Monday morning, Starbucks announced that it will sell Nestlé rights to sell its coffee with a deal valuation of approximately $7.15 billion. With additional royalties, Starbucks is expected to generate near term revenue and to immediately buy back shares and pay out dividends to its shareholders. The deal will transfer the company’s packaged and food service business to Nestlé and should boost Starbucks’ EPS (Earnings Per Share) by 2021. About 500 Starbucks employees will join Nestlé, and any new products to be sold must be approved by Starbucks. The transaction does not include any fixed assets and excludes existing ready-to-drink products and sales from Starbucks coffee shops.
The deal comes as JAB, a European holding company has made large strives into the American coffee business. JAB recently approached Snapple as it is attempting to diversify its products because consumers are steering away from soft drinks and focusing on healthy products. This deal allows Nestlé to bolster its attack against its main competitor, JAB Holdings. This deal is also a trend as other coffee sellers such as Dunkin’ Brands Group Inc. and McDonald’s Crop. have rushed to fill up supermarkets with their coffee. Starbucks have been experiencing slower sales domestically because of slower foot traffic at malls. By allowing Nestlé to sell its coffee and tea in grocery and retail stores, the Seattle-based coffee maker can focus on other strategies. Starbucks recently opened higher-end stores called Roastery and Reserve to fight increased competition and slower sales growth because consumers prefer healthy, organic drinks—consumers are willing to pay more for specialty drinks. This Roastery and Reserve brand has broken into China as well. Starbucks’ main sales are generated from the United States and China, but China is projected to become a larger market in the coming years. The consumer packaged-goods business is roughly 8% of Starbucks’ total revenue in fiscal 2017, but, nonetheless, this deal will benefit both companies. This will allow the Swiss-based coffee company to extend its reach into the United States while Starbucks will be able to focus on other, more important operations and will be able to further its international presence.
Consumer preference changes can be the demise of companies with obsolete products or unwillingness to change strategy. Starbucks recognizes that the decline in retail foot traffic has a considerable impact on its sales growth and has adapted to changes in consumer behavior. This deal will effectively scratch each companies’ backs as they will strengthen sales and international presence. As a business owner, it is important to be aware of market participants and consumers. Nowadays, enough information could be available about consumers out to notice changing macroeconomic and sociological changes to adapt accordingly. Some businesses may not have these resources, so that is why it is important to know your industry—inside and out. Which products are selling best? Which products are not selling as well? How are you retail sales? How are your online sales? These are all relevant analytics that business owners can gather by analyzing the business’ financials and being up to date to market activities.