Illycaffè has joined the global coffee market's dealmaking frenzy, looking to extend its European reach by teaming up with JAB-owned Jacobs Douwe Egberts (JDE) to produce and distribute illy-branded coffee pods.
The licensing agreement is the latest move in the battle for consumers ready to pay more for higher-quality coffee, with Illycaffè's new pods to be designed to work in rival Nestlé's Nespresso coffee machines.
Illycaffè's existing pods work only with the Italian brand's own coffee machines, but Nespresso compatibility would open up the wider European market, where the Nestlé machine holds a very strong market position.
The deal follows Nestlé's own $7 billion (€6.1 billion) licensing deal with Starbucks, announced in May, and Coca-Cola's August acquisition of coffee chain Costa to expand in the fast-growing sector.
A Premium Brand
Illycaffè, a premium brand that produces only one blend made from nine varieties of Arabica beans, is the third-biggest coffee maker in Italy with sales of nearly €500 million ($574 million) last year.
The JDE tie-up was announced in Milan on Monday, though Illycaffè declined to provide financial details.
"Illycaffè has struck a licensing deal with JAB's JDE under which JDE will sell aluminium capsules containing coffee produced by Illycaffè," said CEO Massimiliano Pogliani.
The agreement will see Trieste-based Illycaffè produce its blend for capsules that JDE will sell outside Italy.
Like many other mid-sized Italian roasters, Illycaffè sells its coffee mainly through cafes and supermarkets in its home market - the world's fourth-biggest in term of number of cups drunk.
The arrival of Starbucks, which opened its first roastery in Milan in September, has further ramped up competition in Italy.
The new partnership will start in the first half of next year, with JDE initially selling the pods in Germany, France and Spain.
"The coffee pods segment is still booming, with a rate of growth of between 20% and 30% [a year]," said JDE's finance chief Fabien Simon.
JDE, created in 2015 when Luxembourg-based investment firm JAB Holdings bought Mondelez International's coffee operations, has picked up a string of coffee and tea businesses in recent years, establishing its position as a key global player.
JAB itself has been on an acquisition spree, with a string of restaurant deals including Au Bon Pain, Krispy Kreme and Panera Bread as well as several coffee businesses.
Recent media reports said that the Illy family had rebuffed an offer from JAB to buy the coffee group they own. However, JDE's Simon on Monday denied that such an offer had been made.
Illycaffè chairman Andrea Illy said the company was being courted by bigger rivals but wanted to remain independent and was not ready for a stock market listing.
News by Reuters, edited by ESM. Click subscribe to sign up to ESM: European Supermarket Magazine.