Sector News

Why Nestle is paying $7.2 billion to sell Starbucks coffee

May 7, 2018
Consumer Packaged Goods

Nestle and Starbucks are joining forces to rejuvenate their coffee empires.

The Swiss maker of Nescafe will pay the Seattle-based chain $7.15 billion upfront in cash for the rights to sell Starbucks coffee products in supermarkets, restaurants and catering operations, the companies said Monday. Nestle (NSRGY) will use the Starbucks brand in its Nespresso and Dolce Gusto capsule systems next year.

The alliance underlines Nestle’s efforts to capture more upscale java drinkers in the U.S., where the maker of Nespresso and Nescafe has been outpaced by JAB Holding Co. The investment company of Europe’s billionaire Reimann family has spent more than $30 billion building a coffee empire by acquiring assets such as Keurig Green Mountain and Peet’s.

“The deal with Starbucks allows Nestle to keep JAB at a distance,” Jean-Philippe Bertschy, an analyst at Bank Vontobel AG, wrote in a note. He added that the price may seem expensive, but the investment may pay off within three to four years. “It allows Nestle to gain scale in the U.S., a weak spot so far.”

Nestle shares rose as much as 0.8% in early Zurich trading. The stock has dropped about 9% this year.

The deal is Nestle’s first tie-up with a major rival in coffee. Nestle expects the deal to contribute positively to its earnings per share and organic growth targets from 2019. The business has annual sales of $2 billion, about 9% of Starbucks’s total revenue. The coffee chain said it will use the proceeds to accelerate share buybacks, now expecting to return about $20 billion through repurchases and dividends through fiscal 2020.

Starbucks will continue to produce the coffee products in North America, while Nestle will be in charge of manufacturing in the rest of the world. Sales will be booked by Nestle, which will pay royalties to Starbucks.

About 500 Starbucks employees will join Nestle, and operations will continue to be located in Seattle. The agreement is expected to close by the end of 2018.

Starbucks said Nestle will also obtain the rights to sell packaged coffee products under brands including Seattle’s Best Coffee, Starbucks VIA and Torrefazione Italia. The deal also the includes Teavana tea brand, though it excludes ready-to-drink products and all sales within Starbucks coffee shops.

“With Starbucks, Nescafe and Nespresso, we bring together three iconic brands in the world of coffee,” Nestle Chief Executive Officer Mark Schneider said in the statement. The deal is Nestle’s largest since he began leading the company last year.

Step Back
Schneider has reversed Nestle’s policy on roast-and-ground coffee, a category that the Swiss company began shunning decades ago as it considered it a commodity business with little value to add. Last year’s $425 million purchase of a stake in Blue Bottle Coffee was a step back into the segment, whose growth prospects have revived as consumers become more sophisticated about coffee.

While Starbucks holds the crown in the $13.8 billion U.S. coffee market, Nescafe and Nespresso hold the top ranks globally, according to Euromonitor. Starbucks has been examining each of its businesses to streamline its operations and focus on those that add most to sales and profit, Chief Financial Officer Scott Maw said on a conference call in January.

Nestle also added niche brand Chameleon Cold-Brew last year to expand its portfolio in the U.S. Nespresso also introduced a machine that’s more attuned to Americans’ preference for bigger cups of joe several years ago.

Starbucks in November agreed to sell tea brand Tazo to Unilever (UL) for $384 million.

Nestle said its ongoing share-buyback program will remain unchanged.

Source:  Bloomberg via Fortune

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