On October 1, 2018, leading Italian coffee company Lavazza announced its acquisition of Mars Drinks, the renowned coffee businesses of Mars Incorporated. The deal entails Lavazza’s acquisition of the single-serve Flavia machine and the Klix freestanding Vending machine businesses – two leading brands in the Office Coffee Service (OCS) and Vending segments – and a number of strong proprietary brands such as Alterra. Amidst the series of popular acquisitions in the global coffee sector as part of industry-consolidation strategies this year, the Lavazza-MARS Drinks deal underscores the company’s strategy to compete against global players such as Nestlé and JAB Holding & Co. Through this acquisition, Lavazza seeks to expand operations internationally and increase its market share in North America, Germany, the UK, France, Canada and Japan.
Founded in 1895 in Turin by Luigi Lavazza, coffee roaster Lavazza is a family-owned business, run by the Lavazza family for the past four generations. Lavazza operates in the business segments such as ‘At Home’, ‘Away-From-Home’, and ‘At Office’. The ‘At Home’ segment of Lavazza focuses on products for home or personal use, whereas the ‘Away from Home’ segment has products for cafes or bars. The ‘At Office’ segment focuses on Lavazza’s B2B presence in office spaces through the signature coffee machines. Lavazza was the first Italian business to offer capsule espresso systems. Market leader in Italy, the company operates in over 90 countries and generated a turnover of EUR 2 billion in 2017.
Since 2016, the company has innovated on its international expansion strategy with a series of acquisitions – the most noteworthy of them being French coffee brands Carte Noire and ESP, Denmark’s Merrild, Canadian organic coffee company Kicking Horse Coffee, and Australia’s Blue Pod Coffee. The latest acquisition of Flavia and Klix is likely to help Lavazza expand in particular its ‘At Office’ and ‘Away from Home’ business segments, by expanding its B2B market.
About MARS Drinks
Mars Drinks, a subsidiary of Mars Inc., is focused on OCS and offerering specialty single-serve coffees, teas, and hot chocolate drinks for offices in the United States and Canada. Mars Inc., one of the largest food companies in the world, operates in six segments – Chocolate, Petcare, Food, Wrigley, Drinks and Symbioscience. The privately-owned company recorded a revenue of USD 35 billion last year.
In 1973 Mars Drinks introduced KLIX®, the first-ever fully automatic in-cup drinks vending machine that serves large manufacturing channels across Europe. In 1984, Mars drinks introduced FLAVIA®, the first system for making hot drinks using fresh ground coffee and leaf teas sealed in individual servings, thus spearheading the single serve hot drinks category. In addition to these two major brands of Mars Drinks, the company also has proprietary brands such as ALTERRA® Coffee Roasters coffees, THE BRIGHT TEA CO.® teas, and DOVE® Hot Chocolate. Headquartered in Westchester, Pennsylvania, Mars Drinks generated a turnover of USD 350 million in the past year.
Coffee is one of the most widely consumed beverages worldwide. There are thousands of independent coffee bars in the streets, serving different varieties of the drink. At a first glance, the industry might seem highly diversified, but large players are in a rush to rapidly consolidate. The two largest players are the Swiss giant Nestlé and Luxembourger JAB Coffee, which hold together more than a third of the marked for coffee roasters according to Euromonitor. The have both been major players in M&A within the industry. JAB, for example, has spent more than $50bn in acquisitions over the past 6 years. That is not to say that the industry is highly concentrated; as a matter of fact, there is no clear third major player. Indeed, there is a multitude of smaller players focused on local markets.
Growth strategies differ across the industry, but there are a few common patterns. Companies of medium size have been striving to become more relevant at an international level. Lavazza, for instance, has acquired international brands in an effort to go from a predominantly Italian brand to a global one. In addition, a recent trend in the coffee industry is the attempt to make the drink an alternative to traditional sodas. This is an attempt to portray coffee as an alternative for every time of the day, rather than a source of energy only for when one is tired. This would make coffee an all-day consumption option and would explain the rise in ready-to-drink coffee (RTD). The attention given by companies to RTD can be seen through new product such as Prontissimo!, by Lavazza, and the recent deals focused on the segment. These include the acquisition of Dr. Pepper Snapple and the creation of Keurig Dr. Pepper by JAB Coffee, the deal between PepsiCo and Starbucks, and the recent acquisition of Costa Limited by Coca-Cola.
