Sarah Charles
September 27, 2024
- JAB Holding, a coffee giant, is shifting focus to insurance
- F&B’s appeal is fading – JAB sold 100 million Keurig Dr Pepper shares in March at 25% below their 2022 peak
- JAB’s pivot could reshape the industries it’s exiting, especially coffee
JAB Holding Company, the private investment firm known for its vast consumer goods portfolio, recently announced a pivot towards building a global insurance platform.
Long synonymous with the coffee and food industry, JAB’s portfolio includes a who’s who of beverage and food brands: JDE Peet’s, Keurig Dr. Pepper, Pret A Manger, Espresso House, Krispy Kreme, Intelligentsia Coffee, Coty, and Panera Brands.
Led by its CEO Olivier Goudet, a former Mars executive, the company has executed a $50 billion spending spree that has transformed it into a major player in the consumer goods sector, particularly in the food and beverage (F&B) (and coffee) space.
However, JAB is now making a sharp turn, with its leadership signalling a future that focuses on integrated insurance investments. The move represents a radical shift from an empire built on consumer goods to a platform leveraging policyholder premiums to generate higher returns through private asset investments.
JAB’s new investment chief has been at the helm of this strategy, viewing insurance as a conduit for securing cheap capital and generating superior returns in a low-interest-rate environment. This begs the question: why is JAB betting its future on insurance? And what does this mean for its extensive coffee and consumer goods empire?
The conglomerate, which was once laser-focused on consumer goods, especially in the F&B sector, has grown into a global powerhouse through acquisitions. Peter Harf and Olivier Goudet, advisers to the Reimann dynasty – one of the world’s wealthiest families with a dark past – had an ambitious plan: to build a coffee empire that could rival Nestlé.
Through JAB Holding Co., founded in 2012 to manage the family’s fortune, they invested around $30 billion. They paid a 78% premium for Keurig, now part of Keurig Dr Pepper, acquired Peet’s Coffee, and merged it with Dutch beverage giant Jacobs Douwe Egberts. Their expansion continued with fast-casual brands like Krispy Kreme, Panera Bread, and Pret A Manger.
These brands have become household names, with JAB riding the wave of booming consumer demand for coffee and convenient dining over the past decade. Between 2012 and 2019, JAB’s spree saw it amass some of the best-known consumer brands, creating an empire valued at billions.
Its dominance in the coffee sector alone has been staggering, with JDE Peet’s leading in global retail coffee, and Keurig Dr. Pepper securing a stronghold in North America’s beverage market. According to the Financial Times, “JAB initially cobbled together small publicly traded and independent coffee roasters into a portfolio that now sells more coffee than Starbucks.”
However, the company is now looking beyond the latte foam, as it embarks on a brand new strategy in insurance. The Federal Trade Commission (FTC) and the Department of Justice Antitrust Division (DOJ) recently partnered with labour agencies to enhance the antitrust review of labour issues in merger investigations. The crack-down could be one reason for this shift.
“I think that they are shifting strategy because they know that any new acquisitions in this space would likely face pushback from the FTC and DOJ,” says Austin Frerick, Fellow at the Thurman Arnold Project at Yale University and author of the book Barons: Money, Power, and the Corruption of America’s Food Industry.
“Both of these agencies are now led by regulators who are ushering in a new era of antitrust enforcement.”
JAB’s new investment chief has signalled that its future will be built around policyholder premiums and private assets, which provide stable, long-term cash flow.
Insurance, with its promise of steady capital flow from premiums, offers a lucrative way to diversify and create returns through strategic investments in private equity and real estate. By managing insurance portfolios in this way, JAB hopes to generate higher yields than traditional fixed-income assets.
The logic behind this shift is clear: insurance companies sit on vast amounts of investable capital from policyholders, which can be deployed into asset classes that yield higher returns than typical bonds.
JAB, recognising this potential, sees insurance as a better vehicle for growth than its established consumer portfolio, particularly in a low-interest-rate environment. But why turn away from food and beverage in favour of insurance?
The F&B sector’s waning appeal
While once a gold mine for private equity and investors seeking stable, long-term returns, the industry has faced increasing headwinds in recent years.
JAB’s retreat from its aggressive consumer-focused strategy is emblematic of wider trends affecting the F&B sector globally. Rising inflation, changing consumer habits, and pandemic-related disruptions have all conspired to diminish profit margins in an industry that traditionally offered steady returns.
