption and promote coffee demand.

By Mike Verdin, in Milan

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