Nestle will pay $7.2 billion in order to globally distribute, market and sell packaged products from Starbucks. Instead, chief executive officer Mark Schneider is harnessing the name recognition of Starbucks, with its 28,000 outlets around the globe and massive draw in the U.S. Nestle has struggled there for years with its own products like Nespresso and Dolce Gusto.
Pablo Zuanic, an analyst at Susquehanna International Group, noted that the deal will increase Nestle's share of the USA coffee market - which now stands at just 3%.
Starbucks says it will "retain a significant stake as licensor and supplier of roast and ground and other products going forward".
Coffee is popular with millennials who have grown up with Starbucks and often seek out smaller brands.
Starbucks, worth $44 billion and ranked the second-most-valuable brand in fast food in BrandZ's Global 2017 report, intends to use the proceeds for stock buybacks.
The deal, which needs approval from regulators, is expected to complete by the end of the year.
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It said the Starbucks packaged goods business generates annual revenue of about $2 billion a year. As part of the deal, 500 Starbucks employees will transfer over to Nestle, but will continue to work in Seattle.
Nestle expects this business to contribute to its profit in 2019. Market leader Starbucks itself only has a 14 per cent share, according to Euromonitor International. "We do not want the consumer to perceive that Starbucks is now part of a bigger family", a Nestle source said. The food giant also predicts that its earnings per share will increase as a result of this deal.
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Starbucks, which in April reported a global drop in quarterly traffic to its established cafes, has been streamlining its business.
Nestle sells General Mills' Haagen-Dazs brand in the United States and Hershey sells Nestle's KitKat in the United States. Higher sales at the operating segment were primarily driven by increased sales through the global channels and sales of packaged coffee, foodservice and single-serve products.