To jump-start coffee business, Nestle to pay $7.15 billion to Starbucks

By:Vandita Jadeja 2018-05-11

Food giant Nestle to pay Starbucks $7.15 billion in cash for the rights to sell the U.S. coffee chain’s products across the world in a global alliance which is aimed at reinvigorating the coffee empire. The deal will reinforce the position of Nestle as the world’s biggest coffee company while it tries to fortify its place in a fast-changing market.

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Starbucks stated it will use the proceeds to speed up the share buybacks and the deal would add to their earnings per share by 2021. Nestle expects the deal to sell Starbucks bagged coffee and drinks adding to their earnings by 2019 and it will not involve any of the cafes managed by Starbucks. Both the companies are joining hands in a highly fragmented consumer drinks marker which has seen a number of deals lately.

Starbucks Chief Executive Kevin Johnson stated that the global coffee alliance will bring the Starbucks experience to the home of millions around the world through the reputation and reach of Nestle. Coffee is highly popular with young consumers who have grown up with Starbucks and seek out smaller brands at times. Consumers are willing to pay for specialty drinks and exotic beans, which means richer profit margins for the companies. Starbucks expects to return about $20 billion in cash to the shareholders in the form of share buybacks and dividend by 2020.

Nestle will take about 500 employees of Starbucks as part of the deal stated that its ongoing share buyback program will remain unchanged. This agreement will strengthen the position of Nestle in the United States where is a No.5 player with less than 5 percent of the market. Starbucks has only 14 percent share in the market.

Nestle is the largest hot drinks company globally and has had more sales than the next five largest hot drinks companies combined. Other players are growing in the market, including Italy’s Lavazza which is number 3 in the world.

Nestle bought Texas-based Chameleon Cold-Brew in November and took a majority stake in Blue Bottle Coffee in September. The company is under pressure from the shareholders to improve its performance which has suffered for years as consumers are moving to fresher brands. Starbucks reported a global drop in traffic to its established cafes in April. It is revamping the business as it battles high and low-end competition in the home market. It is expanding the business in China which it expects to be its largest market. It also plans to open up 1000 Starbucks Reserve Stores and a handful of Roastery coffee emporiums as a part of the broad strategy to defend against high-end rivals.

Nestle is the world’s largest packaged food company and is not shy when it comes to partnering with rivals. It sells General Mills’ Haagen-Dazs brand in the United States and Hershey sells Nestle’s KitKat in the United States. The company also has joint ventures with General Mills for cereal, R&R for ice cream and Lactalis for dairy products.

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