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Constant craving: Global coffee industry at full perk

Coffee is on a caffeinated high these days, driving mergers among global makers, aggressive expansion by retailers on both the higher and lower rungs of the food chain, and a raft of well-capitalized new entrants.

Mondelez International Inc. and DE Master Blenders 1753 have brewed up a merger that will create a global coffee giant with combined annual revenue of more than $7-billion (U.S.). The merger of Mondelez's coffee business, the world's second-largest, with Dutch-based DE Master Blenders, the No. 3 purveyor, will bring such brands as Jacobs, Gevalia, Carte Noire, Douwe Egberts, Kenco, Peet's Coffee & Tea and Senseo capsules and Tassimo coffee makers under the same roof.

The combination won't be quite enough to catch leader Nestlé SA, which holds nearly 23 per cent of the global market. But it will be a more formidable opponent as it reaps the benefits of significant cost savings, including better deals from coffee growers at a time when prices for the commodity have been soaring.

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Coffee now ranks as the fastest-growing and one of the most profitable parts of the entire fast-food chain, with U.S. sales up a healthy 9 per cent in 2013. Starbucks, the leader in the specialty segment, posted an 8-per-cent increase during the period, while the more downmarket Dunkin' Donuts had a 3.4-per-cent gain.

Canada's own Tim Hortons Inc., which plans to add hundreds more stores in North America (500 of them in Canada) and the Middle East, posted a revenue increase of 4.8 per cent in the latest quarter. It has long sought to diversify its revenue sources, but where would it be without the steady profit stream from all those coffee-slurping hockey parents, curlers, bird watchers and throngs of other loyalists.

Not even the rising prices for coffee beans have put much of a dent in the industry's prospects. Which helps explain the big expansion at the retail level, where a rash of well-capitalized players are joining the upper end of the market and such fast-food kingpins as McDonald's Corp. are devoting considerably more marketing dollars to the product.

Every time stories surface of droughts in Brazil, bad harvests and serious shortages, coffee peddlers can take the opportunity to increase their own prices. And they know from experience that their remarkably faithful customers will pay up for their favourite caffeine fix.

Yet the coffee itself only accounts for a small fraction of the cost of a typical cup. Starbucks and other vendors are much more price-sensitive to the dairy products they put in their cappuccinos than to the small amount of coffee that goes into them. So even the nearly 90-per-cent jump in the price of the widely used Arabica beans – by far the biggest increase for any commodity this year – can be absorbed without huge difficulty.

In any case, Starbucks and some other coffee heavyweights have protected themselves from big price swings by securing deals that lock in prices for several quarters. Starbucks, for example, has cost certainty for this fiscal year and a large chunk of the next one, enabling the company to sit on the sidelines and wait for prices to decline or at least level off.

With no signs of demand abating, it's a pretty good recipe for further growth. The main dark cloud on the horizon for the likes of Starbucks and less muscular specialty coffee chains is the flood of competition coming from well-financed sellers of high-end artisanal brews. At the lower end where Tim Hortons lives, the serious competition already lurks behind those ubiquitous golden arches.

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About the Author
Senior Economics Writer and Global Markets Columnist

Brian Milner is a senior economics writer and global markets columnist. In a long career at The Globe and Mail, he has covered diverse business beats, including international trade, the automotive industry, media, debt markets, banking and the business side of sports. More

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