Illy Seeks Independence by Partnering With JAB on Capsules

(Bloomberg) -- Illycaffe SpA is teaming up with one of Europe’s richest families and Mondelez International Inc. to sell branded capsules that work in Nespresso machines worldwide, seeking a boost that will allow the Italian brand to stay independent.

Illy, one of the most prized brands in coffee, said it’s refusing to sell out, even as the coffee business consolidates around Nestle SA, Starbucks Corp. and JAB Holding Co., the investment vehicle for Austria’s Reimann family and others. Instead, it’s granting a worldwide manufacturing and distribution license to closely held Jacobs Douwe Egberts, which is controlled by JAB and counts Mondelez as a minority shareholder.

“If we wanted to open our equity structure, we would have done it by now,” the Italian company’s chairman, Andrea Illy, said at the press conference to announce a deal reported by Bloomberg News on Friday. “Everyone would want” to buy Illy, “but we are against it as our company’s business model is conceived to be an independent company and all our investments are long-term.”

Bankers have been pitching Illy many types of deals, he added. The coffee roaster has no current plans for an initial public offering because Illy would need to expand its revenue first before such a deal, the chairman said.

The partnership escalates the struggle among Nestle, the world’s largest coffee company, and Starbucks for dominance of the world’s market. JAB has expanded rapidly in recent years, spending more than $30 billion to acquire coffee brands like Keurig Green Mountain, Peet’s and Stumptown.

“It’s hard for independents like Illy to not strike some sort of deal with the big players when it comes to pods,” said Matthew Barry, a senior beverages analyst at London-based consumer researcher Euromonitor International Ltd. “The nature of coffee demand growth in Western countries means that it is essential to have an effective pod strategy, but the largest pod systems are all controlled by either Nestle or JAB.”

Illy Seeks Independence by Partnering With JAB on Capsules

Single Servings

Single-serve is the fastest-growing category in the coffee market, growing about twice as fast as roast and ground. The $16 billion segment is forecast to expand another 33 percent by 2022, according to Euromonitor International. Illy Chief Executive Officer Massimiliano Pogliani said the segment is growing by about 20 percent every year as Nespresso’s pods have created a new standard for the industry.

Fierce competition in coffee prompted Nestle to spend $7.15 billion earlier this year for the right to market Starbucks products from beans to capsules. That followed a $425 million purchase of a stake in Blue Bottle Coffee. Coca-Cola Co. in August agreed to buy U.K. chain Costa from Whitbread Plc.

After Nestle lost patent protection for Nespresso capsules, dozens of companies have barged in, making knockoffs that work in the machines sold by the Swiss giant.

Luigi Lavazza SpA last week snapped up the coffee business of Mars Inc., including the Flavia and Klix systems.

©2018 Bloomberg L.P.