Brewing profits: the investment case for coffee ☕

Welcome to Alternate Universe!

In today’s edition:

• Is coffee a potential addition to your portfolio? ☕

• Job opportunities at recently funded European startups 👇

• Enron is back - or is it? 😱

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The Crux 🔴

Ten years ago, I wasn’t exactly a fan of coffee—too bitter, too acidic.

Then again, basing my judgment on Nescafe and Costa wasn’t exactly setting a high bar. 😅

That all changed during my Master’s. Rushing to finish coursework, I found myself in a hipster (and overpriced) café and decided to order an espresso, hoping to avoid chugging a jug of regular coffee. One sip, and I was hooked.

Since then, coffee has been a constant—fueling deep work, sparking conversations, and making mornings bearable.

Yet, I know surprisingly little for someone who drinks a lot of it. Recently, YouTube kept recommending videos from James Hoffmann’s channel.

Curious, I clicked.

🐰🕳️⌚

What? 🧐

Coffee, a beloved daily ritual for millions around the world, is a fascinatingly complex substance. With over 1,000 chemical compounds, many of which have physiological effects, coffee’s diversity is a science in itself.

This chemical complexity is what gives coffee its unique flavors, with every step in the supply chain influencing the final taste in your cup.

The 5 key factors influencing coffee’s flavor are:

Bean Type

The most common types are Arabica and Robusta. Arabica beans are prized for their smooth, sweet taste with fruity and sugary notes, making them a favorite in specialty coffees. Robusta, on the other hand, delivers a stronger, harsher flavor with a grainy or nutty profile. Thanks to their higher caffeine content and rich crema, Robusta beans are often used in espresso blends.

Origin

Where the coffee is grown plays a huge role in its flavor profile. Ethiopian beans, for example, often have bright, fruity, and floral notes, reflecting the region’s diverse landscapes. Colombian coffee, in contrast, is celebrated for its balanced flavor, mild acidity, and caramel sweetness.

Processing

Processing methods also shape the coffee’s taste. Wet processing uses water to remove coffee pulp. Wet-processed coffees tend to have a cleaner, brighter flavor, highlighting the bean's inherent characteristics.

In dry processing, the coffee cherries are left to ferment in the sun. Bacteria present on the skin start to metabolize the sugars, creating a more complex flavor.

Roast

Roasting transforms green coffee beans into the aromatic brown beans we know, thanks to the Maillard reaction—a chemical process where heat causes amino acids and sugars to react, creating rich flavors.

Light roasts retain more of the bean's original flavors, and darker roasts like French Roast blends, develop richer, bolder flavors with chocolatey and smoky undertones

Brewing

The brewing method dramatically affects the flavor.

Pour-over methods, like Chemex, highlight the coffee's clarity and complexity, making it ideal for single-origin beans. Espresso brewing, which forces hot water through finely ground coffee at high pressure, produces a concentrated, intense flavor profile, often used for robust coffee blends.

Health 👩‍⚕️

Coffee has multiple health benefits. Several compounds have been shown to delay the onset of neurological disorders such as Parkinson’s and Alzheimer’s. There are some others apart from caffeine, such as trigonelline and caffeic acid, meaning these benefits can also be had in decaffeinated coffee.

Caffeine works by mimicking adenosine, a chemical that promotes sleep, tricking the body into thinking it’s adenosine. Though chemically similar, caffeine has the opposite effect by binding to adenosine receptors and blocking them, which increases adrenaline levels. This process doesn't give you energy; instead, it prevents you from feeling sleepy.

Other compounds, such as diterpenes, have been linked to reduced cancer risk. However, diterpenes can also raise LDL cholesterol, meaning too many cups of coffee might contribute to high cholesterol levels.

Excessive caffeine can lead to palpitations, insomnia, and anxiety. Individual tolerance varies widely—some people feel jittery after one cup, while others can drink ten without issue.

Market 💹

The ‘Coffee Belt’ is a region between the Tropics of Cancer and Capricorn. It includes countries such as Brazil, Colombia, Ethiopia and Vietnam. This zone provides the ideal climate for coffee cultivation, with moderate temperatures, rich soil, and consistent rainfall.

Different countries also produce different bean types - Brazil is the major Arabica exporter while Vietnam leads in the Robusta category.

Apart from its chemical complexity, coffee also has a complex value chain. It is estimated that there are over 25 million coffee growers, the majority of which are smallholder farmers, owning less than 5 hectares of land, most of which live in poverty.

