Why Nestle Just Handed Starbucks $7.15 Billion

The biggest food company in the world just signed on for a big chunk of the biggest name in coffee: Nestle will soon control nearly all of Starbucks’ retail operation, from the bags on grocery store shelves to what gets made into a K-cup, according to a deal announced yesterday. Nestle’s control of Starbucks’ retail arm cost $7.15 billion, and the coffee brand will continue to receive payouts for supplying the beans and licensing its name. Pending regulatory approval, Nestle plans to use its distribution might to push bags of Starbucks coffee into even more markets worldwide.

The release confirms that Starbucks Nespresso pods, for use in the brand’s push-button espresso machines, are on the way. In addition to Starbucks, the deal gives Nestle control of the retail lines for Seattle’s Best Coffee, Starbucks Reserve, Teavana, Starbucks VIA (instant coffee), and Torrefazione Italia packaged coffee and tea globally. Starbucks’ ready-to-drink line, which includes its popular bottled Frappuccinos, is not part of this deal; those products are produced and sold in partnership with Pepsi.

“This historic deal is part of our ongoing efforts to focus and evolve our business to meet changing consumer needs,” Kevin Johnson, Starbucks’ president and chief executive officer, said in the release.

The deal is a win for Starbucks in that Nestle has the capacity to expand the coffee giant’s name into many more markets. But it’s a much, much bigger win for Nestle.

The food company that generated nearly $91 billion in revenue last year is best known for its candy bars in the U.S. But globally, and thanks to exhaustive marketing campaigns, Nescafe is one of the most reliable names in coffee, sitting on shelves everywhere from Chile to China. (That status has fallen somewhat, as Nescafe “has lost market share in four of the past five years,” Bloomberg reports.) Through the late ’90s, while Nestle’s instant coffee fell out of favor with American consumers, it focused on winning over America’s candy market. Profits didn’t quite follow, so this past January, Nestle sold its Butterfingers and Baby Ruths to Ferrero for $2.8 billion.

Meanwhile, Nestle’s no doubt been watching rival corporation JAB pocket American roasters and coffee shops left and right: The holding company snapped up Peet’s, Intelligentsia, and Stumptown in recent years. JAB also owns Keurig, the maker of those infamous K-cups. Last fall, perhaps in an effort to show JAB it was still in the game, Nestle picked up a majority stake in Blue Bottle Coffee, a Bay Area darling known for its minimalist aesthetic and precise roasting and brewing methods. Blue Bottle’s products are a far cry from Nescafe. But the small roaster’s ready-to-drink line and packaged coffee are products Nestle knows how to market and sell — not just in urban centers in the U.S., but worldwide.

“This transaction is a significant step for our coffee business, Nestle’s largest high-growth category,” Mark Schneider, Nestle’s CEO, said, per the release. “With Starbucks, Nescafe 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.”

And a great day for Nestle. Your move, JAB.

Update 5/8 12:00 p.m.: This post was updated to clarify the language about the transaction.