Industry consolidation in Oz or not?

beanflying · July 2011

Ran across this US article the market capitalization figures are staggering. http://www.livetradingnews.com/coffee-ma-targets-47259.htm

I know a few local roasters think we are likely to get some here too but what sized players and who are the likely buyers? Will we see CCA, National Foods (I sure as hell hope not) or some of the other big food company's buying into the market?

mycuppa · July 2011

All businesses in all industries should have a metric used for calculating goodwill. Sure, there are some economic fundamentals such as X times turnover or ROC, etc. but there are some very interesting factors that don't size up or dimension competition correctly. 450 brands in Aus is a simply ludicrous situation and totally unsustainable. Few people really understand the cost of entry to coffee in Australia - most think it's just the cost of plant, equipment, stock and simple overheads. Little do people actually realize that marketing costs in the coffee industry have grown out of proportion due to over-saturated conditions resulting from too much competition, or what some refer to as an unstructured industry - ripe for consolidation. People could argue that advertising is a necessary evil in any business, but reality is for coffee suppliers it has become a way out-of-control expense for limited returns. To invest more than 30% in what is essentially a commoditised product dressed up as an artisan skill in a very interesting dilemma, testing the "goolies" of any brave man. Yes, we desperately need structure and consolidation. Yes, capital rich groups can force this if they are skilled in strategy and execution. Distribution channels feeding retail are usually the key domain for consolidators - this is becoming more difficult with online markets. The opportunity or moment may have just passed. I'd love to give up my massive debt and impossibly tough 95hr week to some big $$ corp ...........a dream come true ;-) Any takers ?

beanflying · July 2011

on 1310635328:

450 brands in Aus is a simply ludicrous situation and totally unsustainable. .......... I'd love to give up my massive debt and impossibly tough 95hr week to some big $$ corp ...........a dream come true ;-) Any takers ?

I am seriously looking at making it 451 after Christmas and much as I would love your roaster I don't want that much of a debt level

Of that 450 my guess is that 10% maximum are likely targets of the sort of consolidation that US article talks about. Not sure the economics of say buying up 20-30 micro roasters just for their clients and or turnover would make any sense to consolidate? Currently seems to be a new cafe in Melbourne adding a roaster at better than one a month too, not that means they know how to roast either but that's for another topic ::)

FreshCoffee2 · July 2011

From Yesterdays cache Hello Tim, It WONT be micro roasters they will be picking up, it will be well established, good turnover, successful (as in properly run & showing good profit indicators), medium sized roasters. They will apply their EBIT calculations to work it out, and as stated they wont be picking up micro roasters because they would have to buy hundreds of them to get the kind of kilo turnover required, that they can get by picking one well run medium sized coffee roaster in each area. So called micro roasters will be left on the side of the road wondering what hit them, because the big boys wont waste time in reducing margins and marketing aggressively to sweep the table of as many cafe clients as possible, in their race for market share in comparison to the other big boys they see themselves competing with. People in business know...its already happening. Despite what is very often said in these special interest coffee forums by those that have no background in actual coffee industry, 95 % of the available market is not made of single retail client coffee nazis. That is not where the real business is. Latest generation micro roasters will be left to eek out a living trying to sell single origins to retail clients and no more than a handful of the smaller cafe clients around them that the big boys dont see any value in. I agree with Jeff in regards to SO's, anyone can buy a bag of SO from a green bean importer and brown it in their new low end roaster, as despite the misguided opinions of internet based coffee nazis, the real artisan skill is in blending. Most micro roasteries "specialising" in SO's will be left to compete it out with each other in selling pretty much the same stuff as browned in their low end roasters where they have virtually no control over what they are doing, and competing for their low turnover on price. That is not really a recipe for growing a business of the type that multi nationals would like to snap up. Roasting Plant manufacturers are currently undergoing boom times. When it stops you will be able to snap up used small sized machines everywhere for a song, their original purchasers long gone back to their much safer original professions. Who among us will have the intestinal fortitude to go into a micro roastery then? Micro roasteries have become the cafes of yesteryear. Do we have the market, population and turnover to sustain them? None of this is written with any bias one way or the other, it is simply how I see it...if you like, its just a general opinion. Good topic. Anyone else? Attilio. very first Crema site sponsor.