On the demand side, the price of coffee is influenced by rising income levels in developing nations. Higher disposable incomes lead to increased consumption, especially in developing countries where coffee is becoming a popular beverage.

New data from Circana shows consumption is surging worldwide. Total global coffee servings increased 5% year-over-year in 2023. China led overall growth with a 15% increase in servings, followed by 11% in France. Comparatively, servings were up 3% in the U.S.

Coffee also outpaced tea (+4%) and carbonated soft drinks (+3%) during the same period, emphasizing its position as one of the fastest-growing beverage categories worldwide.

The coffee market's supply side is heavily influenced by climate, with phenomena like El Niño playing a major role. This warming of sea surface temperatures in the Pacific disrupts rainfall and temperature patterns, significantly affecting coffee production.

Coffee inventories also impact prices. Large producers or countries can strategically release or withhold stock, increasing supply to lower prices or reducing it to drive prices up.

ESG 🌱

Coffee has significant ESG challenges.

Child labor is widespread on coffee plantations, similar to cocoa farming. However, unlike cocoa, where cultivation is concentrated in two countries, coffee production is highly fragmented, making underreporting easier.

Coffee also has a notable environmental impact. An Oxford study ranked it fifth among foods with the highest greenhouse gas emissions across the supply chain, surpassing palm oil, cheese, and pork.

Climate change further complicates coffee cultivation. Key producers like Brazil, Vietnam, and India face declining suitability, with drastic reductions projected in Mexico (98% by the 2050s) and Latin America (88% by 2050). On the other hand, new regions in South America, East Africa, and Asia are expected to become suitable for coffee farming, potentially boosting future productivity.

Investment Implications 🤑

Where would you position yourself if you were betting on a growing coffee market?

The most direct exposure comes from retail companies like Starbucks, Nestlé, and Restaurant Brands International (owner of Tim Hortons). Starbucks offers the purest coffee-focused exposure, while Nestlé and RBI have diversified portfolios spanning non-coffee brands.

Until recently, retail investors could also buy coffee future exchange-traded notes (ETNs) through Barclays iPath® . These are debt instruments traded on stock exchanges tracking the performance of an underlying index or asset, offering investors exposure without owning the asset directly. Unfortunately, the 2 coffee ETNs (tickers JO & CAFE) appear to have been redeemed in 2023.

Coffee machine manufacturers such as Breville could also benefit for a rising coffee consumption.

On the private side, I came across 2 interesting trends; coffee upcycling and alternative coffee.

Interest in mushroom coffee has surged, now becoming a multi-billion dollar market. Four Sigmatic is a company exploring alternative coffee by blending traditional coffee with functional ingredients like adaptogenic mushrooms to enhance health benefits.

Kaffee Bueno, on the other hand, focuses on coffee upcycling, turning used coffee grounds into sustainable products like cosmetics, dietary supplements, and biofuels, showcasing innovative ways to maximize coffee's value beyond the cup.

Dig Deeper ⛏️

• Neuroprotective Effects of Coffee Bioactive Compounds: A Review

• Bioactive compounds in coffee and their role in lowering the risk of major public health consequences: A review

• Coffee futures hit 47-year high on global supply and EU law fears

P.S. Liking this issue? Forward to a friend 🧑‍🤝‍🧑

Headhunted 🦅

Recently funded private companies need talent! Scout jobs at recently funded European startups, ahead of your competition. 💪

1. 9fin 🇬🇧 - The AI-driven analytics provider for debt capital markets, has closed a €47.5 million Series B. Open roles in ML and Legal (link)

2. Raidium 🇫🇷 - The precision radiology startup has raised $13m in Seed funding. R&D roles open (link)

3. Orakl Oncology 🇫🇷 - The cancer drug development, has secured €11m in Seed funding. Business & research roles open (link)

4. Tembo Money 🇬🇧 - The savings & mortgage platform has secured a €16.8m Series B. Marketing & dev roles open (link)

5. Jotelulu 🇪🇸 - The cloud service support platform has raised €6.8m in funding. Software engineering roles open (link)

Interestingness📔 

• A new investment model - venture buyouts

• How the Bank of Mum and Dad reshaped the British economy

• Enron is back or is it? 😱😱

• If you bought $100 worth of Bitcoin every time the media called it 'dead', you'd have $99,952,524.62 now 💸

• Apple might soon deliver you more personalized health insights

📚 New to investing? Grab a PDF copy of my ebook here.

As always, the financial disclaimer!

This is not investment advice. I am not a financial advisor. Make sure to conduct your thorough research before purchasing or selling financial products.