Nestle pays $570m for stake in US coffee chain

Swiss conglomerate breaks into hipster market with 68% of speciality bar Blue Bottle

LONDON/LOS ANGELES • Nestle has bought a majority stake in California-based Blue Bottle Coffee, marking a first step by the packaged coffee leader into the hipster world of speciality bars that serve high-end, single-origin and cold-brewed coffees.

The world's largest food and drinks company, which owns Nescafe instant coffee and Nespresso brewers, announced the purchase of a 68 per cent stake in Blue Bottle on Thursday without disclosing financial terms.

The price was around US$425 million (S$570 million), according to a source familiar with the matter.

Like last week's purchase of Sweet Earth meatless foods, the deal sees Nestle reaching out to the kind of choosy consumers who are turning away from its mass market brands like Nescafe coffee and Digiorno frozen pizza.

It is the fourth deal this year by new chief executive Mark Schneider, an external hire brought in last year to shake up a conservative Swiss company that had missed its sales targets for four years running.

Nestle and its multinational peers are fighting slower emerging markets, competition from new brands and a shift in consumer tastes away from processed food.

It is also selling its United States confectionery business, which includes brands like Baby Ruth and Butterfinger, as it seeks to transform itself into a "nutrition, health and wellness" company.

A Blue Bottle Coffee shop in the Bushwick neighbourhood of Brooklyn. Blue Bottle announced on Thursday that it had sold a majority stake to Nestle, one of the surest signs yet of how so-called third-wave speciality coffee has become a hot business.
A Blue Bottle Coffee shop in the Bushwick neighbourhood of Brooklyn. Blue Bottle announced on Thursday that it had sold a majority stake to Nestle, one of the surest signs yet of how so-called third-wave speciality coffee has become a hot business. PHOTO: NYTIMES

Nestle, Europe's biggest company by market value, is under pressure too from activist shareholder Third Point. The US hedge fund announced a US$3.5 billion stake in June and pressed Nestle for actions such as a margin target and divesting its 23 per cent stake in France's L'Oreal.

The US market for coffee drinks has retail sales of US$2.9 billion, according to Euromonitor International, which forecasts it to reach US$4.4 billion by 2021.

"Starbucks has, for a long time, had a virtual lock on this category, but that lead is starting to slip," said Euromonitor analyst Matthew Barry.

Nestle's purchase also comes amid consolidation in the so-called third-wave coffee sector in the US.

This market caters to mostly young, urban customers who have grown up on Starbucks but have progressed to more exotic drinks coaxed from hand-operated espresso machines or non-traditional brewers by expert baristas.

Rival third-wave chains also include Intelligentsia and Stumptown, which were swept up in the recent coffee acquisition spree by privately held JAB Holdings.

Blue Bottle, known for its exotic, micro-lot coffees, has minimalist-style coffee bars in the San Francisco Bay Area, Los Angeles, New York and Tokyo. It expects to have 55 locations by the end of this year, up from 29 last year.

It has raised nearly US$121 million in funding from high-profile investors including Twitter co- founder Ev Williams.

Nestle said Blue Bottle would continue to operate as a standalone entity and current management and employees would retain a minority stake.

REUTERS

A version of this article appeared in the print edition of The Straits Times on September 16, 2017, with the headline 'Nestle pays $570m for stake in US coffee chain'. Print Edition | Subscribe