Coffee Consolidation Accelerates

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1 Coffee Consolidation Accelerates Sintercafé 2017 Jim Watson Senior Beverages Analyst Rabo Securities 1

2 Rabobank: The World s Leading F&A Bank EUR 426bn outstanding capital with EUR 98bn committed to the F&A sector ranked amongst the (1) Top 25 safest banks globally Located in 43 countries Active in all segments in the Netherlands with a F&A focus worldwide Note 1: Ranking as per Global Finance Rabo Securities

3 Our Mission is to be the Bank of Choice to our Food & Agri Clients F&A Sector Banking We offer sector based finance solutions by bringing together our global sector knowledge, our client insights and seamless execution Animal Protein Beverages Consumer Foods Dairy Farm Inputs Grains, Oilseeds & Sugar Supply Chain Pork Beer Food services Dairy Agro chemicals Grains Food logistics Beef Seafood Poultry Coffee Distribution Juices Soft drinks Spirits Bakery Confectionary Grocery Other value added processing Animal nutrition & health Equipment Fertilizers Seeds Oilseeds Sugar Packaging Wine Sector knowledge Fundamental sector knowledge covering the entire Food & Agri chain supported by extensive research from macro-themes, impacting a particular F&A industry, to micro-level analysis of individual companies Over 80 dedicated research professionals across 20 offices globally, working closely with Rabobank professionals Client insights We champion innovative thinking and idea generation, driven by our knowledge of the clients and their sector, to bring forward-looking deals and solutions to our clients Rabobank Group operates in 40 countries around the world Seamless execution Our Global Sector Heads bring together the local, regional and global network of our bankers and our product suite to support client ambitions and provide disciplined execution of client agendas 3 Rabo Securities

4 No shortage of M&A in coffee 4 Rabo Securities

5 Themes from the ABI model that will impact coffee A path of aggressive M&A can take a regional company to global sector leadership very quickly This kind of aggressive M&A is contagious Increased financial pressure on suppliers will drive a separate wave of consolidation upstream Best practices of the ABI/3G model spread rapidly Local platforms become a base for distribution of select regional/global premium brands. 5 Rabo Securities

6 A three-headed acquisition monster AB-InBev Kraft Heinz JAB Holdings 6 Rabo Securities

7 Coffee consolidation to mimic beer consolidation? All top-15 beer brand owners (outside of China) made major acquisitions (Blue) or were acquired (Red) in the last 10 years 14% 12% 10% 8% 6% 4% 2% 0% 2007 Global Beer Volume Share 7 Rabo Securities

8 What consolidation looks like in financial terms 50,000 The growth of AB InBev (USD m) 45,000 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0 Revenue Gross Profit EBITDA Source: Company Filings 8 Rabo Securities

9 Numerous coffee players between 1-3% share A buy or be bought environment is coming to coffee and those with 1-3% retail share won t be able to stay on the sidelines 25% Hot Coffee World Value Share 20% 15% 10% 5% 0% Source: Euromonitor 9 Rabo Securities

10 Coffee markets are still very regional N. America hot coffee $ share 2016 W. Europe hot coffee $ share 2016 JM Smucker, 12.6 Nestlé, 24.3 Other, 39.7 Starbucks, 12.4 Other, 36.7 Kraft Heinz, 12.3 Paulig, 1.1 JDE, 20.9 Massimo Zanetti, 0.9 Peet's, 1.3 Dunkin' Brands, Tata 2.2, 2.8 Keurig, 11.6 Nestlé, 4.2 Massimo Zanetti, 1.4 Melitta, 1.8 Alois Dallmayr, 1.9 Lavazza, 8.2 Tchibo, Rabo Securities

11 Instant vs fresh vs pods: Who drinks what? 2016 sales breakdown by coffee segment 7% 20% 36% 32% 69% 67% 55% 51% 47% 37% 39% 57% 11% 35% 43% 37% 34% 18% 25% 17% 6% 3% 1% 4% 5% 7% 8% 3% 3% 3% World Asia Pacific Australasia Eastern Europe Latin America Middle East and Africa 9% 9% North America Western Europe Fresh Coffee Beans Coffee Pods Ground Coffee Instant Coffee Source: Euromonitor 11 Rabo Securities

12 What consolidation looks like across the industry At-home coffee market share consolidation 100% % retail sales generated by top companies 80% 60% 40% 20% 0% Asia Pacific Australasia Eastern Europe Latin America Middle East and Africa Top 3 Top 10 North America Western Europe Beverage market share consolidation by segment % retail volume generated by top companies 100% 80% 60% 40% 20% 0% Bottled Water Beer Spirits Wine Carbonated Soft Drinks Top 3 Top 10 Juice RTD Coffee Coffee Source: Euromonitor 12 Rabo Securities

13 What 2017 deals show us across the supply chain Sucafina takes minority stake Lavazza acquires 80% stake in Brazil farm JV in Kicking Horse Coffee We see pressure on trading houses to expand outward M&A is clearer path (vs organic growth) Only limited options to get closer to production Premium brands with the potential for regional/global expansion will become increasingly valued Kicking Horse Coffee represents one of the local jewels the Lavazza Group continues to seek as part of its globalization and premium positioning strategy, Antonio Baravalle, CEO of the Lavazza Group 13 Farmer Brothers grows with West Coast Coffee acquisition Roasters will be under pressure to increase efficiency and scale As third wave roasters take ownership of premium coffee, mainstream roasting becomes increasingly commoditized Rabo Securities

14 Consumers will accept large scale third-party roasting For consumers - the brand story matters more than production ownership For brand owners - the flexibility, scale, QC of third-parties are the benefit 14 Rabo Securities

15 What does an asset light model mean for coffee? Going asset-light is a core strategy across beverages Not just production, even innovation has been outsourced Brand-owner expertise is in growing and leveraging brand equity Over the next six years, PepsiCo Europe will increase the size of its contract manufacturing business sixfold without increasing our number of suppliers and without a significant increase in internal management resources The company may want to test a product in a market seen as high risk initially using a resourcelight contract manufacturer model, before possibly brining production in-house following market tests 15 Rabo Securities

16 We didn t forget about Nestle Blue Bottle The drivers behind the deal Global brands: Blue Bottle already has a bit of international presence with a few shops in Japan but, like Kicking Horse, see themselves as a global brand eventually. Build out a portfolio: Blue Bottle slots in very nicely with Nestle as a true ultra-premium brand to sit at the top of the portfolio. RTD coffee is a young category: is so small relatively, that paying a big premium now will likely seem very reasonable if the category takes off. Buying a top player early in the game gives a lot of upside. An e-commerce play?: Blue Bottle had previously bought Tonx (subscription coffee start-up) and Perfect Coffee (start-up focused on grinding and preserving coffee). Every beverage company (coffee through spirits) is trying to figure how to get an edge in online shipping. Or more accurately they are all investing money to prevent missing the boat and getting left behind. 16 Rabo Securities

17 The power of global brands (AB-InBev version) 17 Rabo Securities

18 Final thought: It takes two to tango Source: Reuters, Bloomberg 18 Rabo Securities