Deal focus: Pencarrow profits from grocery wars

The supermarket duopolies of Australasia delivered two key opportunities to the latest turnaround story by New Zealand’s Pencarrow Private Equity. First, the rivalry between New Zealand grocers Progressive Enterprises and Foodstuffs set up an advantageous entry for the PE firm. Then, intense competition between Australia’s Coles and Woolworths offered a convenient stepping stone to internationalization.

After a lengthy review process by New Zealand’s Overseas Investment Office, Pencarrow has finalized the sale of hot beverage company BrewGroup to Jacobs Douwe Egberts (JDE) of the Netherlands at a valuation of around NZ$100 million ($72 million). The GP acquired the business for $25.6 million in 2013 alongside the government’s Accident Compensation Corporation, which took a 33% stake that the GP managed on its behalf.   

BrewGroup – previously known as Bell Tea & Coffee – was owned by Foodstuffs, and consequently suffered from Progressive’s tendency to understock its products. Pencarrow saw this as a chance to increase penetration through neutral ownership, and outmaneuver a number of trade buyers.  “Foodstuffs recognized that as a supermarket operator with a significant competitor, they were holding them back, so they started off with an auction, but we got ourselves quite quickly into an exclusive process,” says Nigel Bingham, managing partner at Pencarrow.

Value-add efforts were pursued on a number of fronts. Perhaps most significantly, the company acquired Hummingbird Coffee and rebranded itself as BrewGroup. As a more diversified beverages supplier, exports and operating profit nearly doubled, making BrewGroup the New Zealand’s largest operator in the tea and coffee space.

Product innovations played a role as well. The most notable of these was a line of strength-coded instant coffee products known as Jed’s Bean Bags that infuse in hot water like traditional tea bags. “There have been several attempts, but no one else globally has managed to crack that formula yet,” Bingham says. “We were going for growth, so that helped us get good market recognition of the Jed's brand in New Zealand.”

Jed’s has doubled its market share in the past four years to more than 10% within New Zealand, but the brand has also been instrumental in providing BrewGroup with an inroad to Australia. Eager to find a product to differentiate it from Coles, Woolworths began stocking Bean Bags at its 800 stores.

For JDE, which operates across some 100 countries, the international foothold was doubtlessly an attractive factor in its acquisition – and a hallmark of a reliable New Zealand-style expansion play. “Australia is often a very good route to begin international growth, particularly if you’re in the fast-moving consumer goods area,” Bingham adds. “It’s an economy seven times the size of New Zealand, so once you reach the natural boundaries of the market here, it’s the next logical place to go.” 

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• Topics
• Australasia
• Consumer
• Trade sale
• New Zealand
• Australia
• Pencarrow Private Equity