ok lets try this again.......ISP problems and time wasted in posting replies that disappeared...aside

Larger companies are not going to snaffle up micro roasteries. They are looking to well established, medium sized, well run coffee roasters turning good volume with good profit. They will apply their various formulas to work out if the profitsbility suits their own models, with a certain return in a certain payback time for their investment. They will be looking to compete for market share with the other companies that are doing the same thing, and who they see as their group competitors. They wont be buying up scores of micro roasters in order to try and build some volume base.....that would be ridiculous. Micro roasters will be left on the side lines wondering why they bothered getting into this in the first place. They will be squeezed by forever decreasing margins in a world of ever increasing costs, and any cafe client they may have of any significance will be snaffled by the big boys with low priced beans and endless freebies. This is not a look into the future, it is happening right now. Yes, consiolidation has already been happening here for some time. There will of course always be room in the market for micro roasters, but its not where the real business is, and unless micro roasteries can really build their businesses in toto, they dont really have much to sell in the end. Other opinions? Rgdz, Attilio very first Crema Site Sponsor.

admin · July 2011

on 1310772397:

ok lets try this again.......ISP problems and time wasted in posting replies that disappeared...aside

Hi guys = yes, once again, all i can do is apologise on this... Tim thanks for recovering and Attilio, appreciate you perservering as it's obviously an important subject! A

DoubleRistretto · July 2011

I personally find it very interesting, although I'm still looking for an answer to my question from a similar thread - the one about Coke possibly buying Stumptown in the US

on 1307654368:

I'm not sure you guys are right - won't the good boutique roasters just keep taking market share from the big established players [eg Vittoria, Lavazza, Piazza d'Oro, Segafredo etc]?

I'm not saying I disagree with you guys, just that I honestly don't know - Attilio you presumably disagree, but can you explain why please? dR

FreshCoffee2 · July 2011

Hello mate. I guess it depends on anyone's definition of what a "boutique roaster" is, VS a "micro roaster". To me a micro roaster is just that, a very small usually emerging roaster, probably trading from a retail shop front or if not doing most of whatever business they have out of their own retail. To me, this is essentially a retail roastery or cafe with roastery incorporated. I dont believe any corporates are going to run around buying up essentially retail and or small businesses to create their own volume market. A boutique roaster to me on the other hand is usually a well established medium sized roastery that has gone way past the former and has very good turnover and an established cafe market section.....much much smaller than the large roasters, still purveying (subject to the individual roastery) a quality product in mixed with the range of services that the larger roasters provide to their cafe clients. It is these boutique roasters that the corporates are indeed looking for (in my honest opinion of course). They are sound, growing businesses, that the acquisition of will allow coporates to gain considerable market share and established infrastructure and expertise quickly. And yes, the good boutique roasters will continue to take market from the large commodity roasters....as they are doing right now, and the corporates buying in will want to try and retain the "look of boutique" even if by ionly retaining the names of the strongest that they buy into. Moving right along..... Rgds, A.

littleroundman · July 2011

DoubleRistretto wrote:

I'm not sure you guys are right - won't the good boutique roasters just keep taking market share from the big established players [eg Vittoria, Lavazza, Piazza d'Oro, Segafredo etc]?

From "inside" the world of coffee cognoscenti, that probably seems possible. In practical terms, however, I would ask "how" ? How would even the most dedicated coffee lover get regular access to his/her supplies of boutique roasted? How many of the average punters are willing and/or able to even get the opportunity to sample anything BUT coffee from the "established players ? A great deal of the coffee "industry" is at pains to distance itself from the wine industry model of samplings and tastings, making it nigh on impossible for even a gold medal winning roaster to make any inroads into the general market, ESPECIALLY given the fact Australia has around 15% of the American population spread over an area not much smaller than the USA. I wouldn't mind betting there are a few Australian roasters who wouldn't mind being owning an operation the size of a Stumptown and yet, still be classified as "boutique"

