Nestle, the owner of Nescafe and Nespresso, is paying more than $7 billion for rights to sell Starbucks coffee and tea in grocery stores worldwide, as the Swiss giant looks to jolt its coffee business.
Although Nestle dominates the world's coffee industry, analysts say it has failed to resonate with younger consumers in the U.S. Analysts say the company's flagship coffee brand, Nescafe, is seen as a boring, mass-market brand, while its higher-end Nespresso has failed to garner widespread appeal in the United States.
"To anybody under 60 years old, Nescafe is boring," said Erik Gordon, a professor at the University of Michigan's Ross School of Business. "Brand awareness among young people is next to zero, which has been a real embarrassment to Nestle management."
Nestle accounts for just 3% of the U.S. coffee market, compared with Starbucks at 15% and Dunkin brands at 6%, according to Susquehanna Financial Group.
Sales of traditional roasted coffee by brands such as Nescafe, Folgers and Maxwell House have slipped in recent years as consumers seek more expensive varieties, according to market research firm Mintel. (An $8 jar of Nescafe instant coffee makes about 158 cups of coffee, according to Nestle. An $8 bag of Starbucks coffee beans, meanwhile, yields about 34 cups.)
For Starbucks, the partnership offers a ready-made global distribution network that will allow the company to focus on its more lucrative coffee shops and higher-end Roastery locations, according to industry analysts. Starbucks says it plans to use the $7.15 billion from the deal — which is pending regulatory approvals — to fund stock buybacks. About 500 Starbucks employees will join Nestle, which moved it U.S. headquarters to Arlington, Va., last year.
As part of the deal, Nestle will market, sell and distribute packaged products — including single-serve capsules — from Starbucks, as well as its other brands, including Seattle's Best Coffee, Teavana and Torrefazione Italia. (Ready-to-drink bottles of coffee, tea and juice are not included in the agreement.)
Starbucks shares fell 0.4% to $57.45. Nestle rose 1.4% to $77.35.
Nestle, the world's largest packaged-food company, owns dozens of mass-market brands, including Gerber, Perrier and Hot Pockets. This year the company sold its U.S. candy business to Ferrero for $2.8 billion as part of a move toward more healthful products. It has also doubled down on its coffee business in recent months by buying up Chameleon Cold-Brew in Austin, Texas, and taking a majority stake in Blue Bottle Coffee, an Oakland specialty chain.
As part of the deal, Nestle will expand its line of single-serve capsules to include Starbucks coffee and teas.
Although Nespresso continues to be the premium coffee-pod of choice in much of the world, rival Keurig Green Mountain reigns supreme in North America, with "near-control" of the market, according to Euromonitor International. (Nespresso, meanwhile, accounts for less than 1% of single-serve coffee systems in the U.S. and Canada, according to the market research firm.)
"Nespresso is a niche product that just doesn't have the market share to compete with [Keurig's] K-Cups," Gordon said.
Starbucks, credited with introducing premium coffee to millions, is responding to the trend by shifting its focus to its Reserve bars and Roastery locations, where $10 cold brews are the norm.
"Consumers are trading up, which has been good for Starbucks," said Caleb Bryant, an analyst at Mintel. "Starbucks offers a premium product, but it's still accessible to most consumers."
3 p.m.: This article was replaced with a Washington Post version.