Bean wars

Nestlé’s deal with Starbucks leaves bitter taste for JAB

Earns Starbucks
Nestlé takes a jab at JAB. Source: AP

Swiss-based food giant Nestlé has thrown down the gauntlet to German rival JAB Holding, owner of high-end US coffee brands Keurig, Peet’s and Stumptown, by sealing a major marketing deal with Starbucks. The new alliance promises to reshuffle the deck in the all-important American market.

JAB, the investment arm of Germany’s Reimann family, has built a global coffee empire by spending $32 billion (€26.9 billion) since 2012 on leading brands in the US and Europe. Now registered in Luxembourg, the company aims to create a counterweight to Nestlé, the world’s biggest coffee group and owner of Nescafé and Nespresso. For a while, JAB could claim a partial success in that quest, even managing to overtake the Swiss conglomerate in North America.

But Ulf Mark Schneider, Nestlé’s German boss, has scored a coup by purchasing Starbucks’ rights to sell its bagged coffee products around the world, for a cool $7.15 billion in cash. Nestlé said the transaction provided a “strong basis for further growth in North America” and other markets, including fast-growing Asia.

Analysts said the deal will keep JAB at arm’s length and cement Nestlé’s position in the high-end coffee business. While increasingly lucrative, the market remains fragmented due to the diversity of regional coffee traditions, despite the ever-present Starbucks outlets.

SoftBank Corp’s human-like robot named “Pepper” introduces Nestle’s coffee machines during a promotion event at an electronics shop in Tokyo
This time, fill me up with Starbucks. Source: Reuters

Worldwide, Nestlé earns more from hot drinks than its next five rivals put together. But in the US, Starbucks remains the top brand, according to market research firm Euromonitor. By purchasing the right to sell bagged Starbucks coffee and drinks, Nestlé is giving its American presence a major boost. Jean-Philippe Bertschy, an analyst at Swiss bank Vontobel, said Mr. Schneider had killed two birds with one stone – gaining market share in the US while extending its global lead over JAB.

The intensely private Reimann family, who made its fortune in the chemicals industry in the 19th century, has poured vast sums into the coffee market. Run by a small group of trusted advisors, its company JAB Holding also has stakes in well-known fashion brands including Calvin Klein, Jimmy Choo, and Bally.

Over the past decade, it has absorbed a dozen acquisitions with a two-pronged strategy: improving management and branding to make coffee more profitable, and producing better, more sustainable coffee with fair prices for both farmers and consumers.

In Europe, it spent €14 billion on acquiring Jacobs Douwe Egberts, along with smaller chains like Scandinavia’s Espresso House. An additional €18 billion was shelled out in America, where it bought Keurig, the market leader in capsules, alternative brands like Intelligentsia Coffee and Stumptown Coffee Roasters, and huge chains like Krispy Kreme, the doughnut franchise whose profit flows almost entirely from coffee. One in five cups of coffee sold worldwide is linked to the Reimann family.

08 p15 JAB & Nestlé brew up a rivalry-01

Nestlé’s deal covers the sale of Starbuck products through supermarkets, a business that generates annual revenue of some $2 billion out of Starbucks’ total sales of some $22 billion. Nestlé is paying around 3.6 times annual sales for the rights. It will take on some 500 Starbucks workers as part of the transaction and said it plans to work closely with Starbucks on product development and market launches.

In Europe, Starbucks products are conspicuous by their absence from supermarket shelves. But it’s a very different story in the US, where Nestlé will be able to use the Starbucks label to mount a frontal attack on JAB. Up to now, JAB and Starbucks had been partners in a somewhat loveless alliance, after JAB bought Keurig in 2015. Starbucks, as it happens, is one of the coffee brands sold in Keurig capsules.

Nestlé has said it will continue to sell Starbucks capsules, meaning that ironically, the Swiss group will earn money from capsules that fit into coffee machines owned by its archrival.

Michael Brächer is Handelsblatt’s Zurich correspondent. Christoph Kapalschinski covers consumer goods, textiles and food for the paper. David Crossland adapted this story into English for Handelsblatt Global. To contact the authors: braecher@handelsblatt.com, kapalschinski@handelsblatt.com

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