Strong Brew: Starbucks and Nestlé Partner in $7 Billion Deal

Starbucks and Nestlé are forming a “global coffee alliance” designed to bring the Seattle coffee giant into new markets and give the world’s largest food company a path to winning the competitive single serve capsule market in the United States. Nestlé will pay Starbucks $7.15 billion to market and sell Starbucks coffee and tea in grocery stores worldwide, including bags of coffee and K-cups.

Nestlé is a coffee powerhouse outside America, but in the U.S., the company’s Nescafe and Nespresso brands have struggled to reach younger consumers. The partnership with Starbucks creates an opportunity to compete in the U.S., especially in the single serve market currently dominated by JAB Holding, the company that owns Keurig (K-cups). Currently, Nespresso single-serve push button coffee systems account for less than 1 percent of market share in North America, according to the market research firm Euromonitor International.

For Starbucks, the deal allows the company to do two things: focus on its core business and expand into new areas like China where Nestlé already has a strong market share.

Starbucks and Nestlé
Starbucks

“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,” said Kevin Johnson, president and chief executive officer, Starbucks. “This historic deal is part of our ongoing efforts to focus and evolve our business to meet changing consumer needs, and we are proud to work alongside a company that is committed to our shared values.”

What does the Starbucks and Nestlé deal mean for American consumers? Most importantly, you’ll be able to buy Starbucks Nespresso pods. You’re also likely to see more Starbucks coffee and tea products sold at grocery stores. So, if you’d rather brew your Starbucks at home, you’re going to have more options to buy the retail coffee.

“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. We are delighted to have Starbucks as our partner. Both companies have true passion for outstanding coffee and are proud to be recognized as global leaders for their responsible and sustainable coffee sourcing. This is a great day for coffee lovers around the world.”

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The deal gives Nestlé control over other Starbucks brands as well, including Seattle’s Best Coffee, Teavana, and Torrefazione Italia. The deal does not include bottled Starbucks coffee, tea, and juice drinks, which are produced and sold through a partnership with Pepsi.

Once the deal is approved by regulators, there’s other good news if you’re a Starbucks shareholder — the money paid to Starbucks will be used by the company for additional dividends to shareholders and share buybacks.

The partnership is another step for Nestlé in strengthening their coffee business line. Recently, the company acquired Chameleon Cold-Brew, based in Austin, Texas, and bought a majority stake in Blue Bottle Coffee, a specialty chain based in Oakland, California.

About 500 Starbucks employees will be affected by the deal; those employees will taken over by Nestlé. In a call with financial analysts, Johnson also stated that Starbucks will continue to make K-Cups for Keurig, noting that they are reaching out to Keurig for discussions but intend to continue that product line.

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