According to Nestlé, the Starbucks business – which constitutes the majority of the coffee chain’s channel development segment – generated revenue of €1.68bn (US$2bn) in fiscal 2017. The transaction excludes items sold through Starbucks coffee shops and ready-to-drink products that are produced under a joint venture with PepsiCo.
For 2017, Starbucks channel development unit booked a 4% rise in revenue year-on-year – something of a slowdown from the growth rate of 10% reported in the prior year. Higher sales at the operating segment were primarily driven by increased sales through the international channels and sales of packaged coffee, foodservice and single-serve products.
Shares of the US retail coffee segment
JM Smucker 26%, including 6% Dunkin brand
JAB Holding Co / KMG 15%
Private label 15%
Kraft Heinz 14%
Nestlé said the deal will provide it with a “strong platform” in North America as well as opening up “exciting new growth opportunities” with Starbucks premium coffees internationally.
Pablo Zuanic, an analyst at Susquehanna International Group, noted that the deal will increase Nestle’s share of the US coffee market – which currently stands at just 3%. However, he believes that the international opportunity affords the most noteworthy avenue for growth. “Clearly, the bigger opportunity for Nestlé, in terms of sales upside, will be overseas,” he suggested.
Starbucks president and CEO Kevin Johnson also noted that the Starbucks brand will expand its reach through Nestlé’s distribution channels, making Starbucks branded products accessible to more consumers “around the world”.
"This global coffee alliance will bring the Starbucks experience to the homes of millions more around the world through the reach and reputation of Nestlé,” Johnson suggested.
Nestlé added it expects to accelerate growth in out-of-home channels.
Boosting coffee, boosting margins
Nestlé, which also produces the Nescafé and Nespresso coffee brands, said that the deal would expand its high growth and margin coffee business.
“This transaction is a significant step for our coffee business, Nestlé’s largest high-growth category,” said Mark Schneider, CEO, Nestlé. "With Starbucks, Nescafé and Nespresso we bring together three iconic brands in the world of coffee.”
While Nestlé does not strip out the figures for its coffee brands on a stand-alone basis, powdered and liquid beverages is the largest of the company’s seven product categories, generating combined annual revenues of CHF20.4bn. This is followed by the health and nutrition, milk and ice cream, pet care, prepared dishes, confectionery and water segments.
According to analysis from analysts at MainFirst, beverages is “by far” Nestlé's most profitable business, with an EBIT margin of 21%.
“We think that the deal will further strengthen Nestlé's market position in a competitive environment and would further expand its high margin and high return generating coffee segment,” MainFirst CEO Alain Oberhuber said.
The acquisition is in-line with Nestlé’s long-running portfolio management strategy, which has seen it divest under performing areas of the business and invest in M&A behind segments that the company believes will provide higher growth and returns.
Bernstein analyst Andrew Wood said that the deal will enable Nestlé to extend its higher margin coffee sales and advance its global leadership in coffee. “We see several positives for Nestlé. [There is a] clear strategic alignment, with this acquisition being in one of its core, high-growth, high-margin categories, and enhancing Nestlé's global number one position in coffee. The acquisition of a strong brand, which Nestlé should be able to further strengthen through its global leadership in coffee.”
Nestlé said it expects this business – which currently generates an operating margin of around 45% - to contribute positively to its earnings and organic growth targets as from 2019 and the company’s ongoing share-buyback program will remain unchanged.
The agreement is subject to regulatory approval and is expected to close by the end of 2018.