Published On: Fri, Oct 12th, 2018

Competition is hotting up in the coffee industry

IN 1934, in the Italian city of Trieste, Francesco Illy came up with a way to package coffee in pressurised containers that kept it fresh. In 1935 he invented the first automatic coffee machine. In 1974 Illy, the company he founded, became the first to sell a kind of coffee pod—single servings of ground, tamped beans that produced espresso anywhere, any time.

Aluminium capsules, the successors of those pods, have become a fiercely contested battleground for the world’s biggest coffee companies, notably Nestlé, a Swiss food-and-drink giant, and JAB Holdings, an investment firm intent on building a coffee empire. On October 8th, in the latest sign that the coffee wars are hotting up, Illy signed a licensing deal for capsules with JAB, blending Illy’s coffee and cachet with JAB’s commercial clout.

Two decades ago as many as 20 substantial companies competed in the retail-coffee trade, says Jeffrey Young of Allegra World Coffee Portal, a consulting firm. In the past few years the market has consolidated—and at a faster pace in the past year or so.

In 2015 JAB bought Keurig, America’s biggest coffee-pod system, for $ 13.9bn. It has also swallowed Jacobs Douwe Egberts, Espresso House and Peet’s Coffee. Nestlé signed a $ 7bn deal in May with Starbucks to distribute the ubiquitous chain’s products. Today JAB and Nestlé together control about a third of the market for fresh and instant coffee, which Euromonitor International, a research firm, estimates to be worth $ 83bn a year.

Capsules—an expensive but convenient way of making coffee—have been the market’s fastest-growing area in recent years. The pace has slowed recently, notably in America where the market has matured, but Europe is still bubbling away. Nespresso, owned by Nestlé, leads in Europe but has failed to make inroads in America. Keurig got there first, offering a variety of brands, and selling them through supermarkets. Until recently Nespresso only sold its products in its own shops and through its website. Nestlé’s acquisition in 2017 of a majority stake in Blue Bottle Coffee, a hip Californian brand, is a sign of its eagerness to boost its presence in America.

Despite JAB’s and Nestlé’s heft, others are keen to compete. Coca-Cola bought Costa, a British chain, in September for £3.9bn ($ 5bn). This month Lavazza, another Italian coffee-maker, bought Mars’s coffee business, including its Flavia and Klix vending systems. But—as for many other products—Amazon is the great unknown. Sales of hot drinks have been slow to take off online. As capsules’ popularity grows that may change, says Matthew Barry of Euromonitor. Amazon’s purchase of Whole Foods, a trendy grocer, in 2017 brought with it Allegro, another fancy coffee brand. A bigger battle may be brewing.

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The Economist: Business

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Competition is hotting up in the coffee industry