30 Days of Blog - Day 12 - Nestle and acquisitions

Welcome to day 12 of 30. The past day has brought another fun topic to the forefront again, and I figure it will be good to talk about it a little. @Normanito1 on Twitter said he would be interested in my opinion, so here you go Norm!

I am of course talking about the Nestle / Blue Bottle acquisition.

After watching Chris Baca's Youtube video as well as numerous news reports on this topic I realized it is a little more complicated than simply taking a moralistic stance on what is happening. In the past few years we have seen buyouts and consolidation of medium-large specialty coffee companies, especially newsworthy was JAB holdings snagging up Intelligentsia, Stumptown, Peet's, and Green Mountain/Keurig. After this big buying spree I was asked by numerous people what I think this means for the industry.

A couple of things tend to happen after acquisitions like this. Product distribution goes up, and product quality plateaus or falls. By having a massive multinational company behind your brand suddenly increases in buying power, marketing reach, and recognition. However, by being owned (or partly owned) by profit focused corporations, your finances usually get more scrutiny and spending and margins tend to get thinner. 

Let me start off in regard to Blue Bottle/Nestle to say that this is all still very fresh and few of the details are known to the public so far. My first instinct when reading about this purchase was that Blue Bottle had taken on venture capital investments around the San Francisco area in the past, and that perhaps these interests were looking to get their returns. I really don't know for sure, but it is a possibility. What I think the buzz is about in this regard is more about the actual company doing the buying. Nestle is a polarizing company for many because of who they are. They are massive. They may be contributing to problematic issues in "third world" countries. They value profit. They probably have done terrible things. But guess what? You almost certainly buy some of their products from time to time. 

From what I have read in news articles, Nestle is going the same route as JAB and keeping the existing management and structure of the company. That makes sense. Why would you buy into a company for 1/2 billion dollars and then change what is already working? If it needed huge change I doubt they would have paid so much money for it in the first place. 

Now let's talk about selling. This just seems like good business to me, especially if your goal was to have a salable company. It makes sense from a business standpoint. I think the place where many of us get hung up is that Specialty Coffee was not so long ago rooted in "counter culture" (coincidence?) behavior. We were the little guys fighting against the corporate machine. We didn't always do things for the money, but for the love of making the best coffee possible. This behavior influenced how we source coffee, work at origin to improve the supply chain, want to improve the lives of farmers and producers, and ultimately have created a rich community around the world with quality coffee as one of the primary things that brings us together. Because we focused so much on coffee itself, it became easy to take the moralistic approach regarding the rest of the world.

Interestingly these roots needed some of the corporate knowledge to make better businesses that could thrive and grow. There would always be cross over because you simply can't stay in business solely based on good intentions and integrity. Trust me, I've seen plenty of fantastic places close their doors because they were so intent on "doing the coffee right". 

Anyway, not so long ago we were all singing the praises of doing it ourselves and not "selling out". Selling out is always a blanket term that means anything from literally selling your company to Starbucks, to selling lower cost coffee to appeal to your local customer demographic. I dislike this term because it is most often applied to someone who is making a business decision, and most often we know little about the inner workings of how and why it is happening. I've always seen it as a way for petty people to feel good about themselves. 

A great example is George Howell. From what I understand George created the original "Frappuccino" a long time ago, and later sold the name and rights to Starbucks. Prime example of "selling out" I suppose, but George has since become one of the most recognized people in coffee, with a massive integrity toward great coffee. He was able to create another brand, his own name, into a coffee company that is soaked in prestige. Besides, who cares anymore? No one that I know.

So the question then becomes "Why does it matter in the first place?"

It's hard to argue that Frappuccinos changed the face of coffee, but something else did happen. More people started loving coffee. Even though they are drinking a sugary, frozen version of coffee, they still associate it with specialty coffee and cafes. And that's the point. Bringing better appreciation of coffee to the masses. Back then it converted non coffee drinkers into, well, quasi-coffee drinkers. But in the case of Blue Bottle and other acquisitions it has the chance to change "functional" or low quality coffee drinkers into "appreciative" or middle quality coffee drinkers on a much larger scale. 

Many of these companies are actively opening multiple stores in larger, underserved cities. They are placing products like ready to drink cold brew in supermarkets and retails all around the country (and possibly beyond). Places you would never have run into a Stumptown "stubby" if they had not sold. 

Let me put it like this: We have had a pretty low bar to jump over in order to create a better coffee experience for people in the past. It was so easy in fact, that even with bad service standards we could still be successful because the coffee was better (and a little hipster push didn't hurt business). The biggest companies didn't seem to care what we did in our little niche and so we kept pushing to grow and grow. But what happens when you grow and take more and more market share? The big guys (or gals [but let's be honest, this is corporate America]) take notice and start figuring out what you are doing. And guess what overcomes years of not doing it yourself? Money. That's exactly what these companies have a lot of. Either they will pay a ton to have someone create it for them, or (the better choice) they will just buy the companies that have been making the waves.

What this means is that specialty coffee, or at least a reasonable version of it, is likely to become much more mainstream. I just talked about raising the expectations of coffee to the masses the other day. Specialty coffee, as a product quality standard, is likely not stagnant but rather growing. That growth just might be significantly different from what you thought it would be. What these companies will have to concern themselves with is avoiding losing product quality as they grow, which is often considerably harder than it may seem.

It's not all doom and gloom for the small business owner luckily. Because while these larger companies will get more and more reach, they will grow the demand for high quality coffee experiences. It may not be the easiest for you. You will have to innovate, push your abilities, and reevaluate how you serve coffee, because the bar to beat will not be as low. You won't be able to coast and get by with bad service. But if you have good coffee standards and service you might find yourself selling even more because the expectation has grown. 

I find that people still tend to want to support local businesses. They still want something special. So now is your chance to do just that. 

So moral of the story is if you ever have a chance to sell part of your company for half a billion dollars, let me know how long it took to get to that decision. I can't blame James really, just like you couldn't blame Doug Zell and Dwayne Sorenson for selling when JAB snagged them.

I'm sure this post will be plenty controversial, but that's my point of view.

Thanks for reading, and hopefully tomorrow will be less dramatic.

Pete

Posted on September 15, 2017 and filed under Blog.