Starbucks (SBUX -0.35%) is selling its Seattle's Best coffee brand as it continues to narrow its vision about what the coffee experience means. Where once that meant bakeries, health foods, and coffee brands -- all at different price points -- today the beverage behemoth has winnowed the concept back toward its core mission of being a coffee shop that its customers love to visit.
It was CEO Howard Schultz who oversaw the expansion of Starbucks into becoming the everything coffee company, and he is the one who is seeing it return to its roots. The sale of Seattle's Best to Nestle (NSRGY 0.11%) for an undisclosed sum marks his latest divestiture since returning earlier this year to the helm of the company he founded.
Because Schultz will turn the reins of the company over to his successor next year, he's using his time to create a leaner, more focused business that will be primed for its next leg of growth.
Image source: Getty Images.
A brand of unrealized potential
Purchased for $72 million almost 20 years ago, Seattle's Best was supposed to become a $1 billion brand for the coffee company. The idea was for it to be a complementary business that could greatly expand Starbucks' reach by going into markets where its own premium coffee wasn't a good fit.
In 2005, for example, Starbucks got the coffee brand placed inside Borders bookstores, but that was short-lived as the bookstore declared bankruptcy and thought it could regain profitability by running its own coffee shops.
Seattle's Best was then considered as a drive-thru-only opportunity, which might work today -- Dutch Bros is a rapidly growing chain doing just that -- but that idea also fell by the wayside.
Today, Seattle's Best has become a largely forgotten asset, one that hasn't even been mentioned in company conference calls in years. It would seem that whatever Starbucks can get for the business would be worth it.
Better off elsewhere
Starbucks partnered with Nestle in 2018 to form the Global Coffee Alliance to sell its packaged coffee and tea in regional markets worldwide across all channels. Nestle paid $7.1 billion for the rights to Starbucks, Seattle's Best, Teavana, and Torrefazione Italia, another brand Starbucks acquired when it bought Seattle's Best. So gaining full control over the coffee brand fits well within Nestle's extensive coffee portfolio.
Nestle, of course, was first associated with coffee through its Nescafe and Taster's Choice brands, and has since expanded to include Nespresso and Blue Bottle, a coffee chain in which it owns a majority stake.
Seattle's Best would give Nestle a brand in the low- to mid-priced range, providing a full range of pricing options for consumers, much as Starbucks had originally planned. For Starbucks, though, shedding it means it can get back to basics.
Image source: Getty Images.
Meeting changing customer expectations
Schultz is looking to reinvent Starbucks once again. As part of its reinvention, Schultz sold Evolution Fresh juices to Bolthouse Farms in May and plans to invest $450 million in new equipment for greater efficiency and reduced complexity. Other developments include:
- A new and faster system to extract cold coffee and espresso
- Quicker hot coffee system that prepares fresh brew in 30 seconds
- Putting batch-cooked food on heated racks for faster service
The emphasis on speed is essential because consumer preferences are changing. Two out of every three drinks are being customized with espresso or flavorings, and nearly 80% of all Starbucks sales are now cold drinks. Other coffee shops are seeing the same response, with Dutch Bros saying cold drinks make up 80% of its menu mix.
Starbucks stock has lost a quarter of its value this year and is down by half from the highs hit just over a year ago. It has a restless workforce that is increasingly becoming unionized, leading the coffee chain to announce $1 billion in employee investments, including higher hourly wages.
By itself the Seattle's Best deal won't change much for Starbucks, but it does lay the groundwork for its next phase of leaner, more focused growth. Yet at 25 times trailing earnings and next year's estimates, three times sales, and 120 times the free cash flow it produces, the coffee shop isn't a cheap stock.
Investors may just want to wait to see if consumers like what Starbucks is brewing.
