Coverage: Nestle pays $7.1 billion to sell Starbucks in stores

In the third-biggest transaction in Nestle SA’s 152-year history, the Swiss food giant will spend $7.15 billion for the right to market Starbucks Corp. products from beans to capsules.

Thomas Mulier and Corinne Gretler of Bloomberg News had the story:

Nestle won’t get any physical assets in the deal. Instead, Chief Executive Officer Mark Schneider is harnessing the name recognition of Starbucks, with its 28,000 outlets around the globe and massive draw in the U.S. Nestle has struggled there for years with its own products like Nespresso and Dolce Gusto.

Nestle could use a jolt — sales rose at their weakest pace in more than two decades last year. By entering a marketing pact with Starbucks, the Swiss company is revealing the limits to growing with Nescafe and Nespresso.

“Nestle needed a big brand, and they needed one fast,” said Alain Oberhuber, an analyst at MainFirst Bank in Zurich. “Starbucks is the only strong brand in roast-and-ground. It’s a rather defensive move — a bit late — but nevertheless, a strategically absolutely vital step.”

Lisa Baertlein and Martinne Geller of Reuters reported that Starbucks will use the money for stock buybacks:

Starbucks will use proceeds to increase planned stock buybacks to $20 billion from $15 billion through fiscal 2020. It said the deal would add to earnings per share by 2021.

The agreement also includes Starbucks-branded capsules for Nestle’s Nespresso and Dolce Gusto single-serve brewers, which should help Nestle curb sales of alternatives from other providers.

Nestle expects the alliance to add to its earnings by 2019. It did not alter share buyback plans.

In addition to the cash payment, Starbucks will receive revenue from product sales and royalties.

“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 Starbucks Chief Executive Kevin Johnson, calling the arrangement a brand amplifier.

Richard Kestenbaum of Forbes.com questioned the long-term success of the deal:

The market sees all this opportunity and likes it. Both stocks are up on the announcement. I see it too and believe they are going to see growth from the deal in both companies. At the same time however, I am scratching my head. I have a few reasons for feeling this way.

This deal is a licensing model and that’s counter-trend. It’s not what the world wants right now. What consumers want now are brands that are communicating their value directly to consumers. That is why so many direct-to-consumer brands are displacing brands sold only through multi-brand retailers. You may ask, “How will consumers know the difference?” What happens in deals like this is that incentives for supporting the brand start to diverge. If you’re Nestlé, you care about selling more coffee. It’s not that Nestlé would do anything to purposely hurt Starbucks. I don’t believe they’d do that. But they have less of an incentive to defend the brand, to keep its position secure, to be creative about how to advance the brand’s position. They have a big incentive to push out as much coffee into the channel regardless of what that does to the brand.

Look at the last such deal that Starbucks did with Kraft. That deal unwound because Starbucks accused Kraft of mismanaging the brand and breaching their contract. In the end, Starbucks had to pay Kraft over $2 billion to settle and end their arrangement.