The largest coffee company in the world, Nestle (NSRGY, Financial), is in talks with Starbucks (SBUX, Financial) in a deal to form a global collaboration for its coffee business. According to some media reports on Friday, the Swiss-based food giant is looking for that segment of Starbucks’ business, which sells bagged coffee and drinks in supermarkets. Here’s a closer look at what to expect from the coffee alliance.
A bit in details
Nestle is entering into a partnership agreement with Starbucks to sell the American coffeehouse’s consumer and food-service products across the global. The news was initially conveyed by Inside Paradeplatz, a Swiss financial blog. A formal agreement is yet to be signed.
Starbucks generates approximately $2 billion a year from this business. The Swiss company said that it will pay Starbucks $7.15 billion in cash, expecting that the arrangement would have a positive bearing on its earnings, as well as in assuming organic growth from 2019 onwards. Nestle has confirmed that its share buyback program would not get affected by the impending deal.
The alliance is a clear indication of Nestle’s efforts to spread its reach in its more upscale java market. The company faces tough competition from the likes of JAB Holding Co. in the U.S. This is not the first time that the maker of Nespresso and Nescafe has attempted to build its coffee kingdom through acquisitions. The company has earlier invested more than $30 billion in purchasing similar businesses, such as Keurig Green Mountain and Peet’s. CEO Mark Schneider said:
“With Starbucks, Nescafe and Nespresso, we bring together three iconic brands in the world of coffee.”
Nestle would be taking around 500 Starbucks employees, with its operation's base to remain at Seattle. The deal will give Nestle the privilege to globally market the American coffeehouse chain’s products beyond Starbucks’ coffee shops. CEO Kevin Johnson was happy to note:
“This global coffee alliance will bring the Starbucks experience to the homes of millions more 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.”
A win-win
Starbucks recently reported its quarterly financials where it registered global same-store sales decline in traffic. In fiscal 2017, the company’s consumer-packaged-goods business, which includes ready-to-drink beverages, accounted for 8% of the company's revenue, translating to around $1.8 billion.
Starbucks has been working on overhauling its business. Some of its recent efforts include shutting down its poor performing Teavana retail stores and the sale of its Tazo tea brand to Unilever in a $384 million deal. The deal will help Starbucks to reach many more millions across the globe.
Last year, Nestle acquired niche brands including Blue Bottle Coffee and Chameleon Cold-Brew in an effort to expand and strengthen its portfolio. The company is focused on getting a stronger grip of the U.S. market. The deal with Starbucks is a crucial one, considering the latter’s dominance in the U.S.. Starbucks is the coffee chain leader, occupying $13.8 billion of the total market, according to Euromonitor. Other popular ones include Green Mountain and Kraft Heinz, while Nestle ranks fifth. The historic deal between the two rivals is subject to regulatory approval, which should conclude this summer or early fall.
Disclosure: I do not hold any position in the stocks mentioned in this article.
