When big com­pa­nies think small

Nes­tle buys in­stant cool­ness with Blue Bot­tle Cof­fee deal.

Los Angeles Times - - BUSINESS - By James Ru­fus Koren

Big com­pa­nies are good at lots of things. Manag­ing com­plex sup­ply chains. Buy­ing in bulk to get the low­est prices from sup­pli­ers. Get­ting prod­ucts on lots of store shelves and in front of lots of con­sumers.

But they’re not good at ev­ery­thing. Like be­ing cool.

Which is why, over the last few years, big brands have gone on a buy­ing spree, snap­ping up small, hip, high-end com­pa­nies that have the kind of im­age and street cred that some multi­na­tional con­glom­er­ates have ac­knowl­edged they are un­able to cre­ate on their own.

In the lat­est deal in the space, an­nounced last week, Nes­tle, the world’s largest food and bev­er­age com­pany, is buy­ing Oak­land’s Blue Bot­tle Cof­fee, a chain with just 40 lo­ca­tions, all in

trendy ur­ban neigh­bor­hoods, all with baris­tas who take an im­prob­a­bly long time to craft a cup of pourover cof­fee.

Terms of the deal were not dis­closed, but the Swiss firm is re­port­edly pay­ing as much as $500 mil­lion for a ma­jor­ity stake in Blue Bot­tle, valu­ing the cof­fee com­pany at more than $700 mil­lion.

Why spend that much on a tiny chain rather than try­ing to build one from scratch, pos­si­bly for much less cash? Be­cause Nes­tle knows there’s a good chance it wouldn’t work, said Nick Setyan, a food and bev­er­age an­a­lyst at down­town L.A.’s Wed­bush Se­cu­ri­ties.

“I don’t think they view that as their core com­pe­tency,” he said.

In many ways, the idea of a tiny cof­fee chain that charges high prices — a small, ba­sic cof­fee costs $3.75, al­most twice the price at Star­bucks — for painstak­ingly made prod­ucts is the op­po­site of Nes­tle, a pub­licly traded cor­po­rate giant that makes mass-pro­duced, af­ford­able prod­ucts avail­able ev­ery­where. Nes­tle’s brands run the ga­mut, from Dreyer’s ice cream and Cookie Crisp ce­real to Ger­ber baby food and Pu­rina kib­ble.

And that’s kind of the point of the deal, said Tay­lor Palmer, an an­a­lyst at re­search firm IBISWorld. In buy­ing Blue Bot­tle, Nes­tle is buy­ing a com­pany whose cus­tomers care about all the lit­tle things Blue Bot­tle does that Nes­tle doesn’t.

“They’re able to tap into a brand that peo­ple re­ally iden­tify with, and one with val­ues peo­ple don’t nec­es­sar­ily as­so­ciate with larger brands,” he said. “They can at­tach them­selves to the feel­ing that is elicited by con­sumers when they see th­ese brands.”

That same think­ing has mo­ti­vated other deals, too, across all sorts of in­dus­tries.

Wal­mart has ac­quired trendy on­line re­tail­ers Bono­bos and Mod­cloth. Big ho­tel chains have ac­quired high-end “bou­tique” ho­tels. Con­sumer prod­ucts giant Unilever paid $1 bil­lion for mil­len­nial-fo­cused groom­ing com­pany Dol­lar Shave Club.

But nowhere has the trend been more no­tice­able than in the food and bev­er­age in­dus­try, par­tic­u­larly in beer and cof­fee.

Two years ago, Emeryville’s Peet’s Cof­fee & Tea ac­quired two craft cof­fee com­pa­nies, Port­land’s Stump­town and Chicago’s In­tel­li­gentsia. Peet’s it­self was ac­quired back in 2012 by Lux­em­bourg con­sumer prod­ucts con­glom­er­ate JAB Hold­ings, which also owns Krispy Kreme Dough­nuts, Pan­era Bread and fash­ion brands Jimmy Choo and Bel­staff.

AB InBev, the owner of Bud­weiser, has nu­mer­ous craft-beer hold­ings, in­clud­ing Chicago’s Goose Is­land Beer Co., Seat­tle’s Elysian Brew­ing and L.A.’s Golden Road Brew­ing. Big Bel­gian brewer Du­vel Moort­gat owns Kansas City’s Boule­vard Brew­ing and Paso Robles’ Fire­stone Walker.

Heineken this year ac­quired Pe­taluma’s La­gu­ni­tas Brew­ing Co., and Con­stel­la­tion Brands, the owner of Mex­i­can mega-brews Corona and Modelo, paid $1 bil­lion for San Diego’s Bal­last Point Brew­ing Co. in 2015.

