Commentary

Nestle, Starbucks Brew A $7.15 Billion Deal To Peddle Beans

Starbucks and Nestlé this morning announced an “alliance” whereby the latter will pay the former $7.15 billion up front “to accelerate and grow the global reach of Starbucks brands” just about everywhere except “the third place” itself. Starbucks retains “a significant stake” in the enterprise going forward. 

“The agreement only covers Starbucks’ packaged goods sold outside the U.S.company’s stores. It doesn't include Starbucks’ ready-to-drink coffee, tea or juices,” writes Rishi Iyengar for CNN Money

It does include the rights to market, sell, and distribute Starbucks, Seattle’s Best Coffee, Starbucks Reserve, Teavana, Starbucks VIA and Torrefazione Italia packaged coffee and tea in all global at-home and away-from-home channels.

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Starbucks CEO Kevin Johnson is hosting a 30-minute investor conference call at 8 a.m. EDT to provide further details.

In the release announcing the agreement, Johnson said it “will bring the Starbucks experience to the homes of millions more around the world through the reach and reputation of Nestlé. This historic deal is part of our ongoing efforts to focus and evolve our business to meet changing consumer needs … .”

“This transaction is a significant step for our coffee business, Nestlé’s largest high-growth category,” Nestlé CEO Mark Schneider said. “With Starbucks, Nescafé and Nespresso, we bring together three iconic brands in the world of coffee.”

“Coffee and creamers generate $18.1 billion in revenues for Nestlé, roughly a fifth of its turnover. The ‘beverages’ category, of which it has the largest share, was the biggest and fastest-growing last year, Ralph Atkins writes for Financial Times. But he points out that “it is weak in the U.S. coffee market, where it faces stiff competition from the empire built by JAB Holdings, the investment company of Germany’s billionaire Reimann family.” 

“Knockoff capsules — including Starbucks-branded ones — have dented one of Nestle’s largest growth engines, its Nespresso portioned-coffee business. The new deal will give the Swiss company control of Starbucks capsules, among other products. It comes as Nestle’s Nescafe brand of instant coffees has lost market share in four of the past five years, according to Euromonitor, Bloomberg’s Thomas Mulier and Corinne Gretler write.

“Starbucks is the second-most-valuable brand in fast food, according to BrandZ’s Global 2017 report, which estimates it’s worth $44 billion. Nestle’s $7.15 billion payment is 3.6 times sales, higher than the average of 3 times for major global food deals,” according to Sanford C. Bernstein analyst Andrew Wood, Mulier and Gretler continue.

“This will be [relatively new CEO Schneider’s] first big M&A test,” Wood wrote in a client note. “Nestle’s acquisition track record over the last 10-15 years has been less than stellar.”

“Coffee has been highlighted by Nestlé as a priority product line, along with bottled water, pet care and infant nutrition,” Brian Blackstone and Anthony Shevlin report for the Wall Street Journal, pointing out that it bought a majority stake in Blue Bottle Coffee in September.

“Nestlé has been shaking up its product mix, which stretches from frozen pizza and bottled water to noodles and medicinal foods. In addition to the Blue Bottle deal, Nestlé last year bought California-based Sweet Earth, which makes vegan and vegetarian products. In June, it bought a minority stake in startup Freshly, which sells prepared meals directly to U.S. consumers,” Blackstone and Shevlin continueadding that it sold its confectionery business to Ferrero International SA for $2.8 billion in cash in January.

Nestlé’s Schneider, who in 2016 became the first outsider to run Nestle in almost 100 years, as the BBC points out, described the alliance with Starbucks as “a great day for coffee lovers around the world.”

Juan Valdez could not be reached for comment.

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