The Nestlé-Starbucks licence: a match made in heaven or a marriage of convenience?

10 May, 2018

The news that Nestlé had penned an agreement with Starbucks will have surprised many this week. But reflecting on it, it makes sense.  Despite being a coffee goliath, Nestlé, like most big FMCG companies, has been struggling to find growth and although its premium offer, embodied in Nespresso and Dolce Gusto, has worked in the UK it has largely failed to resonate in the US. Nestlé also lost its battle to retain the intellectual property for its coffee capsules, opening the door to competitor branded and private-label versions which substantially undermined its device-disposable business model.

Starbucks, like many brands, has established a premium proposition through its retail offer and presumably wants to remain focussed on this. The deal meanwhile allows it to take advantage of Nestlé’s global distribution network and know-how. Not to mention the $7.1 billion Starbucks received as part of the deal that it will use to action share buy-backs. Starbucks will likely be hoping this deal increases their market share outside of the US, whilst for Nestlé, the tie-up is a bid to enter the premium coffee space whilst aligning themselves with one of their potentially strongest rivals in this market. Ultimately Nestlé appears to have recognised that it was going to be too much of a stretch to achieve a premium position on its own.

Why Nestlé’s premium offer didn’t work

One of the key reasons Nestlé had to buy their way to premium was that the perception of the brand was too mass-market. The loss of the capsule-protection only accelerated this. Ultimately, Nestlé struggled to overcome its association with Nescafé, which ironically is the product that has been an industry leading brand and backbone of its coffee business for years. Unfortunately, the strength of this instant coffee brand holds little appeal for most premium-coffee drinkers. Notwithstanding the intense competition in this space, Nestlé simply didn’t have consumer permission to innovate here. It could have technologically delivered the best coffee going (and it did a great job with Nespresso) but on the whole it didn’t resonate with consumers.

How far can you stretch a brand?

Nestlé isn’t the only large FMCG company struggling to find growth by establishing a foothold in a premium offer. Nor is it the only organisation to be stuck in an uncomfortable marriage between a power-brand that is plateauing or losing market share and the prospect of a new product that could drive growth but risks further cannibalising sales. For Starbucks, there is a risk that the Starbucks brand will lose some of its gloss and with that, their ability to command £3 a cup in-store. Time will tell.

We developed our Brand Stretch service to help brand owners move into new spaces. It defines clear boundaries for innovation based on feedback from target consumers and allows us to qualify opportunities – new products, new categories, new positioning – that resonate with the brand and are therefore most likely to lead to sales growth. 

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