NESTLE TO GET A SHOT AS IT BUYS STARBUCKS RIGHTS
▶ Swiss company is looking to use the US brand to lift sales in markets in which it has struggled to grow
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 products from beans to capsules, marrying its international distribution network with the allure of arguably the biggest name in coffee.
Nestle won’t get any physical assets in the deal. Instead, chief executive Mark Schneider is harnessing the name recognition of Starbucks, with its 28,000 outlets around the globe and huge 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.
By entering a marketing pact with Starbucks, the Swiss company is revealing the limits to growing with Nescafe and Nespresso.
“Nestle needed a big brand, and they needed one fast,” said Alain Oberhuber, an analyst at MainFirst Bank in Zurich. “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 shares gained 3.2 per cent in premarket trading in New York.
The company said it would use the deal proceeds to accelerate stock buybacks. Nestle rose 1.3 per cent as of 1.16pm in Zurich.
Its shares had dropped about 9 per cent this year.
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 its worth at $44bn. Mr Schneider agreed to pay 3.6 times sales for the consumer-products business, higher than the average of three times for major global food deals, according to Andrew Wood, an analyst at Sanford C Bernstein.
“This will be his first big M&A test,” Mr Wood said. “Nestle’s acquisition track record over the last 10 to 15 years has been less than stellar.”
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 has spent more than $30bn building a coffee empire by acquiring assets such as Peet’s and combining with Mondelez International’s coffee business.
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 agreement adds prospects for growth outside of North America, where Starbucks outlets are less prevalent. 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.