Nestle brews a confusing tie-up with Starbucks

Just how many kinds of coffee can you have? For habitual drinkers, there’s good coffee, average coffee and awful coffee. Aficionados will say there’s the purest filter coffee preferably from Chikmagalur, there’s your usual cookie cutter coffee you get in the neighbourhood cafés and then there is Nescafe.

Based on your tastes, you go to some lengths to prepare the first, walk into the nearest Café Coffee Day or Costa Coffee outlet to get the second and rustle up a quickie concoction of the third.

Not satisfied with such clear-cut definitions, Nestle, the world’s largest coffee company, is now paying Starbucks a huge $7.5 billion for the right to sell beans and pods from the world’s leading coffee chain. The press release from Vevey boasts that this will give “the company perpetual rights to market Starbucks consumer and foodservice products globally, outside of the company’s coffee shops.” Starbucks, though, will not be selling any Nestle products at its 28,000 odd outlets across the world including in such rapidly growing markets as China where it has 3000 stores in 135 cities.

Effectively, Nestle will now sell three different brands of coffee—Starbucks, Nescafé and Nespresso.

The move seems driven by Nestle’s business compulsions. Coffee is a crucial ingredient of the food company’s product mix, accounting for nearly 20% of its sales. In the US, the business has been limping with the company’s Nescafe and Nespresso trailing leaders Starbucks, Folgers and Maxwell House.

What’s worse, Euromonitor data reveals that Nestle’s Nescafe brand of instant coffees has lost market share in four of the past five years as consumers move towards more sophisticated coffee choices. In the US, Starbucks has three times the market share in coffee as Nescafe and Nespresso added together, though globally, the Swiss company dominates. There too, it has been feeling the heat of competition with JAB Holding, owned by the European billionaire Reimann family, challenging its top ranking in recent years after acquiring a series of well-known coffee brands like Douwe Egberts, Peet’s Coffee and Keurig Green Mountain. Nestle’s food business has also been under stress with the result that the company’s sales for 2017 were up a meagre 0.4% over the previous year, the slowest pace of sales growth in the last 20 years. So that’s clear then. In the face of mounting competition and slowing growth in its overall business, Nestle is trying to boost its coffee sales by tying up with Starbucks.

Hang on though. It isn’t as simple as it seems.

Nestle has tied up with Starbucks to take on rival JAB. Effectively, that makes Starbucks a competitor to JAB as well. But here’s where it gets complicated. Starbucks already has a partnership with JAB for its K-cup pods, a coffee brewing system from Keurig Green Mountain, now owned by JAB. There are also indications that the two companies are looking to strengthen their arrangement. So, what we will have at the end of this new tie-up is a whole plethora of coffee brands, from companies that are rivals at times but partners at others. To an already bewildering menu of Irish Latte, Coconut Latte, Amaretto & Vanilla, Skinny Latte, Double Choc Mocha, Azera Americano and dozens more, add a Starbucks range as well. The proliferation of brands and their extensions can’t get any more confusing.

Of course, Nestle’s press statement goes on to explain everything most satisfactorily: “As a complete provider of coffee solutions, Nestlé will accelerate growth in out-of-home channels.”livemint