Swiss-based food giant Nestle will pay Starbucks $7.15 billion in cash
for the rights to sell the U.S. 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
Bernstein analyst Andrew Wood said that Nestle’s third-biggest
acquisition would allow the Swiss company to expand the brand through its
global distribution network.
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.(Nestle and Starbucks shares: reut.rs/2If7WvF)
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 (EPS) 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
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.
“This global coffee alliance will bring the Starbucks experience to the
homes of millions more around the world through the reach and reputation of
Nestle,” said Starbucks Chief Executive Kevin Johnson.
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.
Starbucks said it now expects to return approximately $20 billion in
cash to shareholders in share buybacks and dividends through fiscal year 2020.
It said the transaction was expected to add to earnings per share by the
end of fiscal year 2021 or sooner, with no change to the company’s currently
stated long-term financial targets.
Nestle said it expected the business to contribute positively to
earnings per share and organic growth targets from 2019.
The company source said it would also pay market-linked royalties to
Starbucks. It will not buy any industrial assets as part of the deal, but could
step in to produce in markets where Starbucks is not present.
Nestle, which will take on about 500 Starbucks employees, said its
ongoing share buyback program remained unchanged.
The agreement will strengthen Nestle’s position in the United States,
where it is the No. 5 player with less than 5 percent of the market. Market
leader Starbucks has a 14 percent share, according to Euromonitor
“In the U.S., 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
“Nestle is far and away the largest hot drinks company globally, with
more in sales than the next five largest hot drinks companies combined,”
Matthew Barry, an analyst at Euromonitor, said when the tie-up was first mooted
“However, Nestle’s leadership position is less secure than it once was.”
COFFEE IN FOCUS
Other big players are growing as well, including Italy’s Lavazza, which
is now the world’s No. 3.
Nestle CEO Schneider last year identified coffee as an area of
It bought Texas-based Chameleon Cold-Brew in November and took a
majority stake in Blue Bottle Coffee, a small upscale cafe chain, in September.
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.
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