FreshCoffee2 · July 2011

Welcome to Crema littleroundman

The "how", is that the market currently wants a better quality product than the very large commodity roasters purvey. Whether they purvey a good quality product or not doesnt matter, what matters is that the current retail market thinking as endlessly pushed around in internet forums by a small number of people, is they dont. Millions on the other hand read it. That gives momentum to the smaller players, and the corporates are not silly. Why do you think Cerebos slash Mocopan bought Toby's? And what are they curently doing....? Expanding the Toby's name, presumably because they see value in that. Is Toby's a "boutique" player? That's up to the individual, but it certainly wasnt one of the big boys. For the rest of it I'm afraid I dont understand what you are getting at. The one constant here, is that nothing is constant. The market is changing, traders are having to learn how to do business differently, everyone is busy re inventing themselves to keep up, and the corporates will stop at nothing to sweep the table and gain or keep market share. After that, I for one dont know much about the wine industry so cant compare, and being in lilolOz, dont know anything about some american roaster called stumptown that apparently sold out to coca cola apparently exemplifying the above over there ?

Regards, Attilio

littleroundman · July 2011

I don't think the discussion is now comparing apples with apples. The article linked by the OP was referring to stock market listed coffee companies, and the fact some observers are looking to consolidation-of-the-industry related takeover targets as sources of investor profit and the relatively high market capitalization of listed coffee related companies. Additionally, many of the listed companies have massive export divisions. Many have their own retail (cafe) outlets as well as roasteries and some, such as Starbucks.....well, they're Starbucks.

LiveTrading News wrote:

Players love chasing buyout candidates, and they love chasing coffee over the past 18 months.

My point is, we are NOT the USA. As evidenced by the fact one of the companies referenced positively in the OP article is Starbucks. IM(very)HO, any "market consolidation" we see here is more likely to be industry based, rather than investment based as in the OP article. I cannot, for example, see many Australian roasters as being sufficiently profitable to become targets for equity based investment companies The "industry" if it exists, is entirely different. The potential domestic market of Australia is around 20% of the US domestic market, yet it occupies nearly the same land area. The economies of scale are nowhere near comparable. On another note, I agree with you entirely that the Australian public is SCREAMING out for a better quality product. I believe anyone who thinks differently is in for a rude shock (are you listening Mr Myer, Mr Jones and Mr Telstra) eventually. HOWEVER, I would also argue the average punter has very little chance of ever discovering there ARE coffees better than what is available from the "usual suspects" and no amount of industry machinations are going to make a difference. I be prepared to bet that 2 years of industry organized "coffee and biscuit" tastings along the lines of those ubiquitous "wine and cheese" of the 80's and 90's would change the face of the Australian coffee "industry" way, way more than almost any amount of industry rationalization.

mycuppa · July 2011

on 1310798269:

How would even the most dedicated coffee lover get regular access to his/her supplies of boutique roasted?

Do what most people do when they need something special - Online shopping......

on 1310798269:

A great deal of the coffee "industry" is at pains to distance itself from the wine industry model of samplings and tastings, making it nigh on impossible for even a gold medal winning roaster to make any inroads into the general market, ESPECIALLY given the fact Australia has around 15% of the American population spread over an area not much smaller than the USA.

As a person who has closely watched the wine industry for a long time, the concept of Samplings and tastings involving coffee are very different.......the exercise is not as simple or practical as people imagine. Sure, people will go....."hey nice coffee" but it doesn't easily translate to a sale. Samplings and tastings for wine are usually held in a "captive" enclosure where there can be a half-expectation that you should buy a few bottles or a case or two and let's not forget it's easy to keep tasting wine, whereas once people have had their few sips of coffee, that's it.......they have had enough to satisfy the craving or the curiosity. Distribution is where consolidation would be focused - driving a wedge into the separation of wholesale and retail. It's the reason winemakers have been done over by Coles and Woolworths buying up lots of Hotels and opening big bottleshops, so they can control where the end product is used and therefore decide how to cut off supply because they become the demand engine. Same thing with milk and other products. We are fortunate, for the moment, that distribution of coffee is openly fragmented. But it will change over time as it gets more difficult to deliver products to the end-user at a reasonable time and price point. Hopefully, the online world will remain a viable alternative by offering up enough diversity so that consumers continue to have choices.

