Is Nestlé eyeing up Starbucks' packaged coffee business?

By Elaine Watson and Mary Ellen Shoup

- Last updated on GMT

Is Nestlé eyeing up Starbucks' packaged grocery business?
Reports suggest Starbucks is in talks with Nestlé to sell its packaged coffee business, with an announcement possible as soon as this weekend.

Neither party is commenting on a deal – first reported by Inside Paradeplatz​,​ a Swiss financial blog, which notes that the deal would exclude the store chain and coffee purchasing business.

In an equity research note from Cowen this morning, analysts said: “Our quick math suggests the transaction could lead to after-tax cash proceeds of $3.786bn, which we would expect to fund share repurchases accounting for 5% of Starbucks' market cap.

“Starbucks historically licensed the packaged coffee business through Mondelez before bringing the business in-house in 2011. Following a prolonged arbitration, this resulted in a $2.23B payment to Mondelez (ex-$527,000 in interest and attorney fees) that we believe is representative of a tax basis. We estimate SBUX would receive $3.786bn in after tax proceeds, or roughly 5% of the company's market capitalization, likely to be returned to shareholders in the form of share repurchases.”

Rabobank analyst: Deal would offer benefits for both parties

Jim Watson, senior beverage analyst at Rabobank, told FoodNavigator-USA:  "This makes sense from the Starbucks side as they have been focusing on just the core business of operating stores.  They have recently closed their online store, Teavana stores, and sold their Tazo brand. Starbucks has lots of growth opportunities through its digital rewards platform and food offerings in the US and store openings in China - but coffee beans in the retail channel is not a growth segment. 

"For Nestle this can provide additional scale and help build out a more powerful retail portfolio to compete against the growing JAB companies."

Wells Fargo: Starbucks is solidly executing on its packaged coffee strategy

According to a Wells Fargo, which crunched Nielsen data, Starbucks brand packaged coffee (excluding-pods) dollar sales increased 7.5% year on year in the four weeks ending January 27, 2018, driven by +10.6% unit growth, partially offset by a pricing decline of -2.8%, while its dollar share of ground packaged coffee (ex-pods and including Starbucks and Seattle’s Best brands) improved to 12.4%. Over the last 52 weeks (to Jan 27), dollar sales of Starbucks branded packaged coffee were up 6.1% vs the previous year. 

“Despite increased competition, we continue to believe Starbucks is solidly executing on its packaged coffee strategy with a compelling loyalty program and premium brand equity.”

Starbucks remains the category leader in the liquid coffee category with a 78.9% dollar share although it has lost some ground to Coca Cola recently, while its pods business continues to grow strongly.

"Total Starbucks brand unit pod sales growth accelerated to +5.7% in the latest four weeks (vs.+3.7% for the latest 12-weeks). The relative price gap between Starbucks and Green Mountain brand pods expanded to 27.1% vs. the prior period’s 23.7% gap."

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