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Business

Why Nestle wanted high-end, hipster Blue Bottle Coffee

If you don't have the premium brands, you may as well buy them.

A Blue Bottle coffee shop is seen in Los Angeles, California, on Sept. 14, 2017.   © Reuters

GENEVA -- Swiss food giant Nestle on Thursday announced it had acquired a majority stake in Blue Bottle Coffee, a U.S. high-end coffee producer and cafe chain, for an undisclosed amount. It was the latest in a series of bolt-on acquisitions by Nestle this year focusing on health-conscious and premium-food businesses.

Why would Nestle, the world's largest food company, be interested in such a small company?

To be sure, Blue Bottle has been growing fast. It is expected to have 55 coffee shops by the end of this year, almost double the figure from 2016. But the industry has seen food giants on the hunt for much bigger targets with more firepower in the recent past. Only seven months ago, U.S. food giant Kraft Heinz made an unsuccessful $143 billion offer for Anglo-Dutch consumer-goods conglomerate Unilever.

One reasons for Nestle's interest in Blue Bottle is innovation and entrepreneurship. While larger companies are good at burnishing their trophy brands, they tend to struggle when starting new brands.

Blue Bottle was founded in 2002 and is known in the U.S. as a front-runner in the "third wave" of coffee, pursuing originality and discipline in making a high-quality product, even if it means significantly higher prices.

The phenomenon is similar to that in the beer industry, where craft beers have made serious inroads into the turf of global brands such as Budweiser and others.

Nestle has been successful in creating some interesting variations to the flavors of its popular Kit Kat chocolate-bar lineup in Japan, such as green tea, baked potato and wasabi horse radish. But has yet to deliver a major new hit brand since Nespresso, a system of brewing coffee with machines that use specially produced coffee capsules, introduced more than two decades ago.

In announcing the Blue Bottle purchase, Nestle emphasized that the founder and chief executive would stay on to run the business. Nestle seems to not want to tamper with the Blue Bottle DNA, which has been key to its growth. 

Another factor may be pressure from the hedge fund Third Point, led by activist investor Daniel Loeb. In June, Third Point said it had acquired more than 1% of Nestle's shares for over $3 billion. It urged Nestle to raise its operating profit margin and sell its 23% stake in French cosmetics firm L'Oreal. All of this unfolded at a time when Nestle's organic growth had fallen to its lowest in years.

Soon after Third Point came onto the scene, Nestle announced one of the largest share-buybacks in its history. While it may not have had anything to do with Third Point, given that the buyback was disclosed just days after Third Point's share acquisition was revealed, Nestle was clearly in a rush to show shareholders market value and further growth potential.

If Nestle were to get into a proxy fight against Third Point, Blue Bottle and other recent bolt-on acquisitions could be a convincing argument for Nestle's growth potential.

But the bottom line is that Nestle is going after consumers. The food industry around the world is facing price competition, and raising prices on existing products is harder than ever. But at the same time, product lines in premium segments are growing briskly, whether it is beer, coffee, or cosmetics.

Consumer tastes are fragmenting, especially toward the premium end. If you don't have the brands in that sector, you may as well buy them.

In 2015, for instance, Unilever acquired four premium skin-care brands. Brewing giant Anheuser Busch Inbev went on a buying spree, acquiring 10 craft beer companies in Italy, Canada, China and elsewhere. 

With new chief executive Ulf Mark Schneider into his ninth month in office, Nestle is now joining the game.

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