Nestle pays Starbucks $7.1bn to sell its coffee

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Starbuck logoImage source, Getty Images

Nestle has announced that it will pay Starbucks $7.1bn (£5.2bn) to sell the company's coffee products.

The Swiss giant, which boasts Nescafe and Nespresso amongst its brands, will have the right to market Starbucks' coffee in retail outlets outside the cafe chain.

That part of the business currently generates $2bn in annual sales.

The deal means Nespresso machine owners will be able to buy Starbucks coffee branded pods for use at home.

Consumers will also find Starbucks coffee beans, ground and instant coffee more readily available as Nestle, the world's largest food and drinks company, uses its vast distribution network to market Starbucks products worldwide.

Nestle's name will not appear alongside Starbucks's, but the deal could still help Nestle strengthen its US business, thanks to the powerful High Street coffee brand.

Analysis: Joe Lynam, BBC business correspondent

Boil it all down and this is a giant licensing arrangement, whereby Nestle is allowed to sell Starbucks products through Nestle distribution channels.

That means you'll see a lot more Starbucks branded coffee pods for use in Nespresso or Dolce Gusto devices which are all the rage - thanks in part to those George Clooney adverts.

Starbucks will continue to buy the raw (green) coffee beans from farmers but now Nestle will step in and roast and prepare those beans for consumers under strict Starbucks licensing rules. Nestle will not acquire any Starbucks infrastructure nor will any Nestle products appear in Starbucks coffee shops.

For that arrangement, Nestle is paying $7bn because it believes Starbucks products will appeal to premium coffee lovers around the world.

Despite the price tag, Nestle shareholders appear to like the deal. Nestle shares rose 1.5% today. While Starbucks investors kind of shrugged.

Mark Schneider, who in 2016 became the first outsider to run Nestle in almost 100 years, is attempting to boost the company's profit through expansion.

Last year, Nestle paid an estimated $425m for a 68% stake in Blue Bottle Coffee, a California-based company that sells coffee to customers online and has a number of shops in the US and Japan.

Kona Haque, of the commodities trading company ED&F Man said Nestle was aiming to further strengthen its position in the US market through this latest deal.

"At the moment Nestle is very much known for its instant coffee. This is an opportunity to go into roast and ground which for today's millennials is a big growing trend," she said.

Mr Schneider described the "global coffee alliance" with Starbucks as "a great day for coffee lovers around the world".

Nestle said 500 Starbucks employees will transfer over to its business but they will continue to be located in Seattle, which has been the group's headquarters for the last 47 years.

The company recently sold its US sweets and chocolate business, including brands such as Crunch and Butterfinger, to Ferrero Group for 2.7bn Swiss francs (£1.9bn).