Consumer Products

Nestle and Starbucks Set Deal to Expand Their Coffee Empires

Two of the largest companies in the coffee business have created a huge marriage that will benefit each one’s growth. Swiss food giant Nestle will pay Starbucks Corp. (NASDAQ: SBUX) $7.15 billion to distribute its coffee worldwide. It is a bonanza for Starbucks, which has seen its business start to slow.

Management of the U.S.-based coffee retailer disclosed:

Starbucks Corporation will form a global coffee alliance with Nestlé S.A. to accelerate and grow the global reach of Starbucks brands in Consumer Packaged Goods (CPG) and Foodservice. With a shared commitment to ethical and sustainable sourcing of coffee, this alliance will transform, expand and elevate both the at-home and away-from-home coffee and related categories around the world.

While Starbucks has coffee shops around the world, its ability to sell coffee in retail outlets other than its own is limited.

According to Kevin Johnson, Starbucks president and chief executive officer:

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, 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.

Also, the deal will help two Starbucks financial initiatives. The first is to return $20 billion to shareholders. The other is to put a foundation under its financial performance. Starbucks management said the partnership would boost its earnings through its 2021 fiscal year, if not earlier. Starbucks could use the help. In its most recent quarter, global comparable store sales rose only 2%. Revenue rose 14% to $6 billion. At many companies, this revenue increase would be impressive. But Starbucks has posted better growth in recent years. Its share price is about $58, compared to a 52-week high near $65.

It is far too early to say how much the Nestle deal will help Starbucks coffee sales overseas. However, it has the $7.15 billion from Nestle and that is enough to transform its financial results for three or four years.