Nestlé and Starbucks form “global coffee alliance” in US$7.15bn distribution deal

08 May 2018 --- Nestlé has agreed to pay Starbucks US$7.15 billion in a distribution deal that sees two of the most iconic coffee brands join forces to form a “global coffee alliance.” The world’s largest food and beverage company has entered into an agreement for the global license of Starbucks consumer and foodservice products allowing it to market them outside of the company’s coffee shops.

This “historic deal” comes at a time when Starbucks has been struggling with declining footfall in the US despite a series of promotions and is dealing with rebuilding its image following the controversial arrest of two black men in a Philadelphia store and the consequent protests and demonstrations accusing the US giant of racial profiling.

However, since the Nestlé/Starbucks announcement, stocks for both companies are up and, according to Swiss-based Nestlé this transaction will give the company a strong platform for continued growth in North America with leadership positions in the premium roast and ground and portioned coffee businesses.

The deal also allows Nestlé to capture exciting new growth opportunities in the rest of the world with Starbucks premium products and Nestlé expects to accelerate growth in out-of-home channels.

And for Starbucks, the alliance will leverage the scale and sophistication of two of the world’s most recognized consumer brands and bring Starbucks packaged coffee into regional markets globally.

As part of the alliance, Nestlé will obtain 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.

Nestlé will pay Starbucks US$7.15 billion in closing consideration, and Starbucks - with a focus on long-term shareholder value creation - will retain a significant stake as licensor and supplier of roast and ground and other products going forward. Additionally, the Starbucks brand portfolio will be represented on Nestlé’s single-serve capsule systems.

“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.”

Mark Schneider, CEO, Nestlé, says the transaction represents a “significant step” for the company’s coffee business, which is Nestlé’s largest high-growth category.

“With Starbucks, Nescafé and Nespresso we bring together three iconic brands in the world of coffee,” he said. “We are delighted to have Starbucks as our partner. Both companies have true passion for outstanding coffee and are proud to be recognized as global leaders for their responsible and sustainable coffee sourcing.”

FoodIngredientsFirst asked Nestlé how this transaction will impact on the company's US position and what long-term expectations are for growth.

A Nestlé spokesperson said: “This transaction provides Nestlé with a strong platform for continued growth in North America with leadership positions in the premium roast and ground and portioned coffee businesses.”

“It also allows Nestlé to capture exciting new growth opportunities in the rest of the world with Starbucks premium products. As a complete provider of coffee solutions, Nestlé will accelerate growth in out-of-home channels. The two companies will work closely together on innovation and go-to-market strategies to bring the best coffee to customers around the world.”

“The alliance is fully in line with our strategy to focus on high growth food and beverage categories of coffee, petcare, infant nutrition and bottled water. It further solidifies Nestlé’s leadership position in coffee as well as offers a strong cultural fit on sustainable sourcing and corporate social responsibility.”

The two companies will work closely together on innovation and go-to-market strategies and in the US, the deal is expected to enhance Nestlé’s retail and Foodservice presence in coffee, complementing its position in instant coffee and super-premium single serve with Starbucks strong presence in K-cup pods.

As part of this perpetual global license agreement, Starbucks will lead in sourcing, roasting and Starbucks global brand management for the alliance.

Starbucks will receive an up-front cash payment of US$7.15 billion for a business which generated annual sales of US$2 billion. The transaction does not include the transfer of any fixed assets, which facilitates a smooth and efficient integration.

Nestlé expects this business to contribute positively to its earnings per share and organic growth targets as from 2019. Nestlé’s ongoing share-buyback program will remain unchanged.

Starbucks says that it intends to use the after-tax proceeds from this up-front payment primarily to accelerate share buybacks and now expects to return approximately $20 billion in cash to shareholders in the form of share buybacks and dividends through fiscal year 2020.

Additionally, the transaction is expected to be earnings per share (EPS) accretive by the end of the fiscal year 2021 or sooner, with no change to the company’s currently stated long-term financial targets.

Approximately 500 Starbucks employees will join Nestlé to drive performance of the existing business and global expansion and operations will continue to be located in Seattle.

The agreement is subject to customary regulatory approval and is expected to close by the end of this year. It excludes Ready-to-Drink products and all sales of any products within Starbucks coffee shops.

Amid a changing coffee landscape, Nestlé has been making moves to strengthen its position. Last September the company entered the fast-growing, super-premium coffee shop segment by acquiring a majority stake in Blue Bottle Coffee, a Californian-based high-end specialty coffee roaster and retailer that has built a strong reputation among discerning coffee drinkers.

This was quickly followed in November by Nestlé USA continuing to diversify its coffee portfolio with the acquisition of Chameleon Cold-Brew, a leading provider of premium-crafted coffee sourced consciously and grown sustainably. Founded in 2010, Austin-based Chameleon has become the number one organic cold brew brand in the US and one of the top three refrigerated cold brew brands in the country.

In the same month, Unilever acquired Starbucks specialty tea brand Tazo for US$384 million. The brand has been a strong favorite amongst Starbucks’ millennial customers and, at the time of the deal, was described as a “perfect fit” to Unilever’s portfolio of specialty brands.

By Gaynor Selby