Research
Jollibee Makes a Splash With Coffee
Jollibee Foods Corporation (JFC), a listed Philippines-based eponymous quick service restaurant (QSR) operator, acquired Coffee Bean & Tea Leaf (CBTL), one of the top 10 specialist coffee chains in the world. In doing so, JFC acquired a global footprint and one of the most recognized brand names in coffee. CBTL’s strong footprint in Asia – one of the fastest growing coffee markets – offers attractive opportunities for coverage overlaps in Southeast Asia and, consequently, potential synergistic opportunities in operations and supply chains. Furthermore, the deal ties-in with JFC’s recent acquisition of Smashburger, as the US is a key market for CBTL, with nearly a third of total outlets.
A Second Chance for a Second-Wave Player?
While third-wave players, such as Peet’s Coffee and Intelligentsia, have captured the growing premium coffee space, CBTL operates in the second-wave coffee space, which is quite competitive. Starbucks, the segment leader, is significantly ahead of its competitor across most tracked metrics (i.e. daily footfall, outlet sales, and average ticket size) and represents the proverbial 800-lb gorilla in the mass market segment (see Table 1). While CBTL stores are EBITDA positive, the overall business is operating at a net loss – a fact reflected in the stock market’s reaction to the news. JFC will potentially look at store rationalization and cost synergies to improve average store margins.
A Formidable Competitor in Southeast Asia
JFC has the ambition to become one of the top five restaurant companies in the world. They have made several recent acquisitions and remain committed to their mission. While the acquisition of CBTL may not substantially change the competitive dynamics in the coffee-shop segment, it poses strategic implications for the overall QSR industry and supply chain, and makes JFC a serious global player in the coffee-shop and QSR industries (see Figure 1 and Table 2).
We view the CBTL acquisition favorably from a strategic perspective, as it provides JFC with operational advantages and flexibility. The stated priority for the company is to grow the CBTL business in Asia where a short-term win could come from rationalization and cost synergies. As a major player in the Philippines QSR market, the combined coffee-shop and fast-food businesses will make JFC a formidable entity in the Southeast Asian market. In lease negotiations with malls and other landlords, for example, JFC’s combined offering will have an advantage over pure play coffee shops and QSR brands. Similarly, the company could also rationalize supply chain costs to support higher margins.
A Strengthening Presence in North America
While the recent acquisition presents opportunities for synergies in Asia, it also strengthens the company’s presence in North America. JFC might consider using CBTL as a platform to introduce other brands in its stable to consumers in North America, where strong consumer spending and diverse populations offer a good long-term expansion opportunity.
Finally, it should be noted that JFC had been planning an IPO of the Highlands Coffee business, but, with the CBTL acquisition, these plans have now been postponed. JFC plans to make a public offering of the combined coffee business in the next three to five years, which could be attractive to potential investors, depending on the business’s performance over the next few years.