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Coffee Alliance
Nestlé and Starbucks agree to a license deal as both eye the Chinese coffee market
By Wang Jun | NO. 21 MAY 24, 2018

A Starbucks coffee shop in Xiamen, Fujian Province (CNSPHOTO)

Swiss food giant Nestlé announced on May 7 that it had entered into an agreement with Starbucks for perpetual rights to market the latter's consumer and foodservice products outside Starbucks coffee shops.

According to the announcement, Starbucks will receive an up-front payment of $7.15 billion for a business line which generates annual sales of $2 billion. Approximately 500 Starbucks employees will join Nestlé to drive the performance of the existing business as well as global expansion. The transaction will not include the transfer of any fixed assets in order to facilitate smooth and efficient integration.

"This transaction provides Nestlé with a strong platform for continued growth in North America with leadership positions in the premium roast, and ground and portioned coffee businesses. It also allows Nestlé to capture exciting new growth

opportunities in the rest of the world with Starbucks premium products," Nestlé said in its official announcement.

The agreement is subject to customary regulatory approval and is expected to close by the end of 2018, the statement said.

Benefits brewing

Although Starbucks has continued to maintain the positive growth of both sales and profits, since 2013, this growth has been slowing down. According to the available figures, Starbucks' annual sales growth reached a peak of 16.46 percent in 2015, before slowing down for two successive years, hitting 5.03 percent in 2017. The annual growth rate of the company's gross income declined even faster, from 19.39 percent in 2015 to 15.48 percent and 1.41 percent in 2016 and 2017, respectively.

Before the deal took place, Starbucks had already decided to sell its Tazo tea brand to Unilever for $384 million and close all its Teavana stores, further evidence of the company's plan to streamline its business.

However, it is not possible for Starbucks to close or sell all of its non-core businesses, and so selling marketing rights is a viable alternative. Nestlé, as another coffee giant, makes a good buyer.

"By cooperating with Nestlé, which is significant in the middle and low end of the business, Starbucks can expand the retail market, and the two companies can share resources in the purchasing and transportation of coffee beans so as to enhance their bargaining power and reduce costs," said Lu Shengzhen, a brand marketing expert.

"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 of Starbucks, "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."

"This transaction is a significant step for our coffee business, Nestlé's largest high-growth category," said Mark Schneider, CEO of 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. Both companies have true passion for outstanding coffee and are proud to be recognized as global leaders for their responsible and sustainable coffee sourcing. This is a great day for coffee lovers around the world."

Zhu Danpeng, a researcher in the food and beverage industry with the China Brand Research Center, said that although both Nestlé and Starbucks are giants in the coffee industry, Starbucks is stronger in the operation of coffee shops while Nestlé focuses more on retail. The agreement between the two firms will transform their relationship from one of rivals to one of allies, which can benefit them both.

According to Zhu, Starbucks excels at chain coffee shops but has proven weak at retail, so focusing on coffee shops will help it to consolidate its market status. For Nestlé, the alliance will help to increase income.

Nestlé products on sale in a supermarket in Yichang, Hubei Province (CNSPHOTO)

More coffee in China

Nestlé and Starbucks share a common goal for their future development: expanding into the Chinese market. Following the evolution of consumption patterns in the country, China has seen robust growth in this area, with the coffee market in particular growing as a result of the market's inherent potential for expansion from an initially small foundation.

A report on China's coffee industry from 2017 to 2021 released by CIConsulting revealed that the country's consumption of the drink grows by 15-20 percent every year, compared with average global growth of only 2 percent.

According to Zhu, Chinese people now drink an average of around five cups of coffee every year, while in major cities such as Beijing, Shanghai and Guangzhou, average annual per-capita consumption stands at 20 cups. For North America and Japan the figure is 400 cups and 360 cups respectively, indicating the potential for growth in the Chinese market.

A report released by market research supplier Euromonitor International said that in 2016, China's ready-to-drink coffee market grew by 19 percent. It also forecasted that the size of the market could reach 14.9 billion yuan ($2.35 billion) by 2021.

Zhu said that Nestlé holds a 60-percent stake of China's coffee market, and that in terms of instant coffee its share is even higher. A report issued by the Zhiyan Consulting Group revealed that in 2015 the sales revenue of chain coffee shops in China totaled 27 billion yuan ($4.24 billion), with Starbucks accounting for more than one third of the total.

According to Starbucks' report for the first fiscal quarter of 2018, the company earned consolidated net revenue of $6.1 billion, up by 6 percent, with the sales of company-operated stores in China also increasing by the same margin. Johnson named China as one of the two powerful, independent but complementary engines driving the company's growth together with the United States.

Zhu believes that the deal between the coffee giants may not have much of an effect on the global coffee market, but that it will enhance their respective influence in China.

"The coffee market in China is at a stage of high-speed growth. After Nestlé acquires the marketing rights to Starbucks' retail products, it will be almost impossible for other brands to challenge Nestlé in China. For Starbucks, since it can better concentrate human and material resources on its coffee shop business, other chain store brands will find it more difficult to challenge Starbucks as well," Zhu said.

Copyedited by Laurence Coulton

Comments to wangjun@bjreview.com

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