In the most re­cent suds deal, Ja­panese brew­ery Sap­poro an­nounced last month it had ac­quired San Fran­cisco icon An­chor Brew­ing, one of the pi­o­neers of the U.S. craft-beer in­dus­try.

In ev­ery case, those buy­ers have deep enough pock­ets that they could try to start high-end cof­fee or craft beer brands of their own.

That’s the tack Star­bucks has taken, an­nounc­ing last year that it aims to put high-end cof­fee bars — un­der the Star­bucks Re­serve brand — within many of its ex­ist­ing lo­ca­tions, and even­tu­ally to open hun­dreds of stand-alone Re­serve cof­fee bars.

But IBISWorld’s Palmer said con­sumers are much more likely to stick with a craft brand once it’s been ac­quired by a big­ger com­pany than they are to be­come loyal to a new brand cre­ated by a big com­pany.

“When con­sumers see a brand be­ing built by a large multi­na­tional, and they see it mar­keted as a craft bev­er­age or craft prod­uct, they view those prod­ucts with a heavy dose of skep­ti­cism,” he said. “But when it’s a brand that’s ac­quired, peo­ple can still view it as what it was be­fore.”

Setyan agreed, say­ing there’s lit­tle ev­i­dence to sug­gest cus­tomers change their be­hav­ior af­ter th­ese deals.

“Most con­sumers don't pay enough at­ten­tion to even know,” he said.

In­deed, big cor­po­rate buy­ers of­ten go out of their way to leave th­ese com­pa­nies alone, at least on the sur­face, so as not to taint their in­de­pen­dent im­age, said Deb­o­rah MacIn­nis, a mar­ket­ing pro­fes­sor at USC’s Mar­shall School of Busi­ness.

“Of­ten, it’s im­por­tant to not pro­mote the par­ent brand’s as­so­ci­a­tion with the smaller brand once an ac­qui­si­tion is made,” she said. “The brand loses some of its spe­cialty and niche ap­peal when the cor­po­rate brand be­comes strongly associated with it.”

In a state­ment an­nounc­ing last week’s ac­qui­si­tion, Nes­tle said Blue Bot­tle will “con­tinue to op­er­ate as a stand-alone en­tity, while hav­ing full ac­cess to Nes­tle’s well-recog­nised ca­pa­bil­i­ties in cof­fee and its strong global con­sumer reach.”

In other words, don’t ex­pect Blue Bot­tle to start sell­ing Nescafé in­stant cof­fee.

It’s pos­si­ble for big com­pa­nies to cre­ate suc­cess­ful, higher-end, craft-style brands of their own, but the suc­cess sto­ries are few.

McDon­ald’s launched its McCafe line of Star­bucksstyle cof­fee drinks the bet­ter part of a decade ago but has con­tin­ued to re­think the of­fer­ing as it con­tin­ues to try to cap­ture drinkers of higher-end cof­fee.

Coors, part of con­glom­er­ate Mol­sonCoors, launched beer brand Blue Moon, which re­mains a pop­u­lar seller — de­spite a 2015 law­suit, since dis­missed, that ar­gued Coors was de­ceiv­ing cus­tomers by pro­mot­ing the brand as craft beer.

An­a­lysts said there’s an­other rea­son big com­pa­nies are buy­ing and don’t seem to mind spend­ing big bucks on smaller firms.

Re­mem­ber all those things big com­pa­nies are good at do­ing? Those can help quickly ramp up dis­tri­bu­tion, sales and prof­its at the ac­quired com­pa­nies once they are brought into the cor­po­rate fold.

Palmer, for in­stance, ex­pects Blue Bot­tle, with the size and bar­gain­ing power of Nes­tle be­hind it, will be able to sig­nif­i­cantly lower the price it pays for ev­ery­thing from cof­fee beans to cof­fee cups. But be­cause of the com­pany’s craft im­age, it prob­a­bly won’t be low­er­ing the prices it charges to cus­tomers.

“That’s one of the crazy things about com­pa­nies ac­quir­ing craft brands,” Palmer said. “Peo­ple will still as­so­ciate Blue Bot­tle with a cer­tain level of qual­ity, so they’ll be will­ing to pay as much as they are now. They’ll be sell­ing the same $5 cup and get­ting a sig­nif­i­cant in­crease in profit.”

Justin Sul­li­van Getty Images

THE BLUE Bot­tle Cof­fee logo is seen in front of a store in San Fran­cisco. Nes­tle is re­port­edly pay­ing as much as $500 mil­lion for a ma­jor­ity stake in the com­pany.

Eric Ris­berg Associated Press

JAMES FREE­MAN, founder of Blue Bot­tle Cof­fee, cups sam­ples of joe at his roast­ery in Oak­land in 2013. The up­start gourmet cof­fee com­pany, val­ued at more than $700 mil­lion, has just 40 lo­ca­tions.

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