Can Starbucks deal perk up Nestlé’s sales?

By Neil Saunders

The scale of this deal underlines the brand strength of Starbucks and of Nestlé’s desire to use it to power its own growth.

Nestlé has always struggled with market share in North America and this deal essentially buys immediate scale. It also provides numerous opportunities for expansion elsewhere in the world by leveraging the Starbucks brand.

For Starbucks the deal will help to drive brand recognition outside of its core North American and European markets as Nestlé ramps up expansion using its distribution capacity. Arguably, it also allows Starbucks to concentrate more fully on developing its retail business, including the higher end concepts like Reserve Roastery that it is currently rolling out.

For Nestlé, Starbucks gives it a powerful brand it can add to a coffee armory that is looking a little tarnished. The group has always struggled with market share in North America and this deal essentially buys immediate scale. It also provides numerous opportunities for expansion elsewhere in the world by leveraging the Starbucks brand.

The deal is yet another example of how big consumer goods companies are struggling to develop and grow their traditional brands. Arguably, Nestlé’s preferred vehicles for driving growth in coffee would be its own Nescafe and Nespresso brands. However, these have failed to gain traction in North America and have reached maturity elsewhere. There is a case to be made that Nestlé has failed to innovate and develop either brand to the extent it should.

One downside risk for Nestlé is that while Starbucks is one of the best known and most powerful brands in coffee, others like McDonald’s are looking to cash in on the category by selling their own brand products through supermarkets. A host of innovative small companies, like Bulletproof Coffee and Four Sigmatic, are also making advances into the sector by emphasizing the health and wellness benefits of the beverage.

Arguably, Nestlé has gone with the obvious and easy choice — and paid a lot of money for it. It could, and probably should, also examine at how it could also acquire and develop some more innovative startups.

Neil Saunders is managing director of research firm GlobalData Retail.