Nestlé Gains Market Power through Starbucks Acquisition

Nestlé Gains Market Power through Starbucks Acquisition

Swiss group on a shopping spree

The Swiss food giant Nestlé is taking over the rights for global coffee marketing for consumer and hospitality products from the US Starbucks chain. The price for this is $ 7.15 billion. If the regulators agree, business will be perfect by the end of 2018.

The largest food company in the world obviously still sees great potential in the brown bean business, which it plans to further exploit with the latest deal. For Nestlé boss Ulf Mark Schneider, this is a strategic acquisition, Starbucks is concentrating on the profitable sectors and in November 2017 already sold the tea division Tazo to Unilever for 384 million dollars.

Allianz in the upscale coffee market

The approximately 28,000 Starbucks branches in over 50 countries around the world are not affected by the takeover. Nestlé takes over the coffee products that the US group sells through other stores. With that, Starbucks earned around $ 1.8 billion in 2017, around eight percent of total annual sales. The takeover also excludes ready-made beverages and the sale of products in the Starbucks cafés themselves. What sense does the takeover make for the Swiss group – doesn’t it represent the Nescafé and Nespresso brands worldwide? It is an alliance in the upscale coffee market. Nestlé has been overtaken in this segment by a group of companies in the US market: It is the JAB Holding of the German billionaire family Reimann. It has invested $ 30 billion in acquisitions over the past few years. Starbucks boss Kevin Johnson speaks of a “historic agreement”. In his words, the company is reacting to changing customer needs. The aim is to focus the business. Coffee beans , tea bags, ice cream, and made coffee beverages. With the takeover, the coffee division moves to Nestlé.

Strategic considerations and consumer benefits

It is also consumers who will benefit from the takeover. In the words of Nestlé boss Schneider, it brings together three outstanding coffee brands: Starbucks, Nescafé and Nespresso. Among other things, Starbucks coffee is planned for the Nespresso capsule systems and Dolce Gusto. From a global perspective, the situation so far is that Starbucks is the coffee market leader in the USA. Globally, however, Nescafé and Nespresso are at the top. Incidentally, fixed assets will not be transferred with the takeover, but around 500 employees will move from Starbucks to Nestlé. With the takeover, the Swiss company is continuing its strategy of generating momentum through strategic acquisitions in growth areas. Coffee is the most important category. In 2017 Nestlé already joined the Blue Bottle Coffee chain, acquired the organic coffee brand Chameleon Cold-Brew and the Egyptian company Caravan Marketing. Nestlé participated in a total of nine startups last year. With these commitments, the company tries to remedy a deficit.

Analyst judgment

Jean-Philippe Bertschy, an analyst at Bank Vontobol, calls the new alliance an “interesting move”. In his opinion, Nestlé will gain market weight in the USA and keep the JAB holding of the Reimann family at a distance. Bertschy also puts the high purchase price into perspective: it may appear large, but with a view to the return on capital costs it could pay off in three to four years. After the acquisition was announced in May, Nestlé shares rose by one percent on the stock exchange – after losing nine percent since January. According to the company, the takeover should lead to a higher dividend per share from 2019. In addition to the Starbucks takeover, Nestlé is currently quite active in another area. The trigger for this is the criticism from the financial investor Dan Loeb and his hedge fund Third Point. In an open letter to shareholders, he asked the company to distribute more money – for example in the form of share buybacks. Ulf Mark Schneider has already responded and announced that the buyback of shares will continue regardless of the takeover. The same development is currently taking place at Starbucks. The US company plans to return about $ 20 billion to its own shareholders by the end of fiscal 2020 through accelerated share buybacks and dividends.

Classification in the market

Coffee is the market with tremendous growth potential worldwide. In the two most populous countries in the world, China and India, the preferred hot drink is still tea. This is where Nestlé and Co. see their opportunities for coffee, among other things . Experts do not fear the risk of rising coffee prices in Europe as a result of the Nestlé Starbucks deal. The competitive situation with inexpensive coffee roasters like Aldi is too great for that. According to market observers, the green coffee prices at the most important trading centers also remain constant. Joint business areas of Nestlé and Starbucks could in future be internet platforms for everything to do with selling coffee. It is also conceivable that both companies could jointly spread coffee tips on social media. Competitor Reimann, for example, got involved in the US company Trade. It initially sells luxury coffee and trendy roasts, but the media has already given it the name “Tinder for Coffee”. This online trade site wants to bring coffee lovers together on the basis of the following idea: if you like the same coffee, you may have other common preferences.

Briefly

The Swiss company Nestlé takes over the global coffee marketing of the consumer and catering products of the US company Starbucks for 7.15 billion dollars. The Confederates are thus continuing their shopping spree – while the Americans continue to reduce themselves to their particularly profitable core areas.