Starbucks announces new partnership with Nestle. - Mike Kane / Bloomberg Starbucks announces new partnership with Nestle. - Mike Kane / Bloomberg

Starbucks Will Use Cash From Nestle Deal to Ramp Up Digital Relationships

Thanks to Nestle SA, Starbucks Corp. just came into some serious cash.

With the Swiss food giant agreeing to pay the coffee chain $7.15 billion for the right to sell Starbucks coffee products at retailers, shareholders can expect to receive their portion of the proceeds via buybacks and dividends. But the company will also funnel investment into its two key markets: the U.S. and China.

“The two big growth engines for the company from a marketplace standpoint are the U.S. and China,” Chief Executive Officer Kevin Johnson said in a phone interview on Monday. He pledged to continue to expand in both countries while funding a digital push to counteract slowing U.S. growth.

While growth in China has been explosive, Starbucks saw U.S. comparable sales increase just 3 percent in the latest fiscal year — the lowest rate in at least six years. It’s facing more competition from up-and-coming regional coffee houses and steep discounting from fast-food rivals. Consumers also are shopping more at home, shunning brick-and-mortar retail for e-commerce.

That’s sent Starbucks shares down 5.2 percent in the 12 months through May 4. Investors liked Monday’s Nestle deal, though, with shares rising 2.8 percent on Friday after news of the transaction surfaced. On Monday, the stock initially rose as much as 2.4 percent to $59.04 before paring the gain.

Core Market

“They have to really reinstill confidence that they can continue to put up same-store sales growth in the U.S., which is its core market,” said Bloomberg Intelligence analyst Jennifer Bartashus. “They’ve seen traffic fall off in the afternoon — the strategy now is to get occasional customers back into stores, and into stores more often.”

To reverse the post-lunch slump, the company has targeted customers with personalized email offers while opening up its mobile-order-and-pay system to non-rewards members. Starbucks wants to build “digital relationships” with the more than 60 million monthly patrons who aren’t in the loyalty program.

“The strategy that we’ve outlined is one that focuses on experiential experience in stores and expanding that,” Johnson said. “We’ll continue to fund our digital innovation agenda.”

Starbucks also wants to improve its stock performance by sending about $20 billion to shareholders over the next three years via dividends and buybacks, up from a previous goal of $15 billion.

Boosting technology and locking in loyal customers may keep JAB Holding Co. at bay. The Austrian conglomerate has expanded aggressively in the U.S. coffee market: It now owns Peet’s Coffee & Tea, Krispy Kreme Doughnuts, Caribou Coffee and Panera Bread.

©2018 Bloomberg L.P.

This article was written by Leslie Patton from Bloomberg and was legally licensed through the NewsCred publisher network. Please direct all licensing questions to [email protected].

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