Coffee Holding Co., Inc. operates as an integrated wholesale coffee roaster and dealer in the United States and Canada.
The company offers three categories of products:
JVA competes within multiple divisions of the coffee industry. The largest portion of their business is distributing coffee to independent roasters. They also compete in the retail packaged coffee business. Indirectly they compete with coffee houses as well as other beverage companies.
JVA has no significant public competitors in the raw coffee bean distribution space.
|Farmer Brothers Company||FARM||188 Mil.|
|Crystal Rock Holdings||CRVP||17 Mil.|
|Peet's Coffee & Tea||PEET||602 Mil.|
|Green Mountain Coffee Roasters||GMCR||9 Bil.|
Farm Bros manufacturers, wholesales and distributes coffee, tea and culinary products to institutional food service providers, as well as retailers such as convenience stores, coffee houses, general merchandisers, private-label retailers and grocery stores. Acquired Coffee Bean Holding Co, a specialty coffee manufacturer and wholesaler, in 2007. Acquired DSD Coffee Business from Sara Lee corporation in 2009.
Crystal Rock Holdings, Inc. engages in the production, marketing, and distribution of bottled water, and distribution of coffee in New England, New York, and New Jersey. The company also rents and sells water coolers to customers to dispense bottled water; and sells and rents units to commercial accounts that filter water from the existing source on site. In addition, the company rents and sells coffee brewing equipment; and distributes various coffee, tea, and other hot beverage products and related supplies, as well as other consumable products used around the office.
Peet's Coffee & Tea, Inc. operates as a coffee roaster and marketer of roasted whole bean coffee and tea in the United States. The company also offers whole leaf and bagged tea; and specialty food items, such as jellies, jams, candies, beverages, pastries, and other related items. In addition, it markets a range of merchandise, including brewing equipment for coffee and tea; paper filters and brewing accessories; and branded and nonbranded cups, saucers, travel mugs, and serveware. The company sells its products through multiple distribution channels comprising its own retail stores; and a network of grocery stores, home delivery, office, and restaurant and foodservice accounts. As of January 3, 2010, it operated 192 retail stores in California, Colorado, Illinois, Oregon, Massachusetts, and Washington.
Green Mountain Coffee Roasters, Inc. is engaged in the specialty coffee and coffee maker businesses. The Company operates in two business segments: the Specialty Coffee business unit and the Keurig business unit. Their specialty coffee business sources, produces and sells more than 200 varieties of coffee, cocoa, teas and other beverages in K-Cup portion packs and coffee in more traditional packaging, including whole bean and ground coffee selections in bags and ground coffee in fractional packs. Keurig is a manufacturer of gourmet single-cup brewing systems, targets its premium single-cup brewing systems for use mainly in North America. In May 2010, the Company acquired Diedrich Coffee, Inc.
There are many different value chain positions that a company can operate from in the coffee industry. Companies choose which positions to compete in based on the overall strategy of the firm. Coffee Holdings has chosen to compete within the majority of the value chain in order to diversify its product offerings and insulate itself from economic conditions.
1. Growers/Dealers Coffee is grown around the world in many different countries JVA has chosen to source its coffee from Colombia, Mexico, Kenya, Indonesia, Brazil and Uganda. Dealers typically located in the United States supply the coffee beans from these countries. There are large, well-known suppliers in this position, however it is mostly commodity based with all the companies competing on prices. JVA has commented that although they use 10 main suppliers for 85% of their raw coffee, they can easily replace them if necessary.
2. Wholesalers JVA's main business is supplying small, independent coffee shops with fresh coffee beans which they then roast themselves. JVA is the middle man between the coffee brokers and these small dealers who cannot order large enough quantities. This is a very fragmented industry with many small, regional competitors. Many wholesalers are internet based only who supply a limited number of individual roasting enthusiasts and small coffee shops.
3. Roasters This stage of the value chain is where companies can differentiate their products from their competitors. All companies can source their beans from the same suppliers, but all of them have differentiated, proprietary roasting methods. JVA has a very rigorous roasting method that is based on small batches and quality testing. Most specialty roasters use small batches including Peet's and Starbucks.
4. Distributors Many companies are simply focused on distributing their own or other companies' coffees to offices, individuals and the food service industry. Distributing other's products is a very low margin business and thus many companies either distribute their own or are expanding their own brands. Crystal Rock (discussed in competition), for example, distributes its own proprietary brand along with many other brands (including Green Mountain). JVA and FARM distribute their own proprietary products. One of JVA's growth opportunities is expanding their food service distribution business. They are looking to market their Colombian coffee brand to hotels, restaurants, casinos, hospitals and other food service providers.
