SEATTLE — Focus and scale are the key words that define the licensing agreement announced on May 7 by Starbucks Corp., Seattle, and Nestle S.A., Vevey, Switzerland. The deal allows Starbucks management to focus on its core business of selling food and beverages in its stores. Nestle benefits from a well-known brand it may expand in retail and food service markets throughout the world.

Terms of the deal involve Nestle paying Starbucks $7.15 billion for a perpetual global license to market, sell and distribute certain Starbucks coffees and teas at retail and food service outlets outside of Starbucks stores around the world. The agreement does not include Starbucks’ ready-to-drink products, which are subject to other licensing agreements.

Ulf Mark Schneider, chief executive of Nestle, said in a conference call following the announcement that his company will benefit from the boost the licensing deal will give Nestle in North America, where its coffee brands are not as strong as in other international markets.

“And then, of course, there’s a lot that we bring to the table when it comes to the global expansion,” he said. “I think this is where we bring the global Starbucks brand appeal together with our unsurpassed distribution presence in 190-plus countries.”

Francois-Xavier Roger, chief financial officer for Nestle, said the business Nestle is acquiring has annual sales of approximately $2 billion.

Starbucks K-Cups“It strengthens our global leadership in the coffee category, increasing our total coffee sales by almost 15% to 17 billion Swiss francs ($17 billion),” he said. “From a balance sheet perspective, there are basically no fixed assets being acquired … Because we are not transferring fixed assets and we already have our own manufacturing and distribution infrastructure in place, there will be very limited CapEx required from our side for this business. We will use some of our existing manufacturing facilities outside of the U.S., which will enable us to increase our own capacity utilization.”

Mr. Schneider emphasized while much initial attention to the agreement has focused on retail, the opportunities in food service should not be ignored.

“(It) gives us another platform to grow in food service, which is a channel that we have a lot of experience in,” he said. “We already have more than $5 billion of sales in Nestle Professional today, roughly half of which comes from coffee with our iconic, Nescafe and Nespresso, brands. There is a strong complementary tea in adding the Starbucks brand and particularly, premium roast and ground capabilities to this existing business. And it allows us to (be) a complete provider of coffee solutions in out-of-home.”

During the past six months Starbucks Corp., Seattle, has taken steps to streamline and focus its business. Some of those measures have included the closing of Teavana outlets, the sale of Tazo Tea and a stock-keeping rationalization program to improve efficiencies. Entering into the agreement with Nestle is another step toward streamlining and focusing the business, said Kevin R. Johnson, president and c.e.o. of Starbucks.

Nestle Nespresso system“The fact is that we have established a global retail store footprint and global awareness of the Starbucks brand, but the brand amplifier, our Channel Development business, is nascent in all countries outside of North America,” he said. “Therefore, the core strategic rationale for this agreement can be summarized as follows: leverage Nestle's reach and scale to rapidly accelerate growth in Channel Development globally as a brand amplifier for our retail store business; introduce Starbucks brands to the Nespresso and Dolce Gusto system platforms, together, the world's leading at-home coffee systems with particular strength outside of North America; and establish the definitive global coffee alliance in a rapidly changing, competitive landscape.”

Mr. Johnson’s reference to a changing competitive landscape acknowledges the strength JAB Holding Co., Luxembourg City, Luxembourg, has established in the global coffee market during the past few years. The company owns such coffee businesses as Jacobs Douwe Egberts, Keurig Green Mountain, Peet’s Coffee & Tea and Caribou Coffee. The company most recently entered into an agreement to acquire the Dr Pepper Snapple Group, Plano, Texas.

Despite the competition, Mr. Schneider said the transaction should not be viewed as defensive.

“I think it brings two leading companies and three iconic brand names (Starbucks, Nescafe and Nespresso) together,” he said. “And we're excited about the opportunity that that creates.”

Mr. Johnson of Starbucks said the agreement will not affect his company’s business with Keurig Green Mountain, where Starbucks pods are one of the leading brands sold on the system.

“ … Regarding K-Cup, certainly, we’ve got a great relationship with Keurig, and we've got a great business on K-Cup,” he said. “We’re the No. 1 share player of coffee on the Keurig system, and we intend to keep that. And we have an agreement in place that allows us to continue to do that.”