What the Nestlé/Starbucks deal means for licensing’s future
Why would Starbucks license their consumer and foodservice business to Nestlé instead of doing it themselves?
Yesterday, Nestlé announced an agreement granting the company perpetual rights to market Starbucks consumer and foodservice products globally, outside of the Seattle-based company’s coffee shops. This transaction provides Nestlé with a strong platform for continued growth in North America with leadership positions in the premium roast, ground and portioned coffee businesses. It also allows Nestlé to capture new growth opportunities in the rest of the world with Starbucks premium products.
For those of us in the licensing community, this is a prime example of the power of brand licensing. With Nestlé you have a powerhouse foodservice product provider that is in need of a strong premium brand name in a continually growing market. In Starbucks, they found a company that has established brand loyalty and who, essentially, reinvented the coffee business in the U.S.
So why would Starbucks license their consumer and foodservice business to Nestlé instead of doing it themselves?
First, Nestlé already has the distribution networks in place at retail. Grocery retail is a significantly different business than what Starbucks’ stand-alone coffee shop retail business looks like. Nestlé understands the grocery and foodservice business better than most.
Second, Starbucks is facing the challenge of dwindling sales at its core coffee shops. Through the licensing of the Starbucks brand to the foodservice business, it enables Starbucks to focus its attention on reinvigorating its core business, while giving Starbucks a significant infusion of capital from Nestlé along with a long term stream of royalty payments.
What does this mean for the licensing business moving forward? For major brands, this type of licensing partnership is a win/win, working together to extend brand equity and capture greater market share into new and existing markets. With the current disruption of traditional retail, we can expect to see a lot more licensing deals like this one. Companies that were once all-powerful in their particular market segment are learning that through licensing partnerships, they can capture greater market share.
As part of this transaction, Starbucks will receive an up-front cash payment of $7.15 billion for a business, which generated annual sales of $2 billion. The transaction does not include the transfer of any fixed assets, which facilitates a smooth and efficient integration. Nestlé expects this business to contribute positively to its earnings per share and organic growth targets as from 2019.