Global food heavyweights are pulling out of the coffee franchise business one after another.
As recently as 5 to 6 years ago, global food giants who rushed to buy cafes, saying they had to "expand offline touchpoints to survive," are now clamoring to sell, even "at a fire-sale price."
On the 2nd, according to Reuters and the investment banking (IB) industry, Nestle, the world's largest food and beverage corporations, recently selected Morgan Stanley as an adviser and is reviewing various strategic options, including the sale of Blue Bottle Coffee. It did not disclose specific sale options or an asking price.
Nestle acquired a 68% equity stake in Blue Bottle Coffee in 2017 for about $425 million (about 980 billion won). At the time, Blue Bottle Coffee was called the "Apple of coffee" and was considered a brand leading the specialty coffee trend. The total corporations value estimated at the time of the transaction was about $700 million. Experts predicted that Nestle will put Blue Bottle Coffee on the market at a significantly lower price than eight years ago. In other words, a loss-cut exit.
Coca-Cola is also exploring the sale of Costa Coffee, the U.K.'s largest coffee chain. Coca-Cola bought the brand in 2019, investing an astronomical 3.9 billion pounds (about 3.5 trillion won). The price now being discussed is around 2 billion pounds (about 3.5 trillion won). Compared with the acquisition price, the corporations value has been cut in half.
The Blue Bottle Coffee case is a symbolic event that shows the gap between maintaining brand philosophy and business reality. Blue Bottle was a premium brand that put forward a hand-drip extraction method, in which a barista brews coffee by hand, and sleek interiors. It is the approach most disliked by big companies that prioritize profitability and operational efficiency. Introducing an automated system that pulls espresso at the push of a button, like Starbucks, would damage Blue Bottle's brand identity, while sticking to the existing method makes it hard to scale the brand quickly. Eight years after the Nestle acquisition, the number of Blue Bottle stores remains stalled at just over 100 worldwide. It pales in comparison to Starbucks, which has 40,000 stores worldwide.
According to analysis by market research firm GrocerKeypedia, Blue Bottle failed to meet the basic financial benchmarks set within the Nestle group. In particular, it showed low turnover and high labor costs. Experts added that Nestle CEO Philippe Navratil's declaration right after taking office that he would "reduce the share of physical retail (offline stores)" is not unrelated.
Corporations like Nestle or Coca-Cola are familiar with B2B, in which products are mass-produced in factories and distributed through networks, or with an asset-light model that minimizes hiring and facility expansion. Nestle's flagship products such as instant coffee, and Coca-Cola's carbonated drinks, are highly efficient businesses with operating margins of 15% to 25%. By contrast, offline cafes, at best, leave single-digit margins.
According to U.K. retail analysis outlets World Coffee Portal and Caterlyst, Costa Coffee's 2023 revenue was 1.22 billion pounds, up about 9% from the previous year (1.11 billion pounds). In appearance, it is growing. But fundamentals went backward. Pretax profit, which reached 240 million pounds (about 420 billion won) in 2022, flipped to a loss of 9.6 million pounds (about 17 billion won) in just one year. Profit shrank by 250 million pounds (about 440 billion won) in a year.
Franchise operations that must keep stores in pricey retail districts and employ thousands of baristas are a textbook fixed-cost-heavy business model. This year, tariffs and materials and supplies prices have also surged. Mondelez International, the U.S. confectioner known for "Oreo," completely exited last October by selling its entire 17.6% equity stake in JDE Peet's, its coffee business institutional sector, to investment firm JAB Holdings for about 2.16 billion euros (about 3.2 trillion won. Mondelez said, "We will focus on the snacks and biscuits we do best." The calculation is that stocking supermarket shelves with cookies is far more profitable than the headache of managing coffee shops.
Instead of shutting the Blue Bottle business entirely, Nestle is strongly considering selling store operating rights while keeping ownership of the brand (IP). The strategy is to keep using the Blue Bottle brand for Nespresso capsule coffee and whole-bean sