Blog: Nestle strikes coffee tie-up with Starbucks

Dean Best | 7 May 2018

A year ago, Nestlé said coffee would be one of four "high-growth food and beverage categories" in which it would focus its "capital spending". Today (7 May), the Nescafé owner and world's-largest food maker announced a notable deal with Starbucks.

Nestlé has paid US$7.15bn for the "perpetual global licence" to market Starbucks' consumer and foodservice products outside the US coffee-shop chain's own stores.

The agreement excludes Starbucks' ready-to-drink products, on which it works with PepsiCo.

The deal, which Nestlé said is expected to be close in the third quarter of the year, is the third-largest in the Swiss food giant's history.

Nestlé CEO Mark Schneider said the transaction was "a significant step" for the company's coffee business, which he noted is the company's "largest, high-growth category".

"With Starbucks, Nescafé and Nespresso we bring together three iconic brands in the world of coffee," Schneider insisted.

The business for which Nestlé has acquired the licence generates annual sales of $2bn, indicating the price the company has paid represents a multiple of more than 3.5 times.

Pablo Zuanic, an analyst at US investment and trading firm Susquehanna International Group, said the possible gains Nestlé could accrue from the deal would be outside the States.

"While Nestlé may help US distribution on the margin, the bigger opportunity is overseas," Zuanic said.

Analysts have suggested the recent moves from JAB Holding Company to expand in coffee - including 2016's deal for Keurig Green Mountain - was likely a factor in Nestlé's deal with Starbucks.

"The deal is vital for Nestlé to protect its high growth, high margin and high return beverages business and to fight back against JAB's attack," MainFirst analyst Alain Oberhuber said today.

And Zuanic said the Nestlé/Starbucks deal could lead to further transactions in the sector, including a tie-up between two more food companies with interests in coffee - Kraft Heinz and J.M. Smucker.

"Vice-versa, the agreement may be a catalyst for other forms of alignment: Kraft Heinz and J.M Smucker?" he wondered in a note to clients.