Blue Bottle deal highlights hunger to unlock value in millennial brands
Nestle's $500m (€418m) purchase of a majority stake in Irishman Bryan Meehan's California-based coffee bar chain, Blue Bottle, highlights how big companies are seeking exposure to fast-growing premium brands driven by the so-called millennial generation as they come of financial age.
Industry experts are predicting more deals will follow in the highly fragmented coffee market, where profit margins are richer than for mainstream packaged food and drink.
Since 2015 there have been nine coffee deals by Nestlé rival JAB Holding, owned by Europe's billionaire Reimann family. JAB now has brands like Douwe Egberts and Tassimo sitting alongside Blue Bottle rival Intelligentsia, and owns the second-biggest packaged coffee business behind Nestlé, owner of Nescafé and Nespresso.
"There are certainly going to be further purchases at all levels of the price tier," said Matthew Barry, beverage analyst at Euromonitor International, adding that any company not doing acquisitions risks falling behind.
Earlier this month, Italy's Massimo Zanetti bought a majority stake in Indonesian roaster Caswell's and in August, Italy's Lavazza bought a stake in France's Espresso Service Proximite, its third acquisition in less than two years.
In May, Lavazza's CEO told Reuters the company could put together more than €1.5bn for acquisitions.
Switzerland's Nestlé announced its deal with Blue Bottle late on Thursday. Its few dozen coffee bars are part of the so-called third wave coffee movement in the United States, which emphasises quality beans and expertly-made drinks.
Analysts see the deal as evidence that an energised Nestlé, under its new CEO, is taking steps to reconnect with consumers, particularly young ones.
The deal gives Nestle entrance to high-end bars that are part refreshment and part theatre, with space-age "siphon" or "vacuum" brewers.
While niche, these outlets are seen as testing labs for new trends that may eventually go mainstream, such as cold brew, single-origin beans and nitro coffee.
Chains such as Starbucks and Costa are already moving in that direction and a front-row seat could help Nestlé innovate more quickly.
Nespresso already has a network of shops but Liberum analyst Robert Waldschmidt says Blue Bottle is less about retail and more about Nestlé getting a premium brand it may sell in packaged form.
"I don't think they're trying to reinvent themselves as a retailer," Mr Waldschmidt said. "They could be looking at going a bit more multi-brand given that JAB is the epitome of multi-brand."
It remains to be seen whether expanding too much will hurt Blue Bottle's own cachet.
Bernstein analyst Sara Senatore estimated that the top third wave players - which include JAB's Stumptown and Intelligentsia, Philz, Counter Culture, Blue Bottle and La Colombe Coffee Roasters - together generate just $126m (€105m) in revenue across 123 stores.
By contrast, Starbucks alone generated $21.3bn (€17.8bn) last year from 25,085 stores globally. (Reuters)