Jonny Forsyth
Jonny Forsyth is Associate Director, Mintel Food & Drink, monitoring and engaging with latest innovations and market developments in all alcohol and coffee categories.

Mintel’s global coffee expert Jonny Forsyth analyses the recently announced Nestlé-Starbucks coffee tie-up.

“This deal will help Nestlé consolidate its dominance in emerging coffee retail markets — and this is where the big coffee growth will come from over the next decade. But, the deal is unlikely to help Nestlé make serious inroads into the key US market, where JAB has benefitted from decisive early action and where Nestlé remains on the outside looking in.”

Nestlé responds to the slow death of household coffee brands

Decades ago, the marketing power and shelf-space dominance of established coffee brands like Nescafé drew consumers into the coffee category ― and kept them there. But today’s generation of coffee drinkers enter the coffee world via the experiential world of coffee shops. They then want to buy these ‘more premium and exciting’ coffee shop brands in their local supermarkets and convenience stores, rather than default to household coffee brands that ‘their parents like to drink’.

Herein lies the strategic logic of Nestlé paying Starbucks $7.15 billion for the global marketing, sales and distribution rights of Starbucks packaged coffee brands.

The battle for America heats up…

The deal should also be seen in the context of Nestlé’s titanic confrontation with JAB Holdings to become the dominant global coffee player. The deep-pocketed JAB has gone on a spending spree in recent years and its primary focus has been on the key US coffee market where it has bought Keurig, the dominant single-serve machine, whose star capsule brand is Starbucks.

The Nestlé-Starbucks deal will allow Nestlé to also sell Starbucks branded capsules through its Nespresso and Dolce Gusto machines which have struggled to break the dominance of the Keurig machine in American households. Nestlé will also be able to profit from retail sales of Starbucks, Seattle’s Best Coffee and Teavana packaged coffee/tea.

Unfortunately for Nestlé, ground/whole bean coffee sales have long-stalled in US retail. Many Starbucks fans tend to prioritise a fresh cup of Starbucks in-store; although, Starbucks branded ground coffee sales are outperforming the total US ground coffee market. Secondly, Nestlé will not own the rights to Starbucks’ packaged ready-to-drink (RTD) segment (i.e. bottled Frappuccino’s). RTD coffee is currently the primary growth driver in the US market, with the Starbucks brand in pole position. Starbucks RTD coffee brands also show highly promising growth in emerging markets like China, where coffee drinkers are being seduced by Starbucks’ indulgent in-store Frappuccino offerings.

Another potential challenge for Nestlé in the US is that once a country’s coffee consumers buy into a capsule machine – in this case Keurig – they very rarely switch machines. In other words, don’t necessarily expect Nespresso and Dolce Gusto machines to suddenly fly off US shelves just because they can now contain Starbucks branded capsules. However, Nestlé is heavily promoting Nespresso in the US as more of a premium indulgence than Keurig and a bit of Starbucks’ brand stardust may persuade more younger coffee connoisseurs to switch machines.

Nestlé has much more of a foothold in the US coffee market than before. But JAB arguably remains in pole position here. Starbucks can continue to reap the domestic sales rewards of its growing RTD coffee retail sales, and will have a much-needed cash injection to refresh its flat-lining coffee shop sales and assuage investors disappointed by its recent US results.

…but emerging markets lead the way to world coffee domination

For Nestlé, the deal makes most sense by consolidating its coffee business in emerging retail markets. Starbucks is rapidly proving popular in regions like Asia, the Middle-East and Latin America with its branded coffeehouses. The Starbucks coffee shop brand is still seen as genuinely ‘cool’ in such regions, much more so than in Europe and North America.

However, when it comes to packaged coffee in retail, Starbucks only operates in around 28 countries compared to Nestlé’s almost 190 retail coffee markets. Starbucks is simply too busy pursuing its aggressive global coffee shop plans to give emerging retail markets the focus they need, so why not let Nestlé play to its strengths and negotiate a cut of the profits along the way?

Nestlé, meanwhile, gets to consolidate its dominant position over JAB in these crucial and vast-emerging coffee regions. Just like in Western countries, Nestlé’s traditional household coffee brands are under threat from a more experiential, younger coffee drinker who is increasingly being introduced to coffee via their branded coffee houses. But Nestlé will now have access to the popular Starbucks brand in the still-popular soluble coffee format (i.e. Starbucks Via) and the growing coffee pod/capsule segment.

Nestlé may have missed the boat on the US coffee market, but it has consolidated its position as the leading coffee player in emerging markets, where the majority of coffee profits will be generated over the decades to come. Starbucks will likely benefit the most: it can now focus primarily on its fast-growing global coffee shops while also benefitting from an accelerated expansion of its retail offering.