A leading industry analyst has said that the 'global coffee alliance' being formed between Nestlé and Starbucks, will be markedly different to the doomed Starbucks-Kraft Foods alliance that fizzled out at the start of the decade.
Starbucks ended a contract with Kraft in March 2011, three years ahead of an agreed expiration date, after the coffee giant expressed dissatisfaction with how Kraft was managing its brand.
In 2013, Starbucks was forced to pay Mondelez International, which was spun out of Kraft Foods, a severance fee of $2.76 billion for ending the two companies' coffee partnership early.
Brand Building
Commenting on the Nestlé-Starbucks alliance, Bonnie Herzog, an analyst with Wells Fargo, said that she is "not concerned that Starbucks' alliance with Nestlé will be a repeat of Starbucks past contract with Kraft," noting that Nestlé is likely to be "laser-focused on brand building obligations" that form part of the deal.
"Nestlé has identified coffee as one of its leading growth priorities," Herzog wrote in a briefing note. "Starbucks and Nestlé each have strong track records of premiumising the coffee category. [...] This is a global (not regional) relationship (implying that there will be few limits on what Nestlé can do to ensure this partnership is a success)."
Herzog already noted that the deal could have a downside effect for coffee rival Keurig, which announced a merger with Dr Pepper Snapple earlier this year. Starbucks currently has a relationship with Keurig, which sees the latter produce Starbucks-branded K-Cup coffee post for home use.
"Starbucks reiterated that it remains fully committed to its relationship with Keurig (and noted that it’s the “number one share player of coffee on the Keurig system” and that they “intend to keep that”," Herzog wrote. "That said, we see Starbucks' decision to ultimately work with Nestlé to grow its Channel Development business as a sign that Starbucks sees more potential globally with Nestlé’s Nespresso and Dolce Gusto machines.
"More specifically, we note that the alliance will bring the Starbucks brand to both the Nespresso and Dolce Gusto machines. Similarly, we wonder if Starbucks' Nestlé agreement could one day be extended into RTD coffee products and, if so, would view this as a potential negative for PepsiCo."
Nestlé's Growth Ambitions
Elsewhere, analyst Neil Saunders of GlobalData Retail said that the scale of the Nestlé-Starbucks deal underlines both the brand strength of Starbucks and Nestlé's willingness to use the coffee brand to power its own growth.
"For Starbucks the deal will help to drive brand recognition outside of its core North American and European markets as Nestlé ramps up expansion using its distribution capacity," Saunders explained.
"For Nestlé, Starbucks gives it a powerful brand it can add to a coffee armoury that is looking a little tarnished. The group has always struggled with market share in North America and this deal essentially buys immediate scale. It also provides numerous opportunities for expansion elsewhere in the world by leveraging the Starbucks brand."
New Approach
Saunders added that while Nescafé and Nespresso have reached maturity around the world, they have "failed to gain traction" in the US, meaning that Nestlé appears to be going back to the drawing board when it comes to coffee.
"There is a case to be made that Nestlé has failed to innovate and develop either brand to the extent it should," he said.
"One downside risk for Nestlé is that while Starbucks is one of the best known and most powerful brands in coffee, others like McDonald’s are looking to cash in on the category by selling their own brand products through supermarkets. A host of innovative small companies, like Bulletproof Coffee and Four Sigmatic, are also making advances into the sector by emphasising the health and wellness benefits of the beverage.
"Arguably, Nestlé has gone with the obvious and easy choice – and paid a lot of money for it. It could, and probably should, also examine at how it could also acquire and develop some more innovative startups."
© 2018 European Supermarket Magazine – your source for the latest retail news. Article by Stephen Wynne-Jones. Click subscribe to sign up to ESM: European Supermarket Magazine.
