With a new “global coffee alliance,” Swiss food & beverage giant Nestlé is set to sell U.S. coffee company Starbucks’ packaged coffees and teas worldwide.
Nestlé will pay Starbucks $7.1 billion in cash for exclusive rights to market, sell and distribute packaged products with the Starbucks, Seattle’s Best Coffee, Starbucks Reserve, Teavana, Starbucks VIA and Torrefazione Italia brands. The deal combines a premium brand with the global distribution heft of Nestlé, the world’s biggest food & beverage company. The deal, essentially a licensing arrangement, also includes Starbucks-branded capsules for Nestlé’s Nespresso and Dolce Gusto single-serve brewers.
The deal with Nestlé should greatly expand Starbucks’ retail reach. It currently has a roughly $2 billion business selling packaged coffee, tea and other take-home products through grocery stores and other retailers. “This global coffee alliance will bring the Starbucks experience to the homes of millions more around the world through the reach and reputation of Nestlé,” said Starbucks CEO Kevin Johnson.
Analysts say that Starbucks’ core coffeehouse business will also benefit, both from the amplified brand exposure and increased focus. Traffic at the cafés has slowed amid competition from fast-food chains and upscale coffeehouses, such as Intelligentsia Coffee & Tea and Blue Bottle. Starbucks plans to open 1,000 upscale Starbucks Reserve stores as well as some Roastery coffee emporiums to better compete.
Starbucks is also looking to expand its coffeehouse chain in China, which is Nestlé’s second-largest market. The new deal will undoubtedly accelerate this goal. “That would have taken a lot of capital and years to build outside the U.S.,” said John Culver, Group President of Starbucks China-Asia Pacific Region, Channel Development and Emerging Brands.
Nestlé is the world’s biggest coffee company, but it needs to strengthen its position in this fast-changing and increasingly competitive market. European family business JAB Holdings has been building a coffee empire over the past few years through a series of acquisitions which has included Peet’s Coffee & Tea, Caribou Coffee, and Keurig Green Mountain. The gap between JAB Holdings and Nestlé is narrowing. Other big players, notably Italy’s Lavazza, are growing.
Nestlé CEO Mark Schneider has made coffee a strategic priority, Reuters reports, at a time when he is under pressure from shareholders to boost the massive group’s performance. “This is all about growth,” Schneider said. He expects the alliance to give Nestlé a boost in North America. In the U.S. Nestlé currently ranks fifth in coffee, with less than 5% of the market. Market leader Starbucks has a 14% share, according to Euromonitor International. Last year Nestlé took a majority stake in Blue Bottle Coffee, a roaster and café chain based in California, and bought Texas-based Chameleon Cold-Brew.
The packaged products deal is expected to close by October 1. Both Nestlé and Starbucks expect it to add to their earnings, as early as 2019 in Nestlé’s case.