5. Retailers Retailers are broken up into coffee houses and grocers.
High - The coffee wholesale business (JVA's largest segment) is a extremely competitive market. JVA competes by offering specialty coffee, highlighting its quality, and offering value-added services. Specialty coffee and coffee shops offering differentiated products are the fastest growing segment of the coffee market. They have built their economic moat by creating high intrinsic switching costs. Their value-added services include training, coffee blending and market identification. These are designed to create customer loyalty by helping their customers expand their businesses and create loyalty of their own. JVA also has strict internal quality standards that are designed to give consistent, quality coffee. Coffee drinkers seek consistency and quality when choosing coffee shops and JVA is able to provide this to their customers. In summary, it is a very competitive market, but coffee shops are unlikely to switch providers. The retail coffee position is also extremely competitive. Grocers demand slotting fees and the market is dominated by large economy brands and well-known specialty brands. JVA has had trouble penetrating this market, but will continue to try in search of higher margins.
Medium - Entering the wholesale coffee market can be financially easy, but because of the competition it would be hard to make a profit. In order to offer the same value-added services as JVA, you would need management that has a lot of Coffee experience which can only be found in so many people. In the retail position, it is once again fairly easy to offer a coffee brand. However, there are high slotting fees and shelf space is dominated by popular brands. It would not be easy to break into this position.
Low - If people want to drink coffee then they will drink coffee. The only relevant substitute would be other hot beverages such as tea and hot chocolate. JVA is moving into these product lines in order to better compete with these demands.
Wholesale - High - There are a lot of firms that offer the same wholesale capabilities as JVA, but because of the high switching costs they are unlikely to switch firms. However, GMCR accounts for 47% of their sales. This high customer concentration gives the buyer a lot of leverage regarding pricing and could demand lower prices.
Retail - High - In the retail position, there are a lot of retailers selling to a lot of consumers - this creates a position of low buying power for the consumers. Large grocers will be able to demand the lowest prices and high slotting fees if companies want to sell product at their stores.
Low - JVA has stated that although they receive 85% of their beans from 10 suppliers, they do not enter into long term contracts and they can switch suppliers without disrupting their business. They can also switch countries from which they source their beans without an effect on their business.
JVA has been a family-operated business for three generations. This has positives and negatives. On one hand, JVA has a strong management that works well together, but it could lead them to make choices that are beneficial for insiders and not common stock holders.
President, Chief Executive Officer and Chief Financial Officer
28 Years Experience
Executive Vice President – Operations
30 Years Experience
Original member of the Specialty Coffee Association of America.
Specialty coffee roasters compete by offering high-quality coffee. The processes by which they roast their coffee is proprietary and depend on their employees.
Supply coffee under 34 different labels to wholesalers and retailers. Customers seek a quality similar to the national brands at a lower cost, which represents a better value for the consumer.
JVA sells products across multiple price points in the retail environment. Their private label offerings offer high quality coffee that is sold at a value price compared to typical specialty coffee brands. In their branded segment, they offer higher priced specialty coffee as well as economy coffee. Offering products at multiple price points allows them to hedge their business and not be as effected by business cycles. In their wholesale division, they sell specialty coffee that sells at a premium to typical coffee sold on an exchange. This allows them to sell a differentiated product and pass on price increases more so than economy providers.
JVA sells its retail products at numerous grocery locations across the Northeast. They sell their wholesale products through an internal sales force as well as through independent coffee brokers.
JVA promotes its wholesale coffee business through industry publications and through the brokers they hire to sell their coffee. They also attend industry trade shows in order to gain new business.
They promote their retail lines through a combination of in-store promotions such as sales and product taste tests.
The company sells a variety of products in the coffee industry. This includes wholesale coffee, branded coffee and private-label coffee.
Historically, JVA focused the majority of its sales along the East Coast. They have taken numerous steps to expand their business across the United States.
From 1991 to 2004 JVA operated out of a production facility in Brooklyn, New York. Coffee Holding made capital investments to improve roasting, packaging and fulfillment.
West Coast - 2004 - JVA acquired Premier Roasters, a roaster-dealer in La Junta, Colorado. At the time of the acquisition, JVA reached an agreement with the City of La Junta for a 20-year lease on a 50,000 square foot facility in La Junta. The Colorado location allows JVA to reduce freight and shipping costs to the and expand the amount of customers along the West coast.
Mid-West - 2006 - JVA entered into a JV with Caruso's Coffee of Brecksville, Ohio and formed Generation Coffee Company (GCC). GCC engages in the roasting, packaging and sale of private label specialty coffee products. JVA owns 60% equity interst in GCC and is the exclusive supplier of its coffee inventory. This JV allows JVA to bid on private label gourmet whole bean business which they were not able to before.
In October 2009, we sold our Brooklyn, New York location after ceasing our manufacturing operations there in May. The majority of our processing has been moved to our La Junta, Colorado facility with our Generations Coffee Company facility in Brecksville, Ohio becoming more involved with everyday coffee processing. The acquisitions of these companies and the closure of their previous properties have made them more centrally located in the United States and also increase operating efficiencies.
Experience - The company has almost 40 years of experience in the coffee distribution industry. This has allowed them to refine their processes that newer companies can not copy. This experience has also given them the experience to guide newer coffee shops that other companies can not offer.