Koffee_Kosmo · July 2011

on 1310809335:

As a person who has closely watched the wine industry for a long time, the concept of Samplings and tastings involving coffee are very different.......the exercise is not as simple or practical as people imagine. Sure, people will go....."hey nice coffee" but it doesn't easily translate to a sale. Samplings and tastings for wine are usually held in a "captive" enclosure where there can be a half-expectation that you should buy a few bottles or a case or two and let's not forget it's easy to keep tasting wine, whereas once people have had their few sips of coffee, that's it.......they have had enough to satisfy the craving or the curiosity. Distribution is where consolidation would be focused - driving a wedge into the separation of wholesale and retail. It's the reason winemakers have been done over by Coles and Woolworths buying up lots of Hotels and opening big bottleshops, so they can control where the end product is used and therefore decide how to cut off supply because they become the demand engine. Same thing with milk and other products. We are fortunate, for the moment, that distribution of coffee is openly fragmented. But it will change over time as it gets more difficult to deliver products to the end-user at a reasonable time and price point.

on 1310797540:

Hello mate. I guess it depends on anyone's definition of what a "boutique roaster" is, VS a "micro roaster". To me a micro roaster is just that, a very small usually emerging roaster, probably trading from a retail shop front or if not doing most of whatever business they have out of their own retail. To me, this is essentially a retail roastery or cafe with roastery incorporated. I dont believe any corporates are going to run around buying up essentially retail and or small businesses to create their own volume market. A boutique roaster to me on the other hand is usually a well established medium sized roastery that has gone way past the former and has very good turnover and an established cafe market section.....much much smaller than the large roasters, still purveying (subject to the individual roastery) a quality product in mixed with the range of services that the larger roasters provide to their cafe clients. It is these boutique roasters that the corporates are indeed looking for (in my honest opinion of course). They are sound, growing businesses, that the acquisition of will allow coporates to gain considerable market share and established infrastructure and expertise quickly. And yes, the good boutique roasters will continue to take market from the large commodity roasters....as they are doing right now, and the corporates buying in will want to try and retain the "look of boutique" even if by ionly retaining the names of the strongest that they buy into. Moving right along..... Rgds, A.

I cant put my finger on it, but I seem to agree with these posts KK

littleroundman · July 2011

mycuppa wrote:

As a person who has closely watched the wine industry for a long time, the concept of Samplings and tastings involving coffee are very different

You're entirely correct in that they are NOT the same. My argument would be that the coffee industry is the one who needs to work out a way to make it the same and NOT the consumer. For example, from memory, the majority of wine and cheese nights are or were as much about educating the attendees as they are about flogging product, or, at least were made to appear that way. I believe the emergence and subsequent within the Australian wine industry can be put down in large amount to 10 years of hard graft by the "industry" convincing a nation of beer drinkers that there is more to "wine" than red ones and white ones. Now, perhaps, we are in a more cellar door sampling and purchasing era, what I'm talking about is an entirely different concept. I'm old enough (Unfortunately) to remember the years when there was hardly a social club or sporting team which didn't run at least one fundraising "wine and cheese night" and every one of them IM(very)HO contributed to the phenomenal turnaround in Australias' drinking habits and flow-on international successes. I just don't see the same sort of preparedness to do the hard yards within the coffee "industry" If the wine industry had concentrated its' efforts on running annual "best sommelier" competitions rather than a deliberate campaign of bringing ALL of its' products to the masses, I doubt very much the industry would have experienced the unprecedented success of the past decade/s.

mycuppa · July 2011

on 1310816561:

I just don't see the same sort of preparedness to do the hard yards within the coffee "industry"

