Photo: Starbucks
Starbucks and Nestle make a global coffee CPG deal
Nestle has obtained the rights to market, sell and distribute Starbucks’ consumer packaged goods (CPG) and foodservice products around the world for $7.15 billion. The deal includes products under the Starbucks, Seattle’s Best Coffee, Starbucks Reserve, Teavana, Starbucks VIA and Torrefazione Italia brands.
The alliance between the two companies was characterized by Starbucks CEO Kevin Johnson as “part of our ongoing efforts to focus and evolve our business to meet changing customer needs.”
“For Starbucks, the deal will help to drive brand recognition outside of its core North American and European markets as Nestle ramps up expansion using its distribution capacity,” Neil Saunders, managing director at GlobalData Retail and a RetailWire BrainTrust member, told CNBC.
Starbucks has seen its growth rate in the U.S. moderate in recent quarters and the deal with Nestle is expected to allow the company to focus more on its stores. It does not appear, however, that Starbucks will reinvest the cash in its physical locations. Mr. Johnson indicated it would be used to increase shareholder value through stock buybacks and higher dividends.
Howard Schultz, chairman of Starbucks, has focused his efforts on innovation through the continuing development of the coffee giant’s upscale Reserve and Roastery concepts since he turned over CEO duties to Mr. Johnson in April of last year.
The deal will provide the Starbucks brand greater access to the single-service coffee market outside the U.S. where Nestle’s Nespresso system is one of the biggest drivers of the CPG giant’s business. Nestle, which has struggled to make headway in the single-serve segment in the U.S. going up against JAB Holding-owned Keurig, will now have products that not only work on the rival system, but are among the most popular items.
“Nestle needed a big brand, and they needed one fast,” said Alain Oberhuber, an analyst at MainFirst Bank in Zurich, told Bloomberg. “Starbucks is the only strong brand in roast-and-ground. It’s a rather defensive move — a bit late — but nevertheless, a strategically absolutely vital step.”
- Starbucks and Nestle Form Global Coffee Alliance to Elevate and Expand Consumer Packaged Goods – Starbucks
- Starbucks CEO sees Nestle deal as way to give $20 billion to shareholders over next three years – CNBC
- Nestle Bets $7 Billion on Starbucks to Revive Coffee Sales – Bloomberg
- Will Starbucks prosper or slide as CEO changes focus? – RetailWire
Discussion Questions
DISCUSSION QUESTIONS: Do you see the licensing deal between Nestle and Starbucks as a positive or negative for the companies? Does the decision by Starbucks to put the proceeds from the deal into stock buybacks and dividends give you pause about the coffee giant’s efforts to innovate?
Poll
BrainTrust
Lyle Bunn (Ph.D. Hon)
Strategy Architect – Digital Place-based Media
Jennifer McDermott
Consumer Advocate, finder.com
I see benefits in the licensing deal because Nestle can promote the Starbucks brand better than if Starbucks attempted to do this themselves. Starbucks and Nestle should see strong growth in product sales. However, it does trouble me to see $7.15 billion go strictly to stock buybacks and higher dividends. But we are living in a world today that’s all about money; fast made money and no matter how much money, it’s never enough.
So the opportunity is there for Starbucks leaders to take advantage and that’s precisely what they’re doing. It won’t hurt their business, but there are other ways that Starbucks could invest some of the money in the company, like new store designs, remodels, more in-store technology, more staff, more staff training … the list goes on and on.
Starbucks has made strides with their new store concepts, which focuses on storytelling, craftsmanship and the experience of coffee drinking. Perhaps the partnership with Nestle/Nespresso will be part of their latest value proposition?
Either way, the partnership with Nestle enables Starbucks to increase their reach via another shopping channel. For Nestle, they have been struggling to increase their market share, and have suffered some bad PR, so they will be harnessing the name recognition of Starbucks, with its 28,000 outlets around the globe and massive draw in the U.S.
It will be interesting to see how this plays out, and what impact it will have on the Nespresso U.S. market share.
Go-to-market alliances build brand equity and it would appear that a Nestle-Starbucks deal can only help both against rivals. Starbucks growth must at some point deliver rewards beyond operating profits, and a CPG such as Nestle can deliver such rewards.
It’s a great deal for Starbucks’s shareholders and probably good for the brand internationally. From Nestle’s point of view it gives them a strong brand to market, but taste and quality may be more of a challenge globally than it is at home, where most customers either don’t know what good coffee is actually supposed to taste like or are willing to put things in it normally reserved for ice cream in order to make it palatable. Ditto for the teas. So I expect it might be a bit tougher for Nestle than it looks at first.
In answer to the second question, as I said, it’s a great move for the shareholders, but I don’t see it doing much to spur on innovation.
I wrote in September 2017 that either Nestle or Mondelez should pursue a licensing agreement to distribute Starbucks coffee and tea products. However, I did a terrible job of estimating the price of such an agreement as I stated the cost would be $4B to $5B. Even at $7.15B I like the deal.
My argument is this: Starbucks must leverage their brand globally and this agreement with Nestle will prove beneficial. What I don’t like is the idea of using the funds to buy back stock or reward shareholders. I would rather see Starbucks attack their biggest weakness — not fully utilizing their stores to sell better quality food to their customers.
I definitely see the benefit to Starbucks being able to take advantage of Nestle’s global infrastructure. Nestle definitely has more of the leg-work role, but surely has a nice upside as well. Starbucks doesn’t neglect their physical locations so the decision to put proceeds into buybacks and dividends isn’t exactly bypassing some greater need. Totally fine with keeping the investors happy.
Can’t wait for the $500 limited-edition “Starbucks Green” Nespresso machine to be released just in time for the holidays as well.
Starbucks gains huge distribution which is positive. Nestle gains a big brand with which to educate consumers and open a market outside the US. Nothing about the deal focuses on innovation for Starbucks.
The deal makes sense on both sides. I don’t anticipate seeing any “explosive growth” scenarios, though the numbers sound about right.
There’s been some talk of the 3.6x revenue multiple being high — though given the amount of ground that Nestle has been losing to JAB, I view it at a reasonably conservative premium for Nestle to pay to defend their position. While there’d be lower acquisition cost options out there (that would certainly have the opportunity to surprise with growth) there’s no safer bet than Starbucks on predictable returns, and steady market share.
I’d be interested to know what their key markets for building brand recognition are. Starbucks was a well-documented failure in my native Australia whereas Nespresso gained a strong foothold in the market with the launch of its boutiques. This is obviously only one market, but I think it serves as a reminder to Starbucks and Nestle that brand building strategy needs to be a bespoke approach for each market.
This appears to be a positive for both companies as they can now focus more on what they each do best. Starbucks on stores and experience and Nestle on selling CPGs in the US and abroad. Time will tell if the $7.15$ price tag makes sense, and in the long term if that money would be better invested in people, stores or benefits as opposed to stock buy backs. Starbucks is already so far ahead of almost every major company in terms of how they treat employees worldwide (with a few recent horrible contradictions to this rule) so perhaps focusing on shareholders for this windfall is a smart move.
It is a strong strategic move for both companies. As noted Nestle, struggling of late, needed a big brand infusion into its portfolio and they have acquired distribution rights for one of the most powerful and positively perceived consumer brands. Starbucks obviously gains from the announced intent to further enrich shareholders and I am therefore deeply disappointed in the lack of vision to at least put out a PR push that they would invest more in facilities upgrades, helping local coffee producers, etc. The transparent “it’s only about the shareholders” is awful PR for a company that just recently did a great job handling the unfortunate Philadelphia issue.