Nestlé, the world’s largest coffee company, is paying $7.15 billion for the rights to market Starbucks’ products outside its shops, with a primary focus on long-term shareholder value creation.
As per the deal announced on Monday, Nestlé has obtained the rights to market, sell, and distribute Starbucks Seattle’s Best Coffee, Starbucks Reserve, Teavana, Starbucks VIA and Torrefazione Italia packaged coffee and tea in all global at-home and away-from-home channels, including supermarkets. This alliance will help accelerate and grow the global reach of Starbucks brand in Consumer Packaged Goods and Foodservice.
“This global coffee alliance will bring the Starbucks experience to the homes of millions more around the world through the reach and reputation of Nestlé,” said Kevin Johnson, president and chief executive officer, Starbucks. “This historic deal is part of our ongoing efforts to focus and evolve our business to meet changing consumer needs, and we are proud to work alongside a company that is committed to our shared values.”
Nestlé and Starbucks have been through the grinder lately, reporting their slowest sales growth in months. The deal would allow - Nestlé to grow in the U.S., which has been a weak spot so far, and for Starbucks to streamline its focus on aspects that bring most sales and profits.
Starbucks struggles with sales in the U.S.
In the quarter ended April 1, the company's revenue grew 14 percent to $6.03 billion, better than the $5.9 billion analysts had expected. The traffic, however, was flat, according to Starbucks COO Rosalind Brewer.
For a while now, Starbucks has struggled with sales in the U.S. The Seattle-based coffee giant has been working on a number of initiatives to turn around these weak numbers, including offering more cold beverages, which now account for 50 percent of its business, and new lunch offerings to draw more traffic into its cafés in the afternoon. In addition, it recently sold its Tazo tea brand to Unilever for $384 million and closed underperforming Teavana retail stores.
Starbucks previously licensed its packaged coffee to Kraft Foods, but the license agreement ended in 2011, giving the business to privately held Acosta Inc. The partnership had been due to end in 214, however, Starbucks sought an early exit and was forced to pay $2.76 billion to Kraft, half of which went to Mondelez International.
JAB Holdings Challenges Nestlé
Nestlé is the world’s largest food and drinks company however it is yet to make its presence known in the US coffee market, where it struggles with competition from JAB Holdings, the privately held investment firm that’s slowly building a coffee and soft drinks empire. The company has plunked down majority stakes in world’s biggest coffee brands, including Peet’s Coffee, Keurig Green Mountain, Intelligentsia, Stumptown, Jacobs Douwe Egberts and Caribou Coffee Company. The Luxembourg-based investment vehicle has also bought coffee-related food chains like Krispy Kreme and Panera Bread as well as soft drink giant Dr Pepper Snapple Group in a bid to strengthen its distribution.
As a result, JAB Holdings now plays an influential role in the global coffee market: coffee chains like Peet’s for those who love to-go, Keurig K-Cups for the home and coffee, and cold brews from Stumptown at the supermarket.
Coffee products sold pre-bottled, or in cans has experienced a tremendous 200% growth since 2012, compared to the 65% growth coffee chains have seen. Analysts find that the new class of millennial consumers place a premium on efficiency and convenience. With Starbucks, Nescafe and Nespresso, Nestlé will be able to acquire more upscale Java drinkers in the U.S.
Under the alliance, about 500 Starbucks employees will join Nestle. Operations will continue to be located in Seattle.
The agreement is subject to regulatory approval and is expected to close by the end of 2018.