Starbucks and Nestle Team Up on $7 Billion Coffee Deal

May 08, 2018, 03:15
Starbucks and Nestle Team Up on $7 Billion Coffee Deal

The deal gives Nestle the rights to market, sell and distribute bags of Starbucks coffee beans, as well as its instant coffee.

Under the alliance deal announced on Monday, Seattle-based Starbucks and Nestle have agreed to work together on marketing strategies and innovation.

According to Nestle's chief executive Mark Schneider, who became the first outsider to run Nestle in nearly 100 years in 2016, the deal was a "significant step".

The business has annual sales of US$2 billion, about 9 percent of Starbucks' total revenue.

"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", said the chain's chief executive, Kevin Johnson. Nestle rose 1.3 per cent as of 1:16 p.m.in Zurich.

Some 500 Starbucks employees will join Nestle to drive performance of the existing business and global expansion.

Coffee is popular with millennials who have grown up with Starbucks and often seek out smaller brands.

Nestle said it expects the deal to sell Starbucks bagged coffee and drinks adding to earnings by 2019.

Kraft began marketing and distributing bags of Starbucks coffee in grocery stores in September 1998. The coffee chain said it would use the proceeds to accelerate share buybacks, expecting to return about US$20 billion through repurchases and dividends through fiscal 2020. Sales are to be booked by Nestle, which is to pay royalties to Starbucks.

Nestle is making a new offensive in the US a decade after Nespresso renewed a push into that market, enjoying limited success as most coffee drinkers avoid small espressos. Other big players are growing as well, including Italy's Lavazza, which is now the world's No. 3. "Nestle's acquisition track record over the last 10-15 years has been less than stellar", Andrew Wood, an analyst at Sanford C. Bernstein, told Bloomberg.

Nestle CEO Schneider past year identified coffee as an area for investment. The Swiss company will take control of Starbucks capsules, among other products. It comes as Nestle's Nescafe brand of instant coffees has lost market share in four of the past five years, according to Euromonitor.

The deal is subject to regulatory approval, and the companies say it should close this summer or early fall.

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