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A shift in preference and rising health awareness has reinstated coffee as the beverage of choice as consumers continue to avoid sugary, preservative laden packaged drinks. According to KPMG, M&A activity will continue to increase for categories such as coffee,…

A shift in preference and rising health awareness has reinstated coffee as the beverage of choice as consumers continue to avoid sugary, preservative laden packaged drinks. According to KPMG, M&A activity will continue to increase for categories such as coffee, tea, water and functional drinks. This is a key trend, set to shape the global beverage M&A landscape. These categories could also see particularly strong growth with larger players actively pursuing deals to acquire new markets as well as businesses along the value chain. Analysts expect more deals this year because the coffee market continues to provide better profit margins than packaged drinks.

In January Coca Cola completed its acquisition of Costa Limited for about USD 5 billion. The deal which covered Costa’s 4,000 retail outlets, vending operations, roasting operations and at-home coffee products, enabled Coca Cola to enter the trillion-dollar coffee market and expand into a beverage category that is consistently showing growth even as soda is on the decline.

A decade ago, only 3 percent of all coffee sold was priced at a premium. Today premium coffee counts for over 40 percent of overall sales. According to the National Coffee Association, 59 percent of coffee consumed in the United States is classified as “gourmet”. While overall coffee consumption has remained the same over the past year, more consumers are regularly drinking gourmet coffee, nitro cold brew and similar beverages, compared to non-gourmet coffee. The trend puts into perspective Nestlé’s aggressive acquisition spree with targets such as California-based Blue Bottle Coffee, an artisanal coffee chain, and Texas-based Chameleon, an organic cold brew producer, being the company’s primary acquisition focus.

Acquisitions along the value chain and across categories are a notable change from the past decades, when horizontal mergers were the norm across various beverage segments, according to the Bain report on Using M&A to Ride the Tide of Disruption. Companies are now consolidating in parallel or investing in adjacent high-growth categories. Global F&B giant Nestlé has doubled down on coffee as one of its key priorities for investment within beverages, which is Nestlé’s most profitable segment. It acquired Starbucks’s chain of packaged coffees and teas as well as its retail distribution rights in a USD 7.2 billion deal to boost its coffee business in the United States. At the same time, Nestlé leveraged its retail distribution network to grow Starbucks’ packaged coffee retail sales, Teavana tea and other products overseas, especially in geographies such as China.

Coffee around the world is seeing massive innovation in formats, packaging, preparation and experience and this is fueling category growth further. This development combined with the fact that many new players entering the market, is set to culminate in significantly more investment capital being poured into the category.

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Image source: Pixabay

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