Crafting a Revolution in Coffee: La Colombe’s Journey of Innovation, Localization, and Strategic Moats

Every time the words coffee, Philadelphia, and supply chain converge, I have to write an article. I don’t make the rules…

Last week, Chobani announced the acquisition of La Colombe for a staggering $900 million. Established in 1994, La Colombe has carved a niche for itself in the coffee industry, not only through its urban cafes in cities like Philadelphia (where it started), New York, Chicago, and Los Angeles, but also with its innovative ready-to-drink (RTD) retail offerings. Notably, it introduced the market’s first textured canned cold Latte. The brand stands out for its vertical integration, overseeing every step of its process, from sourcing the beans to roasting and producing the final coffee products. Demonstrating remarkable growth, particularly in the RTD segment, La Colombe has seen its business triple over the past five years, a testament to its rising popularity and market presence.

What’s behind the acquisition? The announcement from Chobani clarifies: 

“‘We’ve already made an investment in the coffee category with our creamers and are excited about bringing La Colombe into the Chobani family, and offering the delicious, high-quality cold brew and ready-to-drink craftsmanship of La Colombe to a next generation of consumers, powered by a strong distribution partner in KDP,’ said Hamdi Ulukaya, founder and CEO of the Norwich, N.Y.-headquartered Chobani.”

This acquisition came a little less than a year after Keurig Dr Pepper (KDP) invested in La Colombe, $300M for a 30% stake in the business. The partnership between the two companies encompassed several compelling elements. Firstly, under a long-term sales and distribution deal, Keurig Dr Pepper (KDP) handles the sales and distribution of La Colombe’s shelf-stable ready-to-drink (RTD) coffee beverages within its extensive direct store distribution network. This move significantly expanded La Colombe’s presence in mainstream retail outlets. Moreover, KDP will also take on the manufacturing, sales, and distribution of La Colombe-branded K-Cup coffee pods, based on a licensing agreement, across the United States and Canada.

Up to this point, this may seem like any other business transaction, but one important aspect stands out: how La Colombe owns its value chain. 

This highlights three intriguing themes that I often address in my articles: the significance of value chain integration, the impact of localization strategies, and as an overarching theme, the importance of establishing competitive moats. 

The Innovation

To the best of my knowledge, La Colombe stands out in the coffee industry as the only ready-to-drink (RTD) coffee company that is vertically integrated. This means they manage every aspect of their coffee’s journey, from responsibly sourcing the beans to expertly roasting them and crafting coffee experiences that resonate with their loyal customer base. 

But to understand the value of vertical integration, it’s important to understand the main innovation driving the firm’s success —beyond good coffee and being part of what is referred to as third-wave coffee (with the first two waves being “bad” and “burned”). 

About six years ago, the company launched its second ready-to-drink offering (after the ubiquitous cold brew coffee), a unique can-packaged ‘draft Latte.’ 

If you’re wondering about the challenges of creating canned coffee drinks, a common issue, as anyone who has tasted a bottled Frappuccino can attest, is the absence of foam. This was a significant hurdle for Todd Carmichael, co-founder of La Colombe. He emphasized the importance of texture in coffee drinks, stating, “It started with texture. You have to have texture.”

The “real magic” happens when the can is opened. A strategically placed valve at the bottom of the can releases nitrous oxide gas (previously contained in liquid form) into the beverage, which triggers a flurry of microbubbles that travel upward, creating the much-desired frothy texture. 

This unique valve, known as the “Innovalve” (see image below), is the result of a collaborative effort between La Colombe and Philadelphia-based Crown Holdings, Inc., a company known for its innovative solutions in beverage and aerosol canning. The valve is also FDA-approved (adding a level of complexity). The valve’s “chimney-like” design is crucial as it doesn’t expose the Latte to air but expands to allow a pin to inject the nitrous oxide without compromising the beverage’s integrity.

Additionally, the coffee-can features a protective plastic lip guard for an enhanced drinking experience, because it’s not enough to just make good coffee and have good texture. Anyone who drinks coffee knows that the cup is equally important (well… almost). All this shows a remarkable commitment to replicating the authentic coffee experience in canned form.

Building on the innovative spray technique used to introduce texture in La Colombe’s canned coffee, the drink’s contents are crafted to enhance this experience. The company uses milk that has been heated to achieve shelf stability of 180 days, combined with its signature blend of cold-brewed, roasted coffee. To sweeten the beverage, they add just two grams of sugar, along with acacia gum, which is a common ingredient used to distribute the sugar throughout the drink evenly.

But it’s not enough to have an innovative process. You must also manufacture it. 

The Manufacturing Process

The manufacturing process of La Colombe’s canned Latte is an interdependent series of steps crucial for achieving the desired quality and texture. It begins with the can moving along the production line, featuring the small, uniquely designed valve at its base.

The ingredients – cold-pressed espresso, reduced-fat frothed milk, and cane sugar – adhere to La Colombe’s high-quality standards. The drink undergoes a crucial step in a ‘gasser-shaker,’ where the can is simultaneously shaken and injected with liquid nitrous oxide. This ensures stability and uniformity in the drink’s texture.

The cans are then placed in a retort machine —a step vital for extending the product’s shelf life. The retort floods the cans with super-hot water and heats them under pressure, performing an in-can pasteurization process. This method allows the product to remain fresh for up to 180 days —quite significant in canned beverages.