The attention of beverage companies to coffee may be explained by the current wave of “health-consciousness” that is leading to a reduction in the consumption of sugary and fizzy drinks, and therefore to an increase in the consumption of healthier products such as coffee.
Another trend that has been overlooked by the industry is the preoccupation with sustainability. Even though consumers are growingly concerned about the impacts of the goods they consume in the environment, companies have consistently underinvested in this area. Indeed, the estimated annual budget for sustainability efforts is only $350m out of an estimated annual value of $200 bn. This might be explained by the recent wave of consolidation, since the transactions are highly capital intensive, leaving small room for other growth strategies like a shift to sustainability.
Luigi Lavazza SpA has agreed to acquire Mars Drinks (which is the coffee business of Mars Inc.), including the Flavia and Klix vending systems, for an enterprise value of $650m. Given that Mars Drinks generated $350m of revenues in 2017, the implied transaction multiple is 1.85x sales, which is a low price compared with the 3x sales of the recent and similar Coca-Cola-Costa deal.
From a financing perspective the deal will be financed through a €400m ($463m) financing loan obtained from a pool of banks including Intesa Sanpaolo SpA, UniCredit SpA, and BNP Paribas SA’s Italian unit BNL. The acquisition, which is subject to regulatory approvals and employee consultation in some jurisdictions, is expected to close in December 2018.
Lavazza is estimated by Euromonitor to be the world’s third largest player in the coffee sector by retail sales, holding 2.5% of the global coffee market share. The company relied on the Italian market for 37% of its $2.3 bn revenues in 2017, the rest stemming from foreign markets. Indeed, the decision to acquire Mars Drinks, the beverages arm of Mars Inc. follows the company’s strategy of internationalization and diversification. With this move, Lavazza aims to fully consolidate all coffee market segments and gain a better foothold in the away-from-home business, which is in line with market trends and ever-changing consumer preferences.
Acquiring Mars Drinks is a strategic move for Lavazza, one that follows the company’s recent expansion strategy. In recent years, Lavazza has undertaken many acquisitions in order to both diversify its product base and extend its global reach. The company has been able to diversify its organic coffee portfolio through the acquisition of Canada’s Kicking Horse Coffee, gain share in the coffee pods segment of the market by acquiring Italy’s NIMS and Australia’s Blue Pod Coffee, and cement its position in business-to-business office spaces when it acquired France’s Espresso Service Proximité. Acquiring Mars Drinks would provide Lavazza with higher market share in the US, Canada and Europe and access to Flavia and Klix, leading players in the Office Coffee Service and vending machine service segment of the market.
Lavazza’s highest grossing market is the Italian one, however Italy and most of Lavazza’s target markets are non-coffee producing. Lavazza relies heavily on major coffee producing countries in North America, Asia and Africa for coffee imports. By acquiring Mars Drinks, Lavazza can cement its position in key markets and, under the terms of the agreement, also gain access to production plants both in the UK and in the US, moving production closer to both suppliers and target markets.
Through an acquisition-based expansion strategy, Lavazza has been able to bolster its annual revenue to a target level of $2.3 bn. The acquisition also comes at a time where traditional Italian coffee chains are struggling to compete with third-wave coffee culture. With younger consumers shifting preferences, coffeehouse chains such as Starbucks are gaining traction in Italy, thus a transfer of focus from the Italian home market to a more global playing field can be a viable strategy for Lavazza to protect revenues and promote the company’s brand internationally.
Lavazza was advised by J.P. Morgan, Cleary Gottlieb Steen & Hamilton, PwC and The Boston Consulting Group. Mars Inc. was advised by Bank of America Merrill Lynch, Freshfields Bruckhaus Deringer LLP, KPMG LLP and Rabo Securities USA.