I. Introduction to Coffee Holding Company (JVA)
A. Company profile and history
Coffee Holding Co., Inc. (NASDAQ: JVA) (Coffee Holding Co.) is an integrated wholesale coffee roaster and dealer in the United States. Established in 1972, Coffee Holding Co. has been family managed by the Gordon family since the start and has its headquarters in Brooklyn, NY. Coffee Holding performs wholesale coffee operations, including manufacturing, roasting, packaging, marketing and distributing roasted and blended coffees for both private labeled accounts as well as its own brands. Additionally, Coffee Holding Co. sells green (unroasted) coffee. Coffee Holding Co. currently has business operations in the USA, Canada, China, England and Australia. The majority of sales are in the USA, but they are targeting expansion in Canada and China. Their suppliers of green coffee source the beans from Colombia, Brazil, Mexico, Kenya, Uganda, and Indonesia.
B. Product lines and target markets
According to Coffee Holding Co.’s 2016 10-k report, Coffee Holding Co.’s core coffee products can be segmented into three distinct categories: Wholesale Green Coffee, Private Label Coffee, and Branded Coffee.
· The Wholesale Green Coffee includes unroasted raw beans imported from around the world and sold to large and small roasters and coffee shop operators. Since 1998, Coffee Holding Co. has increased the number of their wholesale green coffee customers, including coffee houses, single store operators, mall coffee stores and mail order sellers, by 425% from 150 to 787. The specialty coffee market represents the fastest growing area of Coffee Holding Co.’s industry. The growth in specialty coffee sales has created a marketplace for higher quality and differentiated products, which can be priced at a premium in the marketplace. Coffee Holding Co. sells green coffee beans to small roasters and coffee shop operators located throughout the United States and carries over 90 varieties.
· The Private Label Coffee includes roasted, blended, packaged and sold under the specifications and names of others, including supermarkets that want to have their own brand name on coffee to compete with national brands. The private label coffee is sold in cans, brick packages and instants in a variety of sizes. As of October 31, 2016, Coffee Holding Co. supplied coffee under approximately 26 different labels to wholesalers and retailers. They produce private label coffee for customers who desire to sell coffee under their own name but do not want to engage in the manufacturing process. Their private label customers seek a quality similar to the national brands at a lower cost, which represents a better value for their consumer.
· Coffee Holding Co.’s Branded Coffee is coffee roasted and blended to Coffee Holding Co.’s own specifications and packaged and sold under their own eight proprietary and licensed brand names in different segments of the market. Coffee Holding Co.’s branded coffee is produced and packaged at their own facilities in La Junta, CO, and Brecksville, OH. Coffee Holding Co. then sells the packaged coffee under their brand labels to supermarkets, wholesalers and individually-owned stores throughout the United States. Coffee Holding Co.’s branded coffee includes:
o Cafe Caribe: a specialty espresso coffee that targets espresso coffee drinkers and, in particular, the Hispanic consumer market
o Don Manuel: is produced from 100% Colombian coffee beans. Don Manuel is an upscale quality product which commands a substantial premium compared to the more traditional brown coffee blends
o S: an upscale canned coffee established in 1921 and includes Premium, Premium Decaf, French Roast, Colombian, Colombian Decaf, Swiss Water Decaf, Kona, Mellow’d Roast and IL CLASSICO lines
o Cafe Supremo: a specialty espresso that targets espresso drinkers of all backgrounds and tastes. It is designed to introduce coffee drinkers to the tastes of dark roasted coffee
o Via Roma: an Italian espresso targeted at the more traditional espresso drinker
o IL CLASSICO: an S&W brand espresso product
o Premier Roasters: retail high-end premium whole-bean canisters and food service packs
C. Recent acquisitions and purpose of acquisitions
1. Comfort Foods Inc. (2017): In February 2017, Coffee Holding Co. purchased Comfort Foods Inc. (Comfort Foods). Comfort Foods was a medium sized regional roaster located in North Andover, MA. Comfort Foods manufactured both branded and private label coffee for retail and foodservice customers located predominantly in the northeast marketplace. In connection with the acquisition, the Company paid $2.3 million for 100% of the capital stock of Comfort Foods.
According to Andrew Gordon, President and CEO of Coffee Holding Co., the purchase of Comfort Foods would allow Coffee Holding Co. to more effectively to serve the northeast region of the US, while also being able to utilize its own distribution abilities to introduce Comfort Foods to the rest of the US. “We are excited to bring Comfort Foods and its Harmony Bay brand coffee into our already diverse portfolio of strong regional retail coffee brands. The Harmony Bay brand, with its uniquely patented molded canisters and diverse flavor profiles, is currently sold in over 1,000 stores and will increase our overall presence and subsequent economies of scale at many of these current retail accounts in the northeast. In addition, through our national platform, we believe we can expand the brand’s distribution over a wider marketing area,” said Andrew Gordon. “In addition, we will once again begin roasting and packaging our products on the east coast in the fully equipped and spacious modern roasting facility we have acquired. In conjunction to closing this transaction, we renegotiated Comfort Foods’ prior lease arrangement which will now provide us with both a highly efficient and economical space in which to conduct our roasting and packaging operations for the next ten years. We believe this transaction will create logistical savings for many of our sales transacted on the eastern seaboard and will also increase our competitive advantage at a number of current and potential accounts in the northeast marketing area. We expect the synergistic value of roasting both in Colorado and Massachusetts to translate to higher margins and renewed efficiencies for both current and potential new business.”
2. Sonofresco (2016): In June 2016, Coffee Holding Co. purchased Coffee Kinetics LLC (dba Sonofresco). Founded in 1999, Sonofresco was a manufacturer of commercial tabletop coffee roasters and a wholesale supplier of green coffee beans. Sonofresco’s customers included retail coffee and home roasting businesses and Sonofresco oversaw importers in the Asian, Australian and New Zealand markets. Revenues generated by Sonofresco were split equally between sales of roasting machines and sales of unroasted green coffee beans.