Finally, a plastic cover, similar to La Colombe’s to-go cups, is added at the top of the can. This serves a dual purpose: it prevents direct contact between the consumer’s lips and the aluminum can, safeguarding against contaminants that might accumulate during storage, and it helps eliminate the metallic flavor that can sometimes be imparted when drinking directly from a can.

Each step highlights La Colombe’s commitment to owning and perfecting every aspect of its product’s journey. 

Why am I getting into such detail?

Because when we consume such a product, we don’t give much thought to the work behind it —from product innovation to the attention to detail in manufacturing. We take it for granted. But we shouldn’t. 

The company has taken significant steps in introducing and manufacturing its draft Latte. Production is carried out in two key locations: their own facility in Philadelphia and a manufacturing plant in Missouri, operated by the Dairy Farmers of America (DFA). 

In different interviews, Todd Carmichael emphasizes the importance of having control over the production process. However, he acknowledges that the current capacity at the Philadelphia facility falls short of meeting their ambitious sales projections, while the DFA facility addresses this capacity challenge. 

The importance of vertical integration in this context cannot be overstated. By owning various stages of the production and distribution process, La Colombe ensures a consistently high-quality product that meets their strict standards. This control also allows for greater flexibility and responsiveness to market demands and trends. Vertical integration not only secures a competitive edge in terms of quality and innovation but also positions the company to scale its operations effectively —as demonstrated by its ambitious production goals. Such integration is a testament to the company’s commitment to excellence, and a key factor in successfully navigating and conquering the highly competitive coffee market.

Localization of Value Chain 

La Colombe’s innovative approach, as well as its strategic partnerships, bring to light a crucial lesson: the immense value of localizing supply chains. This concept is best demonstrated in the way La Colombe operates, and in their collaboration with Crown Holdings.

For La Colombe, localization means more than just geographical proximity; it encapsulates the integration of design, manufacturing, and retail elements within a closely connected network. By keeping these aspects local, the company gains several significant advantages.

Firstly, the collaboration between La Colombe and Crown Holdings is a prime example of how local partnerships can foster innovation. This proximity allows for a seamless and more efficient process of ideation, prototyping, and iteration. The development of the ‘Innovalve’ can, a critical component in the company’s draft Latte, likely benefited from this close collaboration, allowing for rapid testing and refinement. Both companies continue to innovate and launch new products, and it’s something I’ve written about before. 

Secondly, localizing supply chains enhances the ability to respond quickly to market changes and consumer preferences. By closely interlinking design, manufacturing, and retail, La Colombe can swiftly introduce new products or adjust existing ones. This agility is a significant competitive advantage in the fast-paced and ever-evolving coffee market. 

Finally, the concept of localization also supports sustainability and community engagement. By sourcing and manufacturing locally, La Colombe can reduce its carbon footprint and contribute to the local economy. This approach resonates with contemporary consumer values, where a growing preference for high-quality products that are also sustainably produced and supportive of local communities is evident. La Colombe may not be able to source its coffee locally, but it’s been very transparent regarding its coffee trade efforts. 

La Colombe’s emphasis on localization is not just a logistical choice but a strategic decision impacting innovation, responsiveness, sustainability, and community engagement. This approach has undoubtedly played a role in the brand’s success and is a fundamental aspect of its business model.

Real Moats and the Smile Curve 

Nevertheless, coffee is a highly competitive market, so how easy is it to build a real competitive moat in this business? 

In my opinion, La Colombe’s moat (i.e., its sustainable competitive advantage), is deeply rooted in the control over their brand, their process, and their physical presence through coffee shops. Unlike many modern companies that rely solely on digital presence and third-party platforms, La Colombe’s ownership of physical channels adds a tangible dimension. This presence not only enhances brand visibility and consumer experience but also acts as a direct channel for customer feedback and engagement.

This is related to my concept of “real operations make for real moats.” La Colombe’s end-to-end control over its product ensures quality, fosters innovation, and differentiates it from competitors who rely on outsourced production. And while the fact that the firm has control over the manufacturing process (by owning the plant) and collaboration on a unique product may not guarantee a long-lasting moat, it creates an advantage that requires competitors to make similar investments just to keep up. As is evident, the firm used their initial innovation to drive more innovation and expand capacity, further deepening their moat. 

La Colombe and its strategic partnership with KDP is also a great example of the Stan Shih Smile Curve (a topic I’ve previously covered extensively). The Smile Curve concept in this context underscores the high value-added components at both ends of the production chain —innovative product development and direct customer interaction. La Colombe excels in both. The ‘Innovalve’ technology represents the high-value innovation end, while its coffee shops and direct customer relationships represent the other. Nevertheless, if the firm aims to take its business to another level, they need to expand their product range (e.g., K-pods) and distribution channels. And this is where KDP and Chobani come in!

As many of you know, one of the key questions I ask is, “What’s the current constraint?” For La Colombe, even with all its innovation and excellent coffee, distribution has been a challenge. And if a firm really wants to scale, distribution is going to be more important than the quality of the product, which brings us to this acquisition. This is also the reason we see a consolidation trend in the specialty coffee business. 

On a personal note, while I’m fascinated by manufacturing and moats, in the end, what really matters is the coffee. Here’s hoping that with this acquisition, La Colombe’s brew remains as delightful as ever – because, at the end of the day, all we need is…a good cup of coffee.