For JAB, the cracks in its F&B empire became visible during the COVID-19 pandemic. The firm’s holdings, including coffee chains and fast-casual brands, were hit hard.
Since its 2020 initial public offering, JDE Peet’s shares have dropped by over a third. The company now holds just 11% of the portioned coffee market – less than a third of Nestlé’s share. JAB’s coffee and beverage assets saw a 17% decline in fair market value last year, according to its 2023 annual report. Pret A Manger, once a staple for urban professionals, saw sales plummet as city centres emptied.
JAB’s investments, once promising, now appear vulnerable to macroeconomic shocks and inflationary headwinds, eroding the steady growth they once promised.
Moreover, the challenges extend beyond pandemic-related disruptions. As the cost of raw materials like coffee beans, sugar, and wheat rise, companies are forced to either absorb these costs or pass them on to consumers, often at the expense of demand.
In this environment, profit margins shrink, and even well-established brands struggle to deliver the same returns as before. Consequently, the allure of investing in F&B brands has waned, and JAB is not the only investor looking to reallocate resources to more stable sectors.
“I think the appeal is waning because of higher interest rates,” says Austin. “It could shift if interest rates drop, but I’m not entirely convinced. The avoidance of gluten by more and more Americans is having a bigger impact than folks realise.”
In comparison, the insurance industry offers a more predictable environment. The ability to tap into large pools of policyholder capital and invest it strategically in higher-yielding private assets has attracted investors like JAB, who are seeking shelter from the turbulence in consumer markets.
It’s a long strategy that could offer steady cash flow, lower volatility, and opportunities to invest in illiquid assets that can generate outsized returns over time. For JAB, this represents a safer long-term bet in an increasingly uncertain world.
Implications for the coffee industry
JAB’s strategic shift raises important questions about the future of the coffee industry, where it has long been a dominant player.
The company’s “coffee sector takeover” and ownership of brands like JDE Peet’s and Keurig Dr. Pepper has helped it command a significant share of the global coffee market, influencing everything from pricing to distribution.
“JAB isn’t the only company to try to consolidate control of an industry through this sort of naked power grab,” writes Austin in his recent book Barons: Money, Power, and the Corruption of America’s Food Industry.
“In fact, JAB mimicked the strategy of conglomerates in the beer industry, which is dominated by two global firms. As one financial analyst pointed out, it seemed as if JAB was on a mission to become “the Bud(weiser) of the coffee space.”
However, the pivot towards insurance could signal a withdrawal of support for its coffee empire.
If JAB continues to divest from its coffee holdings, the ramifications for the industry could be profound. A potential exit from the coffee market would likely lead to consolidation, with smaller brands either merging or being acquired by larger competitors.
JAB’s scale and resources have allowed its coffee brands to dominate global markets, and its departure could pave the way for other investors or private equity firms to step in, though these new entrants may not have the same long-term vision or strategic interest in growing the sector.
Smaller coffee brands, which have traditionally benefited from JAB’s support, could struggle to find alternative sources of funding. With institutional investors less enthusiastic about the F&B sector, companies may have to turn to non-traditional funding sources such as crowdfunding or direct-to-consumer investment platforms to raise capital.
While these methods can be successful, they come with increased risk and uncertainty, particularly for brands that are not yet profitable or that rely heavily on consumer trends.
The loss of a heavyweight like JAB could also reshape the competitive landscape of the coffee industry, where “the 10 biggest roasters control more than 35% of all coffee sales,” according to the International Trade Centre’s Coffee Guide in 2021.
As JAB reallocates its focus and capital towards insurance, it leaves a vacuum in the F&B investment space that could lead to fewer large-scale investments in innovation and sustainability within the coffee sector.
“I actually think it’s for the best,” says Austin. “Most of these coffee and food brands just aren’t what they used to be, especially Panera.”
“It speaks volumes that the guy who built Panera doesn’t seem to have much faith in JAB’s leadership, given his involvement with Tatte – a fresher, seemingly better version of Panera. The fact that he’s backing Tatte suggests he sees a real opportunity in JAB’s missteps.”
JAB Holding Company’s pivot towards insurance marks a significant departure from its past as a dominant force in the consumer goods sector. However, this shift could have significant implications for the industries JAB leaves behind, particularly coffee.
As one of the largest players in the global coffee market, JAB’s potential exit or reduced role may lead to consolidation and force brands to explore new funding avenues. The coffee industry, once dependent on JAB’s deep pockets, will have to navigate a new landscape where stability and growth are harder to come by.
Coffee Intelligence
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