According to Andrew Gordon, the acquisition of Sonofresco expanded Coffee Holding Co.’s book of green coffee customers by more than double. Additionally, Coffee Holdings Co.’s would provide access to coffee choices that Sonofresco’s customer would not have had access to with Sonofresco alone. Lastly, with the acquisition, Coffee Holding Co. intended to expand Sonofresco’s roasting machine sales both domestically and in the overseas market by utilizing Coffee Holding Co.’s platform and their established relationships. “We intend to vertically integrate Sonofresco’s current business model by offering products complimentary to their tabletop roasters, such as grinders and espresso machines, in order to give customers a more complete turnkey roasting operation. We expect that this deal will be accretive to both our bottom and top line numbers,” claimed Andrew Gordon.
3. Organic Products Trading Company (2010): In May 2010, Coffee Hold Co. purchased Organic Products Trading Company. Organic Products Trading Company sourced high quality certified organic green specialty coffee directly from coffee farmers in South and Central America. Organic Products Trading Company’s green coffee was sold directly to small and medium-sized roasters throughout North America, generating revenues of approximately $10MM per year.
According to Andrew Gordon, the acquisition of Organic Products Trading Company would provide Organic Products Trading Company’s customer base of approximately 200 roasters access to the traditional gourmet Arabica coffees from Coffee Holding Co.’s inventories that they would not be able to procure from Organic Products Trading Company. Additionally, Coffee Holding Co.’s customer base would have immediate access to Organic and Fair Trade Arabica coffees.
The purchase of Organic Products Trading Company not only created synergies for Coffee Holding Co., it also created a recognizable social benefit for the firm. “We believe that this transaction will be immediately accretive to both sales and earnings and that the synergies will be immediate, marrying our individual customer bases into one utilizing best practices. Organic and Fair Trade coffees still represent an upcoming and popular niche in what remains a fairly mature industry. Customers, both retail and wholesale, realize the social value and quality in these types of coffees and are willing to pay the premiums associated with them. In addition, these coffees and the trademarks acquired in this transaction, including the ‘Café Femenino,’® which singles out and helps female coffee producers, support an important social responsibility which we at Coffee Holding and our business partners wish to see highlighted and expanded both now and in the future as sustainability throughout the production pipeline becomes increasingly more important,” claimed Andrew Gordon.
4. Premier Roasters LLC (Premier): In February 2004, Coffee Holding Co. acquired Premier Roasters LLC. Coffee Holding purchased Premier’s coffee roasting and blending equipment located in Premier’s La Junta and Rocky Ford, CO locations. Additionally, Coffee Holding Co. purchased the labels for private label coffee products produced at the La Junta facility.
II. Operational Risk Management Practices at JVA
Coffee Holding Co. is highly dependent on the coffee bean commodity. Due to a lack of product diversification, if the demand for coffee were to decrease, it would have a material and adverse impact on Coffee Holding Co.’s financials. Coffee Holding Co.’s coffee operations have concentrated on:
· The sale of wholesale specialty green coffee to roasters
· Roasting, blending, packaging, and distribution of private label coffee
· Roasting, blending, packaging, and distribution of proprietary branded coffee
The demand for Coffee Holding Co.’s products is affected by:
· Consumer tastes and preferences
· Global economic conditions
· Demographic trends
Coffee industry related risks:
The largest single expense incurred by Coffee Holding Co. is their green coffee. Therefore, increases in the cost coffee beans could increase expenses. As a traded commodity, coffee’s pricing can fluctuate because of:
· Weather conditions in coffee producing regions
· Economic and political situations in coffee producing regions
· Foreign currency price movements
· Import regulations and restrictions importing into the US
Each of the above factors could have an effect on Coffee Holding Co.’s profitability. Historically, Coffee Holding Co. has raised their products’ prices in response to increases in the price of wholesale green coffee. However, due to market volatility, wholesale green coffee prices occasionally increase rapidly or increases beyond their customers’ willingness to pay, and they have not always able to pass the price increases through to customers. Situations such as this can adversely affect Coffee Holding Co.’s profitability.
Supply chain disruptions could result lead to decreased revenues and could impede Coffee Holding Co.’s ability to expand. The supply chain is affected by the factors stated above, all of which may affect Coffee Holding Co.’s ability to purchase coffee from specific regions.
Beyond the traditional supply chain procurement, Coffee Holding Co. has built a network of brokers, exporters, and growers that they are able to trade with directly, outside of the commodity market. If any of Coffee Holding Co.’s relationships deteriorated, they may not economically be able to purchase enough quantities of coffee beans. In this scenario, Coffee Holding Co. may experience a product shortage, and may not be able to meet their customers’ demands.
The coffee industry is highly competitive, which may erode Coffee Holding co.’s sales and reduce its profitability. Competition in the coffee stems from low barriers to entry, leading to pressure on price, quality, reputation. Coffee Holding Co.’s private label and branded coffee products compete with large firms such as Kraft General Foods, Inc. (Maxwell House), Smuckers (Folgers), and Massimo Zanetti Beverage.
Public Opinion of Coffee:
Changes in the public and medical opinions regarding caffeine may have an impact on Coffee Holding Co. In addition to reduced demand caused by potential unfavorable medical reports, Coffee Holding Co. could face litigation relating to the possible medical reports.
Risk Posed by Additional Commodities:
Beside the risk brought on by coffee, Coffee Holding Co. is exposed to risk from other commodities. The notable commodities include steel, natural gas, and gasoline. These commodity costs are generally beyond the control of Coffee Holding Co. and are affected by similar factors as state above.