This article is written by Aura Das pursuing Diploma in M&A, Institutional Finance and Investment Laws (PE and VC transactions) from LawSikho.
The present generation has successfully set the trend for all casual meet-ups and formal meetings to go along with a hot cup of coffee at a fancy café with a delightful ambiance, with Starbucks being one of the go-to places. Even at workplaces, sipping on a hot cup of coffee with the Nestle brand printed on it seems quite a cliché. Hardly have we ever wondered about the two brands coming together. With Nestle acquiring one of the businesses of Starbucks, let’s dwell on the business aspects of the deal while enjoying a cup of coffee!
The business structure of Starbucks
Starbucks has been successfully using its business structure to facilitate its business development. Starbucks, the largest coffeehouse chain in the world, follows a matrix organizational structure which is a combination of both horizontal and vertical structures with overlapping divisions. Starbucks is one of the companies to successfully implement the matrix structure, which is suited for companies with diversified products and services. The grouping of departments is based on different kinds of business functions as well as based on the type of product. With a global-wide presence in as many as 70 nations, they have also optimized their geographical divisions. Each geographical division is headed by an executive who has the responsibility and freedom to incorporate business strategies for the profitability of the business in that particular region.
With time, Starbucks has evolved its business structure to suit the present demand of the market. It has made certain strategic acquisitions in order to expand its business, such as its acquisition of Ethos Water and Best Coffee of Seattle, thus making its organizational structure specific to the needs of the business.
The business structure of Nestle
The business structure of Nestle is much similar to that of Starbucks as the business for most of the food and beverage business is divided based on geographical zones such as the AMS Zone (dealing with America), the AOA Zone (dealing with Asia, Oceania, and Sub-Saharan Africa), EMENA Zone (Europe, Middle East, and North Africa). They also have strategic business units for different branches of products such as the Nestle coffee brand and Nestle Health Sciences.
There have been various strategic moves taken by Nestle to venture into diverse markets. Nestle ventured into the cereal market as a step to reformulate its global product portfolio. In pursuance of this objective, Nestle has set up a Joint Venture known as Cereal Partners Worldwide, which is a partnership between Nestle and General Mills, that has established itself as a global cereal company producing some well-known household cereals such as Cheerios, Chocapic, etc. Similarly, in 2016, Nestle created a JV called ‘Froneri’ with PAI Partners to merge Nestle’s European ice-cream business and PAI’s ice-cream business R&R, making Froneri one of the world’s largest ice-cream companies. In 2019, Nestle decided to sell its US ice-cream business to Froneri. With the said transaction, the successful business model of Froneri would be extended to the US model, thus enabling Nestle to establish global leadership for itself in the ice-cream business.
On May 7, 2018, an agreement was finalized between Nestle and Starbucks by which Nestle acquired the rights to market Starbucks Consumer Packaged Goods and Foodservice products globally. By this, Nestle also acquired the rights to market the products outside Starbucks coffee shops. This transaction was initiated to provide Nestle with the opportunity to establish leading market positions in the premium roast, ground, and portioned coffee businesses. The deal was closed on August 28, 2018. Through the deal, the two companies will work closely together on the existing Starbucks range of roast and ground coffee, whole beans as well as instant and portioned coffee. Through the alliance, Nestle also aims at capitalizing on the experience and value that both the companies bring and to work towards innovation.
In the midst of the share buy-back process of Nestle, the deal was finalized for the slump sale of the Consumer Packaged Goods and Food Services products of Starbucks for an upfront payment of USD 7.15 Billion to Starbucks along with additional royalties, for the right to sell Starbucks products around the globe. This deal helped Starbucks to raise capital from $15 billion to $20 billion which is intended to use to give back to its shareholders in the form of dividends and buy-backs by 2020. The transaction was a smooth and efficient integration, without the transfer of any fixed assets.
The agreement covers Starbucks packaged coffee and tea brands, excluding Ready-to-Drink products and all sales of any products within Starbucks coffee shops. After the finalization of the deal, it was stipulated that over 500 employees of Starbucks in the US and Europe will join the Seattle and London based Nestle office respectively.
Why was the deal closed?
The deal is a big win for Starbucks as Nestle has the capacity to expand the coffee giant’s name into diversified markets. By this deal, Nestle would want to secure its position as a leading coffee brand by strategically integrating with Starbucks as well as promoting it. This deal also signifies the integration of two direct-to-consumer brands that convey their value directly to the consumers. There is also the incentive for Nestle to tap into the best resources of consumer based coffee and increase the profits. Considering it from the perspective of competition from other players, this deal would enable the two strong entities to handle the distribution, control, and marketing of Starbucks, thus increasing their outreach and their brand value as two separate entities as well. Also with Nestle being in the market for more than three decades worldwide and being one of the most trusted coffee brands, promoting another brand is all the more a lucrative option for both Starbucks and Nestle.
Impact of the deal on both businesses
By acquiring the stake of Starbucks, Nestle aimed at exploring growth opportunities in the premium products offered by Starbucks. As per a statement of the CEO of Starbucks, this alliance will help more and more people around the globe to enjoy the Starbuck experience at home through the wide reach of Nestle. This synergy was a significant step for Nestle as post the deal, Nestle would bring three coffee brands to the market. Also, both the players being global leaders in the coffee business would help Nestle in outsourcing sustainable coffee for a huge group of consumers.
Acquisitions and mergers are the effective means for the acquisition of resources, diversifying into different markets as well as having a sustainable competitive advantage over other players in the same market, as is evident from the present transaction. The creation of joint ventures as done by Nestle helps the companies to solely focus on a particular portfolio of products without the added responsibility of incorporating a whole new entity, along with the advantages of sharing resources, skills, and funds to sustain the business. It is through such integrations that innovations in products take place, breaking the stagnation of monotony with the introduction of fresh and exciting products. This no doubt involves a lot of strategic planning for ensuring greater revenue and outreach to the maximum number of people. Thus, such integrations are always welcome by the end consumers.
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