Value-Added Supplier - They are a value added supplier to small roasters. JVA is able to help market specialty products and develop loyalty.
Wholesale Position - The wholesale position allows JVA to participate in industry growth without the risks of being dependent on the extremely competitive retail segment.
Large Roaster - The size of the company gives allows them to have certain economies of scale. This large position also allows them to be favorable positioned to gain to new accounts and grow with current customers.
There are currently two main trends in the coffee industry. One is that there is a movement from drinking standard, economy coffee to specialty, differentiated products. The second is that more consumers are consuming their coffee in single-cup pod form. JVA's strategy and strengths are allowing them to compete and profit on both of these trends.
Specialty Coffee - JVA provides wholesale coffee and value-added services to the specialty coffee industry. This allows them to grow with the industry while at the same time not depending on the most competitive position in the value-chain.
Single Serve - JVA has been able to take advantage of this trend by being a key supplier to Green Mountain Coffee Roasters. Green Mountain owns the Kuerig Coffee System which many analysts believe has a 70% market share of the single-cup market.
As you can see, the growth of Green Mountain has ranged from 40% in 2006 to 73% this most recent year. This has obviously been very beneficial for the growth of JVA.
JVA has been able to take advantage of these opportunities by using their competitive advantages (listed above).
Green Mountain - JVA depends on GMCR for a large percentage of their sales. This has been a very profitable relationship for JVA because of the growth of GMCR's extremely popular Keurig Coffee System. However, the patents for the Keurig Coffee Machine and the related K-Cups are coming off patent in 2011 & 2012. The success of these machines have spawned numerous competitors and planned systems. These include:
These new products could put pressure on Keurig's market share. If their market share decreases, GMCR will sell less coffee and require less raw beans from JVA. However, there is a network effect regarding the individual systems - people will go to the system with the best selection of coffee. The Keurig system already has a wide range of coffee brands including premiums such as Starbucks, Caribou and Duncan Donuts.
JVA makes its money by buying coffee in bulk and selling it to independent coffee shops and roasters. If coffee prices go up then they must increase the prices they charge their customers or they will not be able to sustain their margins. Many times, they are not able to pass on the price increases and their margins suffer. The graph shown is JVA's 4 quarter average gross margins superimposed over a five year price chart of coffee. As you can see, coffee has risen a lot in the last year. The reason for their margins not decreasing is because of the use of hedging.
Brand Failure One of JVAs strategies is to increase its sales of premium brand coffee at the retail level. Retail sales have higher margins, but there is also much tougher competition. JVA signed a deal with Entenmann's Bakery to produce and distribute a premium brand coffee. This was recently cancelled because they were not able to sell the amount they were expecting. The money being spent will be reinvested in their own brands. If their brands do not hold the same market share or it decreases, then revenues will decrease and margins will shrink.
JVA is undervalued to the majority of its competitors. In the distribution sector, CRVP has a P/E of 4.28 and PEET has a P/E of 36.31. In Retail, SJM has a P/E of 17.8, KFT has a P/E of 23.65 and GMCR has a P/E of 128.77. GMCR has such a high valuation because they have had amazing growth rates due to the adoption of their Keurig Coffee Systems.
Profitability is driven by: 1) Margins, 2) Turnover and 3) Leverage.
In 2008, the company's profitability was hurt by falling gross the margins because the global recession. In 2009, profitability recovered to its highest period since the inception of the company, but has since came down to average.
The company believes that the continued expansion of premium coffee shops will allow the company to sustain this level of profitability. The growth into retail markets will put upward pressure on margins and help profitability.
Note on ROCE: ROCE was able to outperform ROA because leverage has increased after the company’s acquisitions.
Margins have been on a steady downward trend since 2003. As discussed above, margins were hurt during the recession. The company has also mentioned many times in their 10K that their margins are effected by the increasing prices of coffee.
The company has very few fixed assets and thus has very high fixed asset turnover. However, the majority of there assets are current assets. Total asset turnover has increased from 2.8 in 2003 to 3.8 in 2010. Current Asset Turnover was 3.7 in 2003 and is now 4.3. Fixed Asset Turnover has increased from 12.6 to 52. Fixed Asset turnover has increased so much because they lease the majority of their properties and they have the capacity to increase sales without increasing their warehouse needs.
The company's CCC has been increasing over the past five years because the company's Days Inventory has been increasing. The company does not explain why their inventory turnover has been decreasing, but it could be because their sales went down during the recession and they made some acquisitions recently. The inventory should revert to mean in the next couple of years. This will help their efficiency and improve their liquidity position.
The company has a very strong liquidity and solvency position. One thing that should be noted is that they do not own their warehouses and account for them as operating leases. That means that they do not account for the real estate in assets nor the long term liability in liabilities. If this was accounted for on their balance sheet it would greatly effect their ratios.
All information contained in this Wiki came from the respected company's 10K