Nestle and Starbucks team up - Taipei Times
Tue, May 08, 2018 - Page 10 News List

Nestle and Starbucks team up

ENCAPSULATE:Starbucks would still oversee production in North America, where Nestle hopes to gain an edge on JAB’s growing coffee empire with Keurig and Peet’s

Bloomberg

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

The Swiss maker of Nescafe is to pay the Seattle-based chain US$7.15 billion up-front in cash for the rights to sell Starbucks coffee products in supermarkets, restaurants and catering operations, the companies said yesterday.

Nestle is to 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 US, 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 US$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,” Bank Vontobel AG analyst Jean-Philippe Bertschy wrote in a note, adding that the price might seem expensive, but the investment might pay off within three to four years.

“It allows Nestle to gain scale in the US, a weak spot so far,” he said.

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

The business has annual sales of US$2 billion, about 9 percent of Starbucks’ total revenue. The coffee chain said it would use the proceeds to accelerate share buybacks, expecting to return about US$20 billion through repurchases and dividends through fiscal 2020.

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

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

Starbucks said Nestle would also obtain the rights to sell packaged coffee products under brands including Seattle’s Best Coffee, Starbucks VIA and Torrefazione Italia.

The deal also includes the Teavana tea brand, although 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.

Schneider has reversed Nestle’s policy on roast-and-ground coffee, a category that the company began shunning decades ago, as it considered it a commodity business with little value to add.

The company’s US$425 million purchase of a stake in Blue Bottle Coffee last year was a step back into the segment, whose growth prospects have revived as coffee consumers become more sophisticated.

While Starbucks holds the crown in the US$13.8 billion US 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 told a conference call in January.

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

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