# An In-Depth Look at JDE Peet's and the Coffee Industry
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Chapter 1: The Coffee Business Unveiled
Recently, my spouse requested that I retrieve two boxes of coffee capsules from storage. Being the dutiful partner I am, I complied, even though I was preoccupied with other tasks.
As I brought down the boxes, I noticed something intriguing: despite the variety of brands, they all shared the same importer—Jacobs Douwe Egberts. What a peculiar name! This piqued my curiosity, leading me to delve deeper into the subject.
My investigation led me to JDE Peet's, which merges Jacobs Douwe Egberts with Peet's Coffee, and is publicly traded on Euronext Amsterdam under the ticker AMS: JDEP. I decided to peruse the company's annual report, which fortuitously was available in English. However, I still found the intricacies of the coffee industry somewhat elusive, prompting me to conduct further research.
For those investors keen on the coffee sector, here's what I discovered.
This Journey Begins with the Beans
Cultivating coffee beans, specifically coffee cherries, is no simple task. You can't just plant them in your backyard; they require specific climatic conditions and elevation to develop their distinct flavors.
Scientific factors play a role too; for example, coffee plants at higher altitudes yield more robust cherries. Additionally, the variety of coffee cherry—Arabica or Robusta—significantly influences taste and optimal growth conditions.
Notably, countries like Vietnam and Brazil emerge as major coffee producers, nestled within the coffee belt near the equator. Each region's unique environment contributes to its coffee's flavor profile, a fact well-known among aficionados, though I personally struggle to discern the differences.
From an investment standpoint, the key consideration is the market price of green coffee beans. Investors typically purchase these unroasted beans before roasting, as they boast a longer shelf life (6-12 months) compared to roasted beans (1 week to 1 month).
A closer look at JDE Peet's annual report revealed that the constant availability of beans is more critical to them than the cost of the beans themselves. The report indicates that only a small fraction of their expenses is allocated for bean purchases, likely because they buy in bulk from countries with weaker currencies relative to the Euro, their operational currency.
The video titled "JDE Peet's and the Coffee Boom" delves into how JDE Peet's navigates the dynamic coffee market, highlighting their strategies and challenges in maintaining a steady supply of quality beans.
Roasting: The Art and Science
Roasting coffee beans is a nuanced process that involves various factors, including the type of bean, roasting temperature, ventilation, and duration. Each of these elements can greatly influence the flavor profile of your coffee, whether it's a latte, cappuccino, or a straightforward black brew.
My research indicated that one of the most significant expenses for a coffee company is the cost of roasting equipment. An industrial-grade roaster can cost around $150,000, and given JDE Peet's scale, they likely possess multiple roasters.
Moreover, packaging costs are essential for prolonging the shelf life of roasted beans, along with transportation expenses, which must also be accounted for.
A glance at JDE Peet's balance sheet shows that the cost of this equipment does not weigh heavily on the company, comprising only about 1% of their long-term assets.
Starting a coffee business can be capital-intensive, especially if you need to secure loans. However, for those already financially sound, the initial investment is more manageable. JDE Peet's debt-to-equity ratio indicates that their debt levels are relatively low at 43%, with minimal long-term liabilities.
Investing in Brands, Not Just Beans
What surprises me about JDE Peet's is that a staggering 77% of their assets are linked to goodwill and intangible assets, primarily goodwill.
What does this accounting terminology imply? Essentially, it signifies that JDE Peet's has recognized that consumers tend to purchase coffee based more on brand reputation than on taste alone.
Evaluating JDE Peet's Top Brands
While I take brand valuations with a grain of skepticism, as they are JDE Peet's subjective assessments, this data does have implications for the coffee industry. Smaller coffee shops face significant challenges against large chains due to their lack of enduring brand recognition.
From an investor's perspective, personal experience may be necessary to gauge the significance of these brands. For instance, in Australia, the brand Moccona is well-known, but JDE Peet's does not attribute it as much value as other brands. My choice for Moccona isn't driven by flavor preference; rather, it offers the most affordable Nespresso capsules, even cheaper than many supermarket brands.
Final Thoughts
If you were to ask me what JDE Peet's perspective on the coffee industry is, I'd say it isn't merely about crafting the perfect cup of coffee. Instead, it's fundamentally centered on brand identity. In essence, the company operates as a conglomerate of coffee brands, resembling an ETF focused on coffee products and cafes.
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