Nestle, the Swiss-based multinational food giant is set to buy Starbucks’ rights to sell the US coffee chain’s products around the world in a global partnership worth $7.15 Billion to be paid in cash as both companies aim at reviving their coffee empires.
The announcement on the deal for a business with $2 billion in sales consolidates Nestle’s position as the leading coffee company in the world and will strengthen its place at the top of a fast-evolving market.
Starbucks shared that the proceeds will be used to speed-up its share buybacks and the money raised from the deal will serve to add to its earnings per share (EPS) by latest 2021. While the deal will not include selling Nestle branded items in Starbucks’ cafes, the Swiss-based company expects the deal to sell Starbucks bagged coffee and drinks that will add to the company’s earnings by 2019.
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.
The deal is major consolidation between two important players of a highly fragmented consumer drinks market that have witnessed a successive amount of deals in a short period. The deals were especially driven by JAB Holdings, a private investment firm of Europe’s billionaire Reimann family that secured deals such as Douwe Egberts, Peet’s Coffee & Tea and Keurig Green Mountain.
Starbucks now expects the deal to enable it to return approximately $20 billion in cash to its shareholders in the form of share buybacks and dividends through the fiscal year 2020. The transaction will also add to the company’s earnings per share by the end of FY 2021 or sooner without impacting the company’s current long term financial targets.
Nestle as well are confident that the deal will positively contribute to its earnings per share and organic growth targets from 2019.
The agreement is likely to consolidate Nestle’s market share in the United States, where the multinational company owns 5 percent of market share. Starbucks is the market leader with 14% market share, according to data from Euromonitor International.
“Nestle is far and away the largest hot drinks company globally, with more in sales than the next five largest hot drinks companies combined,” Matthew Barry, an analyst at Euromonitor said on Friday. “However, Nestle’s leadership position is less secure than it once was.”
The coffee market was identified as a strategic area for investment last year when Nestle appointed Mark Schneider as new Chief Executive, especially since Nestle has already built a name for itself with its Nescafe and Nespresso in the coffee business. Additionally, the company is finding it hard to retain customers after a large portion of them decided to switch to newer brands and shareholders are expecting better performance from the company.
Starbucks also reported a global drop in traffic in the first quarter of 2018 in its established cafes. Therefore it has been innovating its business in a bid to upset this downward curve. It sold its Tazo tea brand to Unilever for $384 and closed down Teavana retail stores due to under-performance. Additionally, Starbucks is looking forward to boosting revenues by beginning operations in China as it projects the East Asian country to become its largest market. Moreover, the company is planning to open 1,000 upscale Starbucks Reserve stores and 5 Roastery coffee emporiums to challenge and kick out high-end coffee rivals off the landscape such as Intelligentsia Coffee & Tea and Blue Bottle.
It is not the first time that Starbucks is planning to distribute its products in retail to consumers but the previous partnerships were quite bumpy. In 2011, Starbucks gave the responsibility of distributing its packaged products to private company Acosta Inc. ending a 12-year collaboration with Kraft Foods on reasons of mismanagement.
As for Nestle, the packaged food mammoth is set ego aside when it comes to partnering with rivals. The Swiss-based company sells General Mills’ Haagen-Dazs brand in the US and Hershey sells Nestle’s KitKat in America as well. Nestle also made joint ventures with General Mills to retail cereal, Lactalis to sell dairy products and R&R for ice cream.