Nestle and Starbucks strike US$7.15b coffee licensing deal

[LOS ANGELES] Swiss-based Nestle , the world's largest food and beverage company, will pay Starbucks Corp US$7.15 billion in cash for exclusive rights to sell the US chain's packaged coffees and teas around the world, tying a premium brand to Nestle's global distribution muscle.

The agreement announced on Monday could rev up Starbucks'roughly US$2 billion business selling packaged Starbucks coffee, Teavana tea and other products through grocery stores and other retailers, including in China.

The alliance, which amounts to a licensing arrangement, frees Seattle-based Starbucks to focus on improving its mainstay US cafe business, where traffic growth has stalled amid competition from fast-food chains and upscale coffee houses, while rapidly adding shops in China.

Starbucks will use proceeds to increase planned stock buybacks to US$20 billion from US$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.

"That would have taken a lot of capital and years to build outside the US," John Culver, Starbucks' group president for international and channel development, said on a conference call with analysts.

Nestle CEO Mark Schneider has made coffee a strategic priority as he tries to convince uneasy shareholders, including activist Third Point, that he can boost the sprawling group's performance.

"This is all about growth," Mr Schneider told analysts.

He said he expects the alliance to boost Nestle in North America and benefit Starbucks in China, which is Nestle's second largest market.

Analysts agreed that the alliance could strengthen Nestle's position as the world's biggest coffee company in a fast-changing landscape. Rival JAB Holdings, a private investment firm of Europe's billionaire Reimann family, narrowed the gap with Nestle with a recent series of acquisitions, including Peet's Coffee & Tea and Keurig Green Mountain.

In January, Nestle sold its US confectionery business to Ferrero. It had been losing ground in the United States confectionery sector as rivals moved towards healthier products.

Nestle, which will take on about 500 Starbucks employees, will not buy any industrial assets as part of the deal.

Shares in Nestle rose about 1.6 per cent in Switzerland, while Starbucks shares slipped 0.4 to close at US$57.45 in US trading.

RICHER BREW

Coffee is popular with younger customers who have grown up with Starbucks and are willing to pay for exotic beans and specialty drinks that translate into richer profit margins than mainstream packaged food.

The agreement will strengthen Nestle's position in the United States, where ranks fifth with less than 5 per cent of the market. Market leader Starbucks has a 14 per cent share, according to Euromonitor International.

Other big players are growing as well, including Italy's Lavazza, which is now the world's No. 3.

Nestle CEO Schneider last year identified coffee as an area for investment.

It bought Texas-based Chameleon Cold-Brew in November and took a majority stake in Blue Bottle Coffee, a small upscale cafe chain, in September.

Starbucks, which in April reported a global drop in quarterly traffic to its established cafes, has been streamlining its business. It sold its Tazo tea brand to Unilever for US$384 million and closed underperforming Teavana retail stores.

Starbucks plans to open 1,000 upscale Starbucks Reserve stores and a handful of Roastery coffee emporiums to take on high-end coffee rivals such as Intelligentsia Coffee & Tea and Blue Bottle.

Starbucks has long farmed out retail distribution of its packaged products, but the partnerships have not always been smooth.

Privately held Acosta Inc picked up that US business in 2011 after Starbucks cited brand mismanagement and ended a 12-year relationship with Kraft Foods.

The partnership with Kraft had been due to end in 2014, but Starbucks sought an early exit. It was later forced by an arbitrator to pay US$2.76 billion to Kraft, which by then had split with the payment going to Mondelez International.

Nestle is no stranger to partnering with rivals through licensing deals or joint ventures, having reached arrangements with General Mills' and Hershey, among others.

REUTERS