With more than 28,000 locations around the globe and a valuation of $44 billion, Starbucks ranks as the second-most-valuable brand in fast food. Along with its many cafes, the chain also sells a range of retail products from beans and coffee pods to pre-packaged versions of its bestselling drinks. In fact, Starbucks’ line of consumer goods does so well that the Swiss food conglomerate Nestle recently purchased the rights to the company’s retail division for $7.15 billion.

According to analysts, Nestle needed a boost to its bottom line after experiencing their weakest sales growth in 20 years. While its Nespresso and Nescafe brands do well overseas, in the past five years these product lines have steadily lost market share in the U.S. By purchasing a major brand, Nestle will not only eliminate some competition but also bring in loads of new customers thanks to the strength of the Starbucks name. “Nestle needed a big brand, and they needed one fast,” said financial analyst Alain Oberhuber. “Starbucks is the only strong brand in roast-and-ground. It’s a rather defensive move—a bit late—but nevertheless, a strategically absolutely vital step.”

Starbucks will continue to produce its retail goods in North America while Nestle takes responsibility for production in global markets. Nestle will also keep track of sales on its own books and pay out frequent royalties to Starbucks. If all goes to plan, Nestle will gain a stronger foothold in the U.S. while Starbucks becomes more familiar to consumers abroad. Of course, the success of this merger is far from guaranteed. “Nestle’s acquisition track record over the last 10-15 years has been less than stellar,” said financial analyst Andrew Wood.

Questions:

1. Do you think this $7 billion acquisition is a good move for Nestle? What about for Starbucks?
2. What makes the Starbucks brand so valuable?

Source: Thomas Mulier and Corinne Gretler, “Nestle Bets $7 Billion on Starbucks to Revive Coffee Sales,” Bloomberg, May 7, 2018.