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The European Coffee Symposium (“ECS”) brought together more than 500 industry pioneers from across the coffee and hospitality sector and value chain. Against a continued challenging macro backdrop, the Berlin-based symposium was a great reminder of what the coffee sector has going for it and the opportunity that persists for those with vision, innovation, insight, and capital backing.
Coffee remains a resilient sector and rewards innovation
We’ve talked before to our clients about the defensive and resilient nature of the coffee sector. Coffee culture is hugely pervasive as an important global trend – illustrated by the chart below – and is shaping hospitality experiences and grocery trends.
As part of this, and the need to keep pace with changing consumer trends, innovation plays a big role. It is evident across formats, including the growth of Ready-to-Drink “RTD” coffee (a trend seen in other beverage sectors such as spirits) and biodegradable coffee capsule developments, as well as beverage types such as cold brew coffee, customised coffee, and crossovers to tea like chai and matcha lattes.
These innovations meet the changing consumer and societal trends of consumption convenience and ESG focus (Löfbergs showcased their paperboard RTD can format in Berlin), and the focus on health with functional ingredients added to coffee as well as new dairy free alternatives (ECS sponsor Sproud recently launched their no sugar or added sweetener pea plant-based Barista ZERO).
They also bring new consumers to the world of coffee – Nestlé’s recent Capital Markets day referenced that 50% of Gen Z consumers first coffee is a cold coffee (cold brew, RTDs). Innovation is also driven by technology, the use of AI and connected machines to provide real-time data and insights in hospitality and at-home channels.
Innovation isn’t a panacea without execution excellence
Consistent innovation and menu development is particularly critical when the top-line and costs are under pressure. The cost of coffee remains high, with the New York C Price recently breaking the US$3 per lb. ceiling, a value not seen since around 2011, due to factors including supply shortages and the strength of the US dollar. Add in other inflationary pressures (labour costs, for example) and it becomes essential to provide an experience or product at a price point that appeals to consumers and protects margin.
Of course, innovation isn’t a panacea on its own – excellent execution in the coffee shop or in the store is critical.
With significant competition in hospitality, having a reliable and consistent point of difference is key. So-called “fifth wave” coffee shops focus on aspirational boutique stores with high-quality curated coffee menus, but they must also deliver consistently excellent (and knowledgeable) customer service. Larger chains can also be highly successful providing they get the essential elements (service, wait time, cleanliness, menu etc.) “spot-on” – something that some of the larger operators by their own admission have struggled with and are rapidly aiming to address. Aligning the quality of the food proposition with the quality of coffee is also critically important.
Those selling into the home and grocery channels must hit customer KPIs and have the most efficient manufacturing and operating models to protect their margin. Becoming a trusted partner in private label and contract manufacturing, who can co-create exciting new lines and add value beyond simply processing is key to developing stickier accretive relationships.
Mastering increased complexity will be a competitive advantage for the winners
The significant breadth of coffee offerings (beans, ground, instant, bags, pods, concentrate, RTD) and flavour varieties increases complexity across the value chain, adds complexity for roasters and manufacturers and creates increased permutations for SKU opimisation in and out of home.
Those roasters and manufacturers seeking to deliver a “one-stop shop” solution to retailers and brand owners need to make new investments while also optimising their core businesses. We have seen in other food and beverage sectors (e.g. beverage contract manufacturing) how scale and international reach can be important in driving efficiencies and positioning businesses to serve global brand owners, retailers, and QSRs alike – and in turn this can drive M&A. Coffee shops also need to consistently invest in equipment and staff training to make new beverage combinations while maintaining a high-quality customer experience.
At AlixPartners, we have significant “hands-on” experience working with clients in the coffee, beverage and hospitality sectors, supporting their navigation of the strategic and M&A landscape, as well as optimising their operations from procurement and manufacturing through to revenue growth optimisation.
Capital is key for “black gold” winners
Innovation and growth also require investment and this is one area where the coffee sector is not standing still, evidenced by significant investments in new state-of-the-art facilities. Westrock Coffee invested in the largest RTD coffee manufacturing facility in North America, a colossal 570,000 sq/ft facility at a cost of $315m. Meanwhile, in Europe, one of the UK’s largest roasteries, Lincoln and York, invested in a coffee lab and innovation space and new high-speed manufacturing lines to meet demand.
We recently advised on the sale of 200° Coffee to The Nero Group, Europe’s largest independent coffee chain, who have acquired a number of coffee hospitality brands in a short period of time. Double award-winning “Europe’s Best Coffee Shop Chain” WatchHouse also successfully raised capital this year and last year to accelerate the growth of their destination coffee houses, including to support US market entry. There are also capital-light models (for brand owners) that can be actively pursued – for example, regional franchise deals to take brands international. Attractive growth and strategic opportunities are certainly out there for those with the means to act.
In summary, whatever your size, or position in the coffee value chain, standing still is not an option. Attracting capital and deploying it smartly is key. Identifying where you will be in 12-18 months, your “North Star” – and how to get there – are also critical. The essentials of planning ahead, stress testing business models, keeping close to relevant sources of capital, and having a disciplined M&A agenda can all pave the way for success.
Finally, congratulations to all the nominees and winners in Allegra's European Coffee & Hospitality Awards 2024.
