What's going on?
Talk about an expensive cup of joe… On Monday, Nestlé (the world’s largest food company) announced it had agreed to buy the rights to sell Starbucks beverages outside of Starbucks’ stores for an extremely caffeinating $7.2 billion!
What does this mean?
Over the past few years, Starbucks has been contending with sluggish sales in the US and believes its path to salvation will be paved by the brick-and-mortar cafés that first made the brand so popular. On the other side of the aisle, there’s food giant Nestlé, which has come under pressure from shareholders to increase profits even though consumer goods companies are struggling with stagnant prices.
But one man’s trash is another man’s treasure: Starbucks plans to relinquish its retail consumer goods arm to Nestlé (tweet this), which will sell and distribute Starbucks’ coffees and teas in supermarkets. The deal will catapult Nestlé into the US market and also allow Starbucks to focus more on its in-store experience!
Why should I care?
For markets: Starbucks investors are in line to receive some stock bucks.
Starbucks is planning on sharing the spoils of its deal with its shareholders through stock buybacks (which are booming across America). However, some point out that shareholders might be better off if Starbucks spent that cash on investing back into the company (by, say, developing a new product line).
The bigger picture: The Starbucks-Nestlé deal might protect both firms from a common foe.
Nestlé hopes moving into the US will give it a better competitive edge against JAB Holding Co., a company with an increasingly big footprint in the US coffee business – it owns brands like like Peet’s Coffee and Stumptown Coffee. Accordingly, there’s been some speculation that JAB might want to buy Starbucks in its quest to become the biggest coffee company in the world – but the high price tag Nestlé is paying for just its consumer goods branch suggests JAB would probably have to splash out quite a latte...