FILE PHOTO: The Nestle logo is seen during the opening of the 151st Annual General Meeting of Nestle in Lausanne
FILE PHOTO: The Nestle logo is seen during the opening of the 151st Annual General Meeting of Nestle in Lausanne

Nestlé will pay R89 billion to sell Starbucks coffee

By Reuters Time of article published May 8, 2018

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INTERNATIONAL - Swiss-based food giant Nestlé will pay Starbucks $7.15 billion (R89.28bn) in cash for the rights to sell the US coffee chain’s products around the world in a global alliance aimed at reinvigorating their coffee empires.

The deal yesterday - for a business with $2bn in sales - reinforces Nestlé’s position, as the world’s biggest coffee company tries to fortify its place in a fast-changing market.

Bernstein analyst Andrew Wood said that Nestlé’s third-biggest acquisition would allow the Swiss company to expand the brand through its global distribution network.

Nestlé shares rose 0.5percent in early trading, having fallen by more than 8percent so far this year.

Seattle-based Starbucks, the world’s biggest coffee chain, said it will use the proceeds to speed-up share buybacks and that the deal would add to earnings per share (EPS) by 2021, at the latest.

Nestlé said it expected the deal to sell Starbucks-bagged coffee and drinks adding to earnings by 2019. It said the deal would not involve any of Starbucks’s cafés, but would let Nestlé sell Starbucks coffee in individual pods and expand the sales of soluble coffee.

The Nestlé 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 Nestlé source said.

Starbucks, strong mostly in the US, 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 Nestlé,” said Starbucks chief executive Kevin Johnson.

Nestlé 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 fuelled the consolidation wave with a series of deals including Douwe Egberts, Peet’s Coffee & Tea and Keurig Green Mountain, narrowing the gap with Nestlé.

Coffee is popular with younger customers who have grown up with Starbucks. Their willingness to pay for exotic beans and speciality drinks means companies can brew richer profit margins than in mainstream packaged food.

Starbucks said it expects to return about $20bn cash to shareholders in share buybacks and dividends through the 2020 fiscal year.

It said the transaction was expected to add to its EPS by the end of the 2021 fiscal year or sooner, with no change to the company’s long-term financial targets.

In a separate statement, Nestlé said it expected the business to contribute positively to its EPS and organic growth targets from next year.

A company source said it would pay market-linked royalties to Starbucks, after the initial fee. 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.

Nestlé, which will take on about 500 Starbucks’ employees, said its ongoing share buyback programme would remain unchanged.

The agreement will strengthen Nestlé’s position in the US, where it is only the number five player, with less than 5percent of the market. Market leader Starbucks itself has only a 14percent share, according to Euromonitor International.

“Nestlé is by far 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 on Friday, when the tie-up was first mooted.

But Nestlé’s leadership position is less secure than it once was.

Other big players are growing as well, including Italy’s Lavazza, which is now the world’s No 3.

Nestlé’s new chief executive Mark Schneider last year identified coffee as a strategic area for investment for the company, known for its Nescafé instant coffee and Nespresso home espresso brewers.

It bought Texas-based Chameleon Cold-Brew in November and took a majority stake in Blue Bottle Coffee, a small upmarket café chain, in September.

It is under shareholder pressure to improve performance, which has suffered for years as consumers migrate to fresher brands.

Starbucks, which in April reported a global drop in quarterly traffic to its established cafés, has been revamping its business as it battles high and low-end competition in its key home market. It sold its Tazo tea brand to Unilever for $384million 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 1000 upmarket Starbucks Reserve stores and a handful of Roastery coffee emporiums as part of a broad strategy to fend off 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 specialised in that process, but the partnerships have not always been smooth.

Privately held Acosta picked up that US business in 2011, after Starbucks cited brand mismanagement and ended a 12-year relationship with Kraft Foods that ended in acrimony.

Nestlé, the world’s largest packaged food company, is also not shy when it comes to partnering with rivals in licensing deals or joint ventures.

Nestlé sells General Mills’s Häagen-Dazs brand in the US, while Hershey sells Nestlé’s KitKat in the US. Nestlé also has joint ventures with General Mills for cereal, Lactalis for dairy products, and R&R for ice cream. 


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