Your next cup of cof­fee at a hip­ster café could be made by Nes­tle

Business Standard - - WORLD - ERIC PFANNER & THOMAS MULIER

Blue Bot­tle Cof­fee’s founder de­scribes him­self as “a slightly dis­af­fected free­lance mu­si­cian and cof­fee lu­natic, weary of the com­mer­cial cof­fee en­ter­prise.” And yet he’s just sold a ma­jor­ity stake to the ul­ti­mate com­mer­cial cof­fee en­ter­prise — Nes­tle, owner of Ne­spresso and Nescafe.

Such pair­ings are be­com­ing in­creas­ingly com­mon as con­sumer­prod­uct giants like Nes­tle, Unilever, L’Oreal and Di­a­geo seek growth be­yond the stag­nat­ing megabrands that un­der­pinned their strate­gies for decades. Now tiny la­bels with or­ganic, hip­ster or eth­i­cal cre­den­tials are all the rage, and the global be­he­moths are pay­ing ever more for them.

A re­cent flurry of deals for niche mak­ers of ev­ery­thing from vege­tar­ian bur­ri­tos to ve­gan may­on­naise to celebrity-backed te­quila un­der­line the trend. As ac­qui­si­tions ac­cel­er­ate, buy­ers have to look harder for tar­gets and pay more for them. Then they have to try to main­tain the in­die cred that at­tracted con­sumers to the new brands in the first place.

“The chal­lenge is whether the multi­na­tional con­sumer com­pa­nies can grow the scale of their new ac­qui­si­tions through in­te­gra­tion, thus re­al­is­ing their value, while main­tain­ing the core val­ues of the brand they are ac­quir­ing,” said Matthew Ap­ple­ton, part­ner at Allen & Overy in London.

Doubters can point to The Body Shop, the self-styled maker of eth­i­cal cos­met­ics that L’Oreal ac­quired in 2006 and sold this year to Natura Cos­meti­cos of Brazil after it lan­guished un­der the French com­pany’s own­er­ship. Some craft-beer brands have also not lived up to their frothy ex­pec­ta­tions. Unilever did bet­ter with its pur­chase of Ben & Jerry’s, which built its im­age around so­cial con­scious­ness. The com­pany with its roots in ru­ral Ver­mont is now one of the largest global ice cream brands.

Con­sumer-goods giants mov­ing into re­tail have had a mixed track record, San­ford C Bern­stein an­a­lyst An­drew Wood said in a note, with The Body Shop serv­ing as the “poster-child of dis­ap­point­ment.” L’Oreal has done bet­ter with more re­cent pur­chases of brands like Nyx, IT Cos­met­ics or Kiehl’s, which was a niche cos­met­ics com­pany with roots in New York’s East Vil­lage and has turned into a global brand.

Nes­tle has also had its set­backs. The com­pany formed an al­liance with Pierre Mar­col­ini, a Bel­gian maker of lux­ury choco­lates made from lim­ited-edi­tion co­coa beans from Venezuela and Cuba in 2007. The Swiss com­pany pledged to help Mar­col­ini ex­pand a store net­work around the world, and the Bel­gian busi­ness helped ad­vise Ne­spresso on its choco­lates. The al­liance foundered a few years later.

The chal­lenge for the new own­ers of niche brands is to strike the right bal­ance be­tween milk­ing the ac­qui­si­tions for growth and keep­ing them sep­a­rate to avoid alien­at­ing cus­tomers who balk at cor­po­rate con­trol. Nes­tle, which is pay­ing $425 mil­lion for a 68 per cent stake in Cal­i­for­nia-based Blue Bot­tle, ac­cord­ing to a per­son fa­mil­iar with the sit­u­a­tion, said in a state­ment that the cof­fee brand will re­main a stand-alone en­tity. Founder James Free­man and other man­agers and em­ploy­ees will re­tain a mi­nor­ity stake and “con­tinue to run the busi­ness with the same en­tre­pre­neur­ial spirit.”

“The price paid looks high,” An­dreas von Arx, an an­a­lyst at Baader Helvea, said of the Blue Bot­tle deal. “The judg­ment will de­pend on how suc­cess­fully the con­cept can be scaled up in the medium term.”

An­other prob­lem is that it can take a lot of small deals to make a fi­nan­cial dif­fer­ence. Blue Bot­tle rep­re­sents lit­tle more than 0.1 per cent of Nes­tle’s an­nual sales, ac­cord­ing to Bern­stein’s Wood.

Con­sumer goods giants mov­ing into re­tail have had a mixed track record

REUTERS

A Blue Bot­tle Cof­fee store in Los Angeles, Cal­i­for­nia. Its founder re­cently sold the ma­jor­ity stake to Nes­tle

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