Brands get all the attention, but distribution is the formidable skeleton that enables food and beverage titans such as Nestlé ($90 billion), PepsiCo ($63 billion), Coca-Cola ($42 billion) and Kraft Heinz ($26 billion) to generate $25 to $100 billion in annual sales.
Last week Nestlé announced it had purchased perpetual rights to market Starbucks consumer and foodservice brands globally, outside the company’s coffee shops.
Nestlé, with its Nespresso, Azera, and Nescafe Dolce Gusto coffee, and Nestea lines, remains the global leader in coffee with an estimated 28 percent of the market, according to Euromonitor International. The company earns $17 billion from coffee sales annually and is one of the world’s top tea suppliers as well.
The specialty category has a lot of fans with 41 percent of U.S. adults consuming gourmet coffee, up from 9 percent in 1999, according to the National Coffee Association. The retail value of the U.S. coffee market is estimated at $48 billion dollars with specialty comprising approximately 55 percent value share, according to NCA.
That is one reason why JAB Holding, a privately-owned Luxembourg-based investment firm, has muscled into food and beverage with more than 10 acquisitions in the past five years totaling $30 billion―spent mainly in the U.S. and Western Europe. The European company, controlled by the Reimann family, is divesting its considerable resources in luxury lines (Jimmy Choo, Bally), in favor of fast moving consumer goods (FMCG).
Coffee roasters and tea companies, soft drink maker Dr Pepper Snapple, donut, bakery and bagel chains are the core acquisitions. Mainstream firms such as Keurig, Panera Bread, Krispy Kreme and Einstein Bros. Bagels are in the mix along with Caribou Coffee, and boutique roasters Intelligentsia and Stumptown Coffee. Major tea acquisitions include Mighty Leaf (U.S.) which supplies Peet’s Coffee & Tea and Pickwick Tea (Europe). Kenco, Douwe Egberts and Espresso House in Europe make JAB the second largest player in the segment globally with an estimated 20 percent market share following a five-year shopping spree that looks like it will continue.
Alliance Brings Mutual Benefits
JAB’s aggressive growth in market share led Nestlé to form an alliance with Starbucks ($22 billion in annual sales) announced last week. The $7.15 billion deal greatly expands an already sizeable domestic distribution network, employing 500. All will join Nestlé and remain in Seattle, according to a press release. Starbucks has been searching for a distribution partner since it dissolved its partnership with Kraft Heinz. Nestlé is rightly concerned as JAB approaches a quarter of global coffee sales.
“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.”
Nestlé will obtain the rights to market, sell, and distribute Starbucks, Seattle’s Best Coffee, Starbucks Reserve, Teavana, Starbucks VIA and Torrefazione Italia packaged coffee and tea in all global at-home and away-from-home channels.
Starbucks earns $2.4 billion annually from sales of packaged goods, about 10 percent of the company’s annual revenue. This includes its packaged coffee, and until recently Tazo Tea, (a brand sold to Unilever), as well as proceeds from a joint operating agreement with PepsiCo to sell bottled coffee. A Starbucks spokesperson said, “the agreement with Nestlé excludes the Starbucks retail portfolio as well as our ready-to-drink (RTD) coffee, tea, and juice products.”
A gem in the JAB portfolio is Stumptown Coffee, one of the early innovators in cold brew, a category that has exploded. The NCA’s annual drinking trends survey in January revealed 6 percent of American adults had consumed cold brew the previous day, up from virtually zero during the past three years. To counter, Nestlé acquired Chameleon, the nation’s largest organic cold brew coffee manufacturer and Blue Bottle, a café roaster comparable to Intelligentsia.
The reason JAB was willing to pay $103 per share ($18.7 billion) for Dr Pepper is the company’s distribution network. Dr Pepper is the world’s fifth largest soft drink company with roots dating back to 1885. It will operate as a division of Keurig, itself acquired by JAB for $14 billion in 2016.
Nestlé, which entered the year with only a 5 percent share of the U.S. coffee market, the world’s largest, is now positioned to offer ground and whole bean coffee, bottled coffee, coffee in capsules and newly acquired boutique specialty roasting brand Blue Bottle (purchased for $700 million). It will also earn Nestlé a bigger share of the U.S. tea market which is valued at $12 billion.
The deal is expected to allow Starbucks to return an additional $5 billion to shareholders, upping the previous $15 billion to $20 billion by fiscal 2020.
Teavana to the Top Shelf
All the above bodes well for Seattle’s Best Coffee and Teavana.
Starbucks has announced plans to launch its tea sachet business in grocery this calendar year, but the launch has not occurred yet, according to a Teavana spokesperson. Nestlé does not offer a tea sachet and is likely to adopt Teavana as its premium brand, given the trend away from instant tea.
Teavana’s distribution deal with Anheuser Busch InBev has driven significant growth since the premium bottled teas were first introduced in five states. The brand is now available nationwide. Recently the company added two new flavors to the premium lineup. It will not be impacted by the Nestlé alliance.
Starbucks currently offers consumer packaged goods in 58 countries with very limited distribution of Teavana outside its stores. Nestlé operates in 190 countries where its products are viewed as middle-class markers of affluence.
“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 CEO, Starbucks. “This historic deal is part of our ongoing efforts to focus and evolve our business to meet the changing consumer needs, and we are proud to work alongside a company that is committed to our shared values.”
Starbucks will lead in sourcing, roasting and Starbucks global brand management for the alliance, while the two companies will work closely together on innovation and go-to-market strategies.
Expanded distribution will enable Teavana, which earned $1.6 billion in 2017, to vault from a U.S. brand, with limited grocery and foodservice presence, to a global power brand. Starbucks estimates Teavana sales to increase to $3 billion in two years.