Coverage: Nestle buying majority stake in Blue Bottle

Nestlé, the Swiss food giant, announced on Thursday that it had bought a 68 percent majority stake in Blue Bottle Coffee for $425 million in an attempt to gain more of the high-end coffee market.

Michael J. de la Merced and Oliver Strand of The New York Times had the news:

The rapidly expanding niche accounts for 15 to 20 percent of coffee consumed in the United States, according to the Specialty Coffee Association. Perhaps more important than the sector’s rapid growth is that it commands higher prices and generates bigger profit margins.

That has drawn the interest of big business. Starbucks has introduced its upscale Reserve brand of coffee bars to fight off upstarts, and JAB Holdings, a family-owned European conglomerate, has been assembling a coffee empire that now includes the mainstream Jacob Douwe Egberts, Peet’s Coffee & Tea brands and Stumptown Coffee Roasters, a high-end mainstay.

Taking a majority stake in Blue Bottle will help Nestlé expand an existing foothold built around the Nescafé and Nespresso line of products to a flourishing new industry with a highly dedicated consumer base (read: millennials).

The investment is also meant to shore up the Swiss conglomerate’s presence in North America, where it has struggled.

Ralph Atkins and Tim Bradshaw of The Financial Times reported that the deal signals a strategy shift for Nestle:

The acquisition of fast-growing Blue Bottle is a strategic shift into retailing by the world’s largest food and drinks company, which owns the Nespresso coffee capsule and Nescafé brands.

It also pits Nestlé directly against two other huge coffee brands in the US — Starbucks and Keurig Green Mountain, which the JAB investment group bought two years ago for $13.9bn.

Nestlé is understood to be paying up to $500m for the 68 per cent stake in Blue Bottle, which by the end of this year will have more than 50 cafés in California, New York, Washington, Miami and Tokyo.

Nestlé is “investing in a team, and expertise that we don’t really have,” said Patrice Bula, marketing director of Nestlé.

Blue Bottle was founded in the early 2000s and along the way has raised a total of $120m from investors including U2 singer Bono and the founders of Twitter and Instagram. Its stylish, minimalist cafés only serve beans roasted in the previous two weeks, meaning a roastery has to be nearby. The company has also been reluctant to sell its coffee wholesale or franchise out its brand to maintain quality.

Martinne Geller and Lisa Baertlein of Reuters reported that Nestle has been making other deals:

It is the fourth deal this year by new chief executive Mark Schneider, an external hire brought in last year to shake up a conservative Swiss company that had missed its sales targets for four years running. Nestle and its multinational peers are fighting slower emerging markets, competition from new brands and a shift in consumer tastes away from processed food.

The company is also selling its U.S. confectionery business, which includes brands like Baby Ruth and Butterfinger, as it seeks to transform itself into a “nutrition, health and wellness” company.

Nestle, Europe’s biggest company by market value, is under pressure too from activist shareholder Third Point. The U.S. hedge fund announced a $3.5 billion stake in June and pressed Nestle for actions such as a margin target and divesting its 23 percent stake in France’s L‘Oreal.

The U.S. market for coffee drinks has retail sales of $2.9 billion, according to Euromonitor International, which forecasts it to reach $4.4 billion by 2021.