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Nestlé To Pay Starbucks $7bn In Global Coffee Alliance

By Steve Wynne-Jones
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Nestlé To Pay Starbucks $7bn In Global Coffee Alliance

Swiss-based food giant Nestlé will pay Starbucks $7.15 billion in cash for the rights to sell the US coffee chain's products around the world, tying a premium brand to Nestlé's global distribution muscle.

The deal, on Monday, for a business with $2 billion in sales reinforces Nestlé's position, as the world's biggest coffee company tries to fortify its place atop a fast-changing market.

It is a bold stroke by Nestlé chief executive Mark Schneider, who has made coffee a strategic priority as he tries to convince uneasy shareholders, including activist Third Point, that he can boost the sprawling group's performance.

Brand Expansion

Bernstein analyst Andrew Wood said that Nestlé's third-biggest acquisition would allow the Swiss company to expand the brand through its global distribution network.

Nestlé shares rose by 1.4% by mid-session, having fallen by more than 8% so far this year. Starbucks stock was indicated 2.8% higher.

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Seattle-based Starbucks, the world's biggest coffee chain, said that it will use proceeds to speed share buy-backs, and the deal would add to earnings per share (EPS) by 2021, at the latest.

Nestlé said that it expects the deal to sell Starbucks' bagged coffee and drinks adding to earnings by 2019. It will not involve any of Starbucks' cafes or ready-to-drink products, but it does let Nestlé sell Starbucks coffee in individual pods (as it does with Nespresso and Nescafé) and expand sales of Starbucks soluble coffee, a key market in Asia. Starbucks now sells single-serve coffee in Keurig K-cup pods.

The Nestlé name will not appear on Starbucks products. "We do not want the consumer to perceive that Starbucks is now part of a bigger family," a Nestlé source said.

Starbucks, strong mostly in the United States, will have the final say on expanding its product range.

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Starbucks Experience

"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 Starbucks' chief executive, Kevin Johnson.

Nestlé and Starbucks are joining forces in a highly fragmented consumer drinks category that has seen a string of deals lately.

JAB Holdings, the private investment firm of Europe's billionaire Reimann family, has fuelled the consolidation wave with a series of deals, including Douwe Egberts, Peet's Coffee & Tea, and Keurig Green Mountain, narrowing the gap with Nestlé.

Richer Brew

Coffee is popular with younger customers, who have grown up with Starbucks. A willingness to pay up for exotic beans and specialty drinks means that companies can brew up richer profit margins than in mainstream packaged food.

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Starbucks said that it now expects to return approximately $20 billion in cash to shareholders in share buy-backs and dividends through fiscal year 2020.

It said that the transaction was expected to add to earnings per share by the end of fiscal year 2021 or sooner, with no change to the company's currently stated long-term financial targets.

Nestlé said that it expected the business to contribute positively to earnings per share and organic growth targets from 2019.

The company source said that it would also pay market-linked royalties to Starbucks. It will not buy any industrial assets as part of the deal, but could step in to produce in markets where Starbucks is not present.

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Nestlé, which will take on about 500 Starbucks employees, said that its ongoing share buy-back programme remained unchanged.

The agreement will strengthen Nestlé's position in the United States, where it is the number-five player, with less than 5% of the market. Market leader Starbucks has a 14% share, according to Euromonitor International.

"In the US, Nescafé is seen as a downscale brand for older people, and the Nespresso system as a niche product. Starbucks is the quality, mass-market leader," said Erik Gordon at the University of Michigan's Ross School of Business.

"Nestlé is, far and away, the largest hot-drinks company globally, with more in sales than the next five largest hot-drinks companies combined," Matthew Barry, an analyst at Euromonitor, said when the tie-up was first mooted on Friday. "However, Nestlé's leadership position is less secure than it once was."

Coffee In Focus

Other big players are growing as well, including Italy's Lavazza, which is now the world's number-three.

Last year, Nestlé CEO Schneider identified coffee as an area of investment.

It bought Texas-based Chameleon Cold-Brew in November and took a majority stake in Blue Bottle Coffee, a small upscale cafe chain, in September.

Starbucks, which in April reported a global drop in quarterly traffic to its established cafes, has been revamping its business amid competition in its key home market. It sold its Tazo tea brand to Unilever for $384 million and closed underperforming Teavana retail stores.

Starbucks is rapidly expanding in China, which it expects to be its largest market one day. It also plans to open 1,000 upscale Starbucks Reserve stores and a handful of Roastery coffee emporiums to take on high-end coffee rivals, such as Intelligentsia Coffee & Tea and Blue Bottle.

Starbucks has long farmed out the retail distribution of its packaged products to a company more specialised in that process, but the partnerships have not always been smooth.

Nestlé, the world's largest packaged-food company, is also not shy when it comes to partnering with rivals through licensing deals or joint ventures, having reached arrangements with General Mills and Hershey, among others.

News by Reuters, edited by ESM. Click subscribe to sign up to ESM: European Supermarket Magazine.

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