I disagree - there are all sorts of little tastings and events running in places - finding them is the key. We are getting OT.............yes we agree tasting of a product that is ready to consume, versus a product requiring considerable ancillary variables and equipment are completely different. The sheer effort of preparing, bumping in/out and running these sorts of things is ludicrous - I've busted my back so many times lugging stuff around and then the 3 days afterwards you are still recovering from the adrenalin drain. Have done numerous coffee tasting events (dozens actually), marketed as "coffee appreciation" and you know the sort of people who attend are a few true coffee lovers (definitely in the minority, probably up to 10 - 15%, perhaps 20% at a stretch), but also many instant coffee drinkers or people who have no means or claim they don't have the time at home in the morning to make coffee. Its wonderful to sample a touch of luxury every now and again :P Of course, I get to stand there with a happy face while I hear the recurring statement "I don't have time in the morning to make coffee". After the 50th time it pops out of someone's mouth............I mutter to myself...........never again........... which begs the question why are these people attending the event....... ?????? And my favorite is......"how much money do I need to spend at home to make it like this ?" and after imparting my knowledge and experience with various options rattling off stats and figures faster then an AK47, it's followed up by "no way I'm spending more than $100 on equipment to make coffee at home" (at which point I feel like using the AK47). So littleroundman, after flogging ourselves to bring quality coffee to the masses, I end up tired, cranky, sore and I've not achieved anything at all as they might pause for a few seconds longer when at Coles or Woolworths coffee aisle admire the multi-colored flash packaging with glazed eyes. Having just ranted about how I hate this tasting gig, ironically I have a master-class coming up at one of my clients.............a true glutton for punishment. Everyone can sample fine coffee - you certainly don't need to attend a "coffee and biscuit" event.

WotB · July 2011

Speaking of which, I am taking part in an event, with canapes and demonstrations. In my case, it is part of a diploma program in Hospitality Management, our main assessment task. I will be doing a simple coffee roasting demo and a pourover coffee demo. My canape will be a bit of molecular - Coffee pearls.

mycuppa · July 2011

I get shocked sometimes when I visit a potential client and the new owner tells me in the first few sentences after our initial greeting how much they paid in goodwill for the cafe........astounding figures. And of course, I can always detect early on when a cafe owner is preparing to sell out - they switch from cash payments to cheques or Bank xfer so they have some partially accurate books available for prospective buyers wanting to verify so-called goodwill calculations......

FreshCoffee2 · July 2011

on 1310865961:

I disagree - there are all sorts of little tastings and events running in places - finding them is the key. We are getting OT.............yes we agree tasting of a product that is ready to consume, versus a product requiring considerable ancillary variables and equipment are completely different...............include the whole post...... Everyone can sample fine coffee - you certainly don't need to attend a "coffee and biscuit" event.

Very well said, and its only the tip of the iceberg of the discussion if that is the direction the discussion is going to take, and I am very well aware of the hours we spend at local shows sampling with clients and being driven to distraction because the greatest majority of them are not really interested at all, just looking to get a free larh-tay from our stand (even if its only a sample size) instead of paying for one at the concession at the end of the trade hall. The academics of the discusson are one thing, and the realities are another quite different thing, particularly because by far the greatest percentage of retail market clients are not well educated enough in coffee at this stage despite they think they are. This is NOT a derogatory statement it is a statement of fact, and most good roasters are in the business of educating their clients every single day whether it is done through cuppings or simply by word of mouth every single time the clients come in to buy their beans or to look at coffee machines, because that is when you find out that what they are romantically annunciating to you (about buying a machine and making their favourite coffee at home) is way off mark. In fact, it is at the time that a client recognizes they want to buy a coffee machine, that a roaster or supplier gets their best shot at educating that client and when they buy a machine (and grinder), from you, they invariably return to buy your coffee, have a positive memory of the experience, and you can become their favourite boutique roaster by way of the total service package & experience you provided to them. Different roasters will have their own approach, but mine simply comes down to...sell the machine and you sell the beans. This starts the process of education, they take a class, eventually spreading their wings and starting to sample the offerings of others, and the ball rolls on. We've been running coffee classes for close to 15 years....and the big positive in all this is that the explosion of interest in all things coffee has raised awareness and grown the market in a huge way even if there is a long way to go. This is quite different to wine where when you open the bottle, and as long as the wine has been treated properly and hasnt for whatever reason gone off, you get to experience what the wine maker intended for you in a quick and direct manner. Instead, when you open a packet of coffee, you re-manufacture it through whatever your modus operandi and level of skill is, in whatever coffee machine you have in whatever condition, with whatever level of skill and understanding you have of the importance of the grinder. Then if you didnt from the beginning get involved with a specialist coffee and equipment trader, you can turn an award winning blend into bitter dish water. Then you can blame the roaster, or your tools, more often than you would blame your own understanding and level of skill in the process. Not so in wine. Right off topic now

Rgdz, A.

beanflying · July 2011

Slow afternoon beckons in the shop, time to go make a large buckochino and sit back in front of the fire and read and digest the posts above. Speed reading Attilio and Jeff's posts in particular just won't do.

