Swiss-based food giant Nestle will pay Starbucks $7.15 billion in cash for the rights to sell the US coffee chain’s products around the…
Swiss-based food giant Nestle will pay Starbucks $7.15 billion in cash for the rights to sell the US coffee chain’s products around the world, tying a premium brand to Nestle’s global distribution muscle.
The deal on Monday for a business with $2 billion in sales reinforces Nestle’s position as the world’s biggest coffee company tries to fortify its place atop a fast-changing market.
It is a bold stroke by new Nestle Chief Executive Mark Schneider, who has made coffee a strategic priority as he tries to convince uneasy shareholders, including activist Third Point, that he can boost the sprawling group’s performance.
Nestle shares rose 1.4 percent by mid-session, having fallen by more than 8 percent so far this year. Starbucks stock was indicated 2.8 percent higher.
Seattle-based Starbucks, the world’s biggest coffee chain, said it will use proceeds to speed share buybacks and the deal would add to earnings per share by 2021 at the latest.
Nestle said it expects the deal to sell Starbucks bagged coffee and drinks adding to earnings by 2019. It will not involve any of Starbucks’ cafes or ready-to-drink products.
But it does let Nestle sell Starbucks coffee in individual pods — as it does now with Nespresso and Nescafe — and expand sales of Starbucks soluble coffee, a key market in Asia. Starbucks now sells single-serve coffee in Kuerig K-cup pods.
The Nestle name will not appear on Starbucks products. “We do not want the consumer to perceive that Starbucks is now part of a bigger family,” a Nestle source said.
Starbucks, strong mostly in the United States, will have the final say on expanding its product range.
Nestle and Starbucks are joining forces in a highly fragmented consumer drinks category that has seen a string of deals lately.
JAB Holdings, the private investment firm of Europe’s billionaire Reimann family, has fueled the consolidation wave with a series of deals including Douwe Egberts, Peet’s Coffee & Tea and Keurig Green Mountain, narrowing the gap with Nestle.
Coffee is popular with younger customers who have grown up with Starbucks. A willingness to pay up for exotic beans and specialty drinks means companies can brew up richer profit margins than in mainstream packaged food.
“In the US, Nescafe is seen as a downscale brand for older people, and the Nespresso system as a niche product. Starbucks is the quality, mass-market leader,” said Erik Gordon at the Univesity of Michigan’s Ross School of Business.
Starbucks, which in April reported a global drop in quarterly traffic to its established cafes, has been revamping its business amid competition in its key home market. It sold its Tazo tea brand to Unilever for $384 million and closed underperforming Teavana retail stores.
Starbucks is rapidly expanding in China, which it expects to one day be its largest market. It also plans to open 1,000 upscale Starbucks Reserve stores and a handful of Roastery coffee emporiums to take on high-end coffee rivals such as Intelligentsia Coffee & Tea and Blue Bottle.
Starbucks has long farmed out the retail distribution of its packaged products to a company more specialized in that process, but the partnerships have not always been smooth.
Nestle, the world’s largest packaged food company, is also not shy when it comes to partnering with rivals through licensing deals or joint ventures, having reached arrangements with General Mills and Hershey, among others.
