NESTLE PAYS $7.15 BILLION TO SELL STARBUCKS PRODUCTS
Starbucks is giving Nestle a shot at revitalising its global coffee business. In the third-biggest transaction in Nestle’s 152-year history, the Swiss food giant will spend $7.15 billion for the right to market Starbucks-branded products from beans to capsules, marrying its international distribution network with the allure of arguably the biggest name in java. Nestle won’t get any physical assets in the deal. Instead, Chief Executive Officer Mark Schneider is harnessing the name recognition of Starbucks, with its 28,000 outlets around the globe and massive draw in the US Nestle has struggled there for years with its own products like Nespresso and Dolce Gusto.
Nestle could use a jolt — sales rose at their weakest pace in more than two decades last year. “This will be his first big M&A test,” wrote Andrew Wood, an analyst at Sanford C.Bernstein. “Nestle’s acquisition track record over the last 10-15 years has been less than stellar.”
Knockoff capsules — including Starbucks-branded ones — have dented one of Nestle’s largest growth engines, its Nespresso portioned-coffee business. The new deal will give the Swiss company control of Starbucks capsules, among other products. It comes as Nestle's Nescafe brand of instant coffees has lost market share in four of the past five years, according to Euromonitor. Starbucks is the second-most-valuable brand in fast food, according to BrandZ's Global 2017 report, which estimates it's worth $44 billion. Nestle's $7.15 billion payment is 3.6 times sales, higher than the average of 3 times for major global food deals, according to Bernstein's Wood.
Nestle shares rose 1.1 percent as of 12:07 pm in Zurich. They've dropped about 9 per cent this year. Nestle is making a new offensive in the US a decade after Nespresso renewed a push into that market, enjoying limited success as most coffee drinkers avoid small espressos. Nestle has been struggling to gain market share in that market, given the prevalence of Starbucks and Green Mountain, which was bought out by Europe’s billionaire Reimann family. Their JAB Holding Co. has spent more than $30 billion building a coffee empire by acquiring assets such as Peet’s and combining with Mondelez International’s coffee business.
“JAB is the biggest danger for Nestle,” said Alain Oberhuber, an analyst at MainFirst Bank in Zurich. “Nestle needed a big brand, and they needed one fast. Starbucks is the only strong brand in roastand-ground. It's a rather defensive move — a bit late — but nevertheless, a strategically absolutely vital step.”
Nestle will take over about 500 Starbucks employees who will remain based in Seattle. Starbucks will continue to produce the coffee products in North America, while Nestle will be in charge of manufacturing in the rest of the world. Sales will be booked by Nestle, which will pay royalties to the coffee chain.
The Swiss company gets the rights to sell packaged coffee products in supermarkets, restaurants and catering operations under the flagship Starbucks brand and others including Seattle’s Best Coffee, Starbucks VIA and Torrefazione Italia. The deal includes the Teavana tea brand as well. Nestle is taking a page from JAB's strategy, as it begins to build a patchwork quilt of different brands in coffee instead of focusing almost exclusively on Nescafe and Nespresso.