The world’s 2nd and 3rd biggest coffee players – Mondelēz and D.E. Master Blenders 1753 – have just announced a mega-merger which will make them into a serious ‘pure play’ coffee challenger to category leader Nestlé. The new company – to be named Jacobs Douwe Egberts – is expected to start operating in 2015 and will generate revenues of US$7bn plus within the US$80 billion global coffee market.

Under the deal, Mondelēz will be the “junior partner”, receiving 49% share equity stake in the company in return for $US5 billion in cash. D.E. Master Blenders was bought only last year by German conglomerate JAB (Joh. A Benckiser) in the biggest deal the global coffee industry had ever seen. JAB is highly ambitious, having recently also snapped up US coffee players, Caribou and Peet’s.

How worried should Nestlé be? Not overly concerned considering it accounts for almost a quarter of global coffee sales and that the ‘new kid on the block’ makes up only 11% even with forces combined. But then again, Nestlé will likely see its market share erode yet further. Both D.E. Master Blenders and Mondelēz have aggressively pursued Nespresso coffee pod sales by producing cut-price capsules for Nespresso machines – with plenty of success.

Now that they have joined forces, this strategy is likely to accelerate. Jacobs Douwe Egberts will now have much greater economies of scale and bargaining power, meaning it can be yet more aggressive in its retail drive. Nestlé is now hugely reliant on the Nespresso coffee pod brand within its coffee division, yet it has publicly stated that it will not go back on its decision not to sell Nespresso pods in supermarkets. This leaves the field open for Jacobs Douwe Egberts – as well as own-label.

There are other advantages to the deal. There is a pleasing geographical symmetry to the new merger. For example, Mondelēz gives D.E. Master Blenders strong access to the two key global markets – US and China – while D.E. Master Blenders returns the compliment with its market leadership of Brazil, as well as its ownership of Senseo – a very popular coffee pod brand in Europe.

The deal will also protect Jacobs Douwe Egberts from the mercurial nature of coffee commodity prices. Arabica prices recently soared by 80% as a result of a poor harvest in Brazil. Yet, commodity prices could soar yet higher in years to come, with adverse growing conditions potentially allowing demand to outstrip supply.

This means buying power is now a crucial component in protecting margins and remaining competitive versus the competition. Expect more major consolidation in world coffee over the next 12 months.

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Jonny Fosyth is Global Food and Drink Analyst at Mintel. Previously responsible for researching and writing all of Mintel’s UK drinks reports, Jonny has worked as a Global Drinks Analyst since 2012. He is regularly called upon by both national and international media to provide commentary and analysis on market and consumer trends within the drinks sector. Follow Jonny on Twitter @Jonny_Mintel

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