Nestlé takes majority stake in US coffee chain Blue Bottle

Switzerland’s Nestlé is accelerating its expansion in the US coffee market by taking a majority stake in California-based Blue Bottle, which is led by Dublin-born businessman Bryan Meehan. The deal values the cafe and roastery chain at more than $700 million (€588 million).

The acquisition of fast-growing Blue Bottle is a strategic shift into retailing by the world’s largest food and drinks company, which owns the Nespresso coffee capsule and Nescafé brands.

It also pits Nestlé directly against two other huge coffee brands in the US – Starbucks and Keurig Green Mountain, which the JAB investment group bought two years ago for $13.9 billion.

Nestlé is understood to be paying up to $500 million for the 68 per cent stake in Blue Bottle, which by the end of this year will have more than 50 cafes in California, New York, Washington, Miami and Tokyo.

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Nestlé is “investing in a team, and expertise that we don’t really have”, said Patrice Bula, marketing director of Nestlé.

Standalone company

Blue Bottle will operate as a “standalone” company within Nestlé: its chief executive, Mr Meehan, and founder James Freeman will both remain.

Mr Meehan has been involved in several companies previously, including Nude Skincare, which he founded in 2007 with Ali Hewson, the U2 singer Bono’s wife. That business was later sold to LVMH.

He also co-founded organic foodstores chain Fresh & Wild in the 1990s, before selling it to a US firm in 2004.

Blue Bottle was founded in the early 2000s and has raised a total of $120 million from investors including Bono and the founders of Twitter and Instagram.

Its stylish, minimalist cafes serve only beans roasted in the previous two weeks, meaning a roastery has to be nearby. The company has also been reluctant to sell its coffee wholesale or franchise out its brand, to maintain quality.

Consolidation among independent US coffee companies has gathered pace in recent years, with JAB also acquiring Portland-based Stumptown and Chicago’s Intelligentsia in 2015.

At Starbucks, Howard Schultz last year stepped aside as chief executive to focus on the company’s premium roastery and retail business.

Nestlé is prioritising high-growth businesses under Mark Schneider, chief executive as of January, as consumers shift towards healthier and less processed foods.

Later this month Mr Schneider will present a strategy update to investors, including US activist Daniel Loeb, who took a 1.25 per cent stake worth $3.5 billion in June.

Nestlé is the biggest seller of instant coffee in the US, while Keurig sells most coffee pods and Starbucks the most fresh beans, according to Euromonitor.

“Fundamental to our culture is delegating responsibility,” said Mr Bula. “We’re a brand-building company and we’re going to help that team build the strongest possible brand for the millennials in the US.”

Control

Mr Meehan referred to his experience selling businesses in the past.

“I know what can happen when you hand over control to the majority partner and I learned from that,” he said. “In this situation, the control is very much with Blue Bottle, the management team and our board here. I want that and Nestlé wants that.”

Nestlé has options to buy the remaining stake in Blue Bottle if certain performance criteria are met. Last week it bought Sweet Earth, a Californian company that makes vegetarian and vegan food, and in June took a stake in Freshly, a New York online ready meals company.

“At its heart, Nestlé is a brand company and Blue Bottle, I believe, is one of the most iconic brands that is being developed in the world right now,” said Tony Conrad, a partner at early Blue Bottle investor True Ventures.

“It was an extraordinary offer which represents a very significant multiple versus current revenue.”

Mike Volpi, a partner at Index Ventures, said: “They went from a cottage, taste-good artisan activity to a much more professionalised activity – that’s the huge change in the five years since we invested.”

Despite selling to the world’s largest food and beverage group, Mr Meehan is confident Blue Bottle can retain its quality and artisanal feel.

“So many companies get it wrong by taking shortcuts, changing the product and making bigger margins. Blue Bottle does it the hard way because making delicious coffee is not easy, especially at scale,” Mr Meehan said.

Nestlé’s backing would help Blue Bottle expand further into Asia, particularly China and South Korea.

Nestlé said that at the same time it will continue Nespresso’s US expansion, after double-digit annual revenue growth over the past three years and with 53 Nespresso shops planned by the end of the year. – (Copyright The Financial Times Limited 2017)