Can Starbucks Be Threatened By Nestle’s Acquisition Of A Majority Stake In Blue Bottle?

by Trefis Team
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Recently, Nestle announced that it had “acquired a majority stake in high end specialty coffee roaster and retailer Blue Bottle.” Blue Bottle is a boutique premium coffee chain with around 50 stores across the U.S. and Japan which aims to serve “fresh coffee” to its guests using the finest coffee beans. The company started 15 years back and is extremely particular about the freshness and flavor of its coffee making – thus a go-to destination for gourmet coffee lovers. Blue Bottle also sells ready to drink and roast and ground coffee products in the retail market. While currently the stores operated by Blue Bottle are insignificant compared to Starbucks’ (NYSE:SBUX) store network, acquisition of a significant stake by Nestle can lead to faster expansion. Further Nestle can provide Blue Bottle with a higher marketing budget which can make it a better known brand, creating a strong competitor for Starbucks in the long term.

Gourmet Coffee: The New Battlefield

Starbucks is focusing on high end coffee to adapt to the preferences of millennials who prefer gourmet beverages and this is likely to drive the next wave of growth for the company. According to Technavio, the market for specialty coffee shops is likely to reach around $121 billion by 2021, as urbanization leads to increase in overall consumption of coffee and consumers prefer gourmet coffee.  Starbucks is investing heavily to capture this trend by building premium Starbucks Reserve Roastaries. Currently one such concept store is functional and the company plans to add three more stores  – in different geographical locations (New York, Shanghai and Italy) next year. The company is also innovating with “iced gourmet coffee” to adapt to changing preferences of the younger generation.

While Starbucks is expanding aggressively, especially in China, the company has been unable to increase average customers per store over the past few years. We expect this number to decline further in the next two years and then increase slowly over our forecast period:

See the Trefis Forecast For Starbucks Average Number of Customers Per Store Here

The company is focusing on increasing the average spend per customer at its stores to drive revenues in the coming years. While it is looking to increase the food spend, gourmet beverages which come at a premium price are also aimed towards meeting this goal. We expect a steady increase in the beverage spend per customer visit at a Starbucks store over our forecast period.

See the Trefis Forecast For Average Beverage Spend Per Customer Visit At A Starbucks Store Here

However, competition from other strong players can impact Starbucks’ revenues if its customers find other premium coffee stores better. Blue Bottle has been a boutique chain with limited presence and hence has not impacted Starbucks significantly so far. However, with Nestlé’s backing it can expand geographically and increase focus on its retail products such as the ready to drink beverages, which can impact Starbucks.

The specialty coffee segment is growing rapidly and this is likely to be the next key growth driver for Starbucks. While Blue Bottle is still a small brand with less than 50 stores, it had a strong growth potential with Nestlé’s backing. We do not expect this boutique chain to be an immediate threat to Starbucks, but the company would have to be on its toes to ensure that its customers are not lured away by upcoming specialty cafes which offer fresh coffee.

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