BREWING A STRONG COFFEEBASED EMPIRE

Owner of Caribou and Krispy Kreme, JAB Holding now turns its attention to restaurants

ver the last several years, a European family business has spent more than $40 billion assembling a coffee empire.

JAB Holding Co. has acquired the American brands Peet’s Coffee, Caribou Coffee and Keurig Green Mountain, all since 2012. It also combined the European coffee giant, D.E. Master Blenders 1753, with the coffee business of Mondelez International foods to create a company now known as Jacobs Douwe Egbert.

Then it bought the high-end coffee retailers Stumptown Coffee Roasters and Intelligentsia. Mondelez continues to own 25 per cent of Douwe Egbert and has a similar stake in Keurig.

Now JAB needs somewhere to sell all that coffee. JAB, which is privately held, has said it would add the Panera restaurant chain to its growing empire of US coffee and food favourites for $7.5 billion, including debt.

It is only the latest effort to expand into restaurants by JAB, the investment arm of the Reimann family of Germany, who are heirs to the consumer goods company Joh. A. Benckiser. In 2014, JAB bought the bagel chain Einstein Brothers, which it has been combining with Caribou is some markets.

And last year, it paid $1.35 billion for Krispy Kreme, the struggling doughnut chain. In Panera, JAB will acquire a popular fast casual chain that serves soups, salads, sandwiches and baked goods at about 2,000 locations.

Panera has set itself apart by offering relatively healthy options and being one of the first US national restaurant chains to distance itself from high fructose corn syrup. But Panera, which went public in 1991, has chafed under Wall Street’s relentless demand for growth.

Ron Shaich, Panera’s personable chief executive who controls roughly 15 per cent of its stock, said one of the biggest attractions to the JAB deal was the chance to take his company private. “For the last 20 years, I’ve spent 20 per cent of my time telling people what we’ve done to grow and another 20 per cent of my time telling people what we’re going to do to grow,” Shaich said. “I won’t have to do that anymore.”

Investment analysts have speculated for years that Shaich, 63, has been looking for a way to reduce his role at the company after spending more than two decades building it up from a tiny 400-square foot cookie store in Boston. Shaich, however, said that he planned to continue to lead Panera.

“Nothing will change,” he said. “The management team and I will remain.”

With the acquisition of Panera, JAB will have spent more than $40 billion in what appears to be a big bet that it can muscle in on a market dominated by Starbucks and Nestlé. Starbucks has just undergone a major management change, with its longtime chief executive, Howard Schultz, stepping aside to focus on developing its emerging high-end coffee business. Kevin Johnson, the new chief executive, served on the Starbucks board but made his career in technology.

In many ways, Schultz was the personification of the company, and under his leadership, Starbucks routinely posted record earnings and stellar growth, but it has run into some glitches recently. Investment analysts were spooked after the company reported first-quarter earnings in January that reflected slower sales in its vast fleet of US stores and problems with its mobile order system, which apparently could not keep up with demand.

One quarter does not, of course, a history make, and JAB also faces challenges. It takes on Panera at a time when it has two large turnarounds on its hands, Krispy Kreme and Keurig Green Mountain. The doughnut chain was a phenomenon several years ago, then fell on hard times and has never fully recovered.

Keurig, which dominates the single-serve coffee market, has struggled as competition cut into its profitability. Then it made a big bet that fell flat on a single-serve machine to make cold drinks, and JAB stepped in.

The restaurant business in general has been in the doldrums for the last couple of years, with most big chains struggling to eke out increases in same-store sales of even 1 or 2 per cent. Panera has done better than most.

The company moved faster than others to build a mobile ordering system and cleanse its menu of ingredients like artificial preservatives and high fructose corn syrup that consumers do not want. The NPD Group, a research and consulting firm, predicts that traffic in restaurants in the US will remain stalled this year as well. The firm predicts that quick-service restaurant chains like McDonald’s and KFC, which account for 80 per cent of the total traffic in the restaurant industry, will see a 1 per cent increase in visits this year.

When it announced the deal with JAB, Panera said its same-store sales in its companyowned stores were up 5.3 per cent, which is stronger than most. But roughly 60 per cent of its stores are owned by franchisees, with sales in those units not doing as well.

Mobile ordering system

Shaich said that was because the fruits of initiatives like the mobile ordering system, which were rolled out first in companyowned stores, have yet to fully show up in the performance of franchisees.

He said JAB had no plans to make changes. “They are hands off,” Shaich said. “These guys have a track record for investing in great brands and companies and letting management do their jobs.”

Under the terms of the transaction, JAB BV, the investment vehicle executing the transaction for JAB, would pay $315 a share, representing a premium of 30 per cent to Panera’s 30-day volume-weighted average stock price as of March 31, the last trading day before media reports that Panera was exploring a potential sale.

JAB BV would also assume about $340 million in net debt. “We strongly support Panera’s vision for the future, strategic initiatives, culture of innovation, and balanced company versus franchise store mix,” Olivier Goudet, JAB’s chief executive, said in a news release. “We are excited to invest in and work together with the company’s management team and franchisees to continue to lead the industry.”

The transaction is expected to close in the third quarter and is subject to shareholder and regulatory approval. Shaich and entities affiliated with him have agreed to vote shares representing about 15.5 per cent of the company’s voting stock in favour of the transaction.