DoubleRistretto · July 2011

on 1310797540:

Hello mate. I guess it depends on anyone's definition of what a "boutique roaster" is, VS a "micro roaster". A boutique roaster to me on the other hand is usually a well established medium sized roastery that has gone way past the former and has very good turnover and an established cafe market section.....much much smaller than the large roasters, still purveying (subject to the individual roastery) a quality product in mixed with the range of services that the larger roasters provide to their cafe clients. It is these boutique roasters that the corporates are indeed looking for (in my honest opinion of course). They are sound, growing businesses, that the acquisition of will allow coporates to gain considerable market share and established infrastructure and expertise quickly.

... it is the the small/medium sized roastery that I was meaning in my question - not a 'micro-roaster' eg a Toby's in Sydney who's probably got 150 - 200+ accounts (before they were bought out by Cerebos) or even Campos, who probably have 80 - 100 accounts by now :o I guess the big guys (like Lavazza, Vittoria, Mocopan, Segafredo & Piazza d'Oro ) have more of the marketing $$ that Jeff is talking about, but surely the small/medium guys are mainly taking share from those 'big' guys - who don't offer the same level of product or service - than each other?

beanflying · July 2011

Interesting feedback and discussion

Couple of things with the local industry as I see it we have basically 3 or 4 major groupings of coffee roasters in Oz. The really big guys Vittoria, Coffex, Grinders, Mocopan, Segafredo, Di Bella etc. These are our equivalents of what the article I posted above is related to. The large roaster tier which includes CosmoreX, Veneziano, Toby's, Surpreme, 5 senses etc. My guess is running 50-200kg batch roasters. I sand to be corrected on a few of these names and or figures. Larger specialty roasters (roasting and selling to a large number of other users) mycuppa, Mahalia, CS, Air. 7S, St Ali these are people running 10-30kg/batch roasters generally. Then the largest grouping by number the boutique shop, niche market roasters. To a fair degree this also includes Market lane, Mecca, Dukes, 65 Degrees and a host of the smaller net based businesses. Generally but not always 10kg and down on roaster size. Other than strategic alliances and or buying a perceived "specialty roaster" tag for themselves or additional web based sales under a second badge the last two groups are least likely candidates for consolidation or takeovers from larger players. That is certainly not to say they are unsalable but buying a chunk from this grouping to get increased turnover just isn't a sensible way to add turnover for the larger players. From the larger two groups the well run ones are growing and taking market share off the largest ones as the Australian coffee palette improves and becomes more discerning. This is certainly where consolidation is likely from what I can see. The client databases and relationships here are worth some serious $$ so it is going to be interesting to see who tries to make a play for who. Paying for goodwill be it cafe, roaster or whatever business is an interesting house of cards or pack of lies depending on being the seller or buyer. Typing slower than DR too

FreshCoffee2 · July 2011

on 1310881500:

Interesting feedback and discussion above..... The large roaster tier which includes CosmoreX, ..... I sand to be corrected on a few of these names and.......

I wish !!!!!

Rgdz, A.

coffeehorse · July 2011

unfortunately more people are happy to get highly drunk, than are prepared to get highly caffeinated. Attilio I hold in very high regard for being able to drive sales across a wide physical area and a range of qualities or product - while he sometimes (often!) disparages himself he adds 'specialty' knowledge to a more volume-based market.

beanflying · July 2011

Certainly bigger than a shop roaster and somewhere smaller than others

It was just an arbitrary set of boundaries as I see it and the takeover potentials.

admin · July 2011

interesting: from a NZ press release [see below] - although it obviously refers to a NZ operation, it seems to back up what some of you guys have been saying: Press release [from RFG foods]: "Leading Australian retail food brand manager and franchisor, Retail Food Group Limited (RFG or the Company), today announced that it has entered into a Sale & Purchase Agreement (SPA) to acquire the business and intellectual property assets of the New Zealand domiciled Evolution Coffee Roasters Group comprising: EVOLUTION COFFEE ROASTERS ROASTED ADDIQTION COFFEE DEALERS EVIL CHILD BEVERAGE CO. RFG CEO Tony Alford said,

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