Nestle to pay billions to obtain Starbucks rights
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Nestle is to pay Starbucks US$7.1 billion for the global rights to sell and distribute Starbucks products outside cafes. The Starbucks rights deal includes 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. And the Starbucks brand portfolio will be represented on Nestlé’s single-serve capsule systems, such as the Nespresso machines.
The Seattle-headquartered cafe giant says the alliance with Nestle will allow it to accelerate and grow the global reach of Starbucks brands in the consumer packaged goods market and in foodservice channels.
Starbucks will lead in sourcing, roasting and global brand management for the alliance, while the two companies will work closely together on innovation and go-to-market strategies.
“With a shared commitment to ethical and sustainable sourcing of coffee, this alliance will transform, expand and elevate both the at-home and away-from-home coffee and related categories around the world,” Starbucks said in a statement.
Neil Saunders, MD of GlobalData Retail, said the scale of the deal underlines the brand strength of Starbucks and of Nestle’s desire to use it to power its own growth.
“For Starbucks the deal will help to drive brand recognition outside of its core North American and European markets as Nestle ramps up expansion using its distribution capacity. Arguably, it also allows Starbucks to concentrate more fully on developing its retail business, including the higher end concepts like Reserve Roastery that it is currently rolling out.
“For Nestle, Starbucks gives it a powerful brand it can add to a coffee armoury that is looking a little tarnished. The group has always struggled with market share in North America and this deal essentially buys immediate scale. It also provides numerous opportunities for expansion elsewhere in the world by leveraging the Starbucks brand.”
Kevin Johnson, president and CEO of Starbucks, said the alliance will take the Starbucks experience into the homes of millions more consumers around the world through the reach and reputation of Nestle.
“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.”
Nestle CEO Mark Schneider said the deal marked a “significant step” for the Swiss headquartered company’s coffee business.
“The group has always struggled with market share in North America and this deal essentially buys immediate scale.”
“With Starbucks, Nescafe and Nespresso we bring together three iconic brands in the world of coffee. We are delighted to have Starbucks as our partner. Both companies have true passion for outstanding coffee and are proud to be recognised as global leaders for their responsible and sustainable coffee sourcing. This is a great day for coffee lovers around the world.”
Saunders observed the deal is yet another example of how large consumer goods companies are struggling to develop and grow their traditional brands.
“Arguably, Nestle’s preferred vehicles for driving growth in coffee would be its own Nescafe and Nespresso brands. However, these have failed to gain traction in North America and have reached maturity elsewhere. There is a case to be made that Nestle has failed to innovate and develop either brand to the extent it should.”
Saunders cautioned there may be a downside for Nestle in the deal:
“There is a risk for Nestle is that while Starbucks is one of the best known and most powerful brands in coffee, others like McDonald’s are looking to cash in on the category by selling their own brand products through supermarkets. A host of innovative small companies, like Bulletproof Coffee and Four Sigmatic, are also making advances into the sector by emphasising the health and wellness benefits of the beverage.
“Arguably, Nestle has gone with the obvious and easy choice – and paid a lot of money for it. It could, and probably should, also examine at how it could also acquire and develop some more innovative startups,” Saunders concluded.
Questions & Answers
Q.What products are included in the Starbucks rights deal with Nestle?
What products are included in the Starbucks rights deal with Nestle?
The deal covers Seattle’s Best Coffee, Starbucks Reserve, Teavana, Starbucks VIA, and Torrefazione Italia packaged coffee and tea. These will be available in global at-home and away-from-home channels, and on Nestle’s single-serve capsule systems.
Q.How will Starbucks benefit from this alliance with Nestle?
How will Starbucks benefit from this alliance with Nestle?
Starbucks believes the alliance will help accelerate and grow its brands' global reach in consumer packaged goods and foodservice. It also allows Starbucks to focus more on developing its retail business, including higher-end concepts like Reserve Roastery.
Q.What is the primary motivation for Nestle to acquire these rights from Starbucks?
What is the primary motivation for Nestle to acquire these rights from Starbucks?
Nestle aims to use Starbucks' strong brand to power its own growth and address its struggles with market share in North America. The deal provides immediate scale and opportunities for global expansion by using the Starbucks brand.
Q.What potential risks does an analyst identify for Nestle in this deal?
What potential risks does an analyst identify for Nestle in this deal?
Neil Saunders cautions that while Starbucks is a powerful brand, other companies like McDonald’s and innovative smaller firms are entering the coffee category. He suggests Nestle might have chosen an obvious option without exploring more innovative start-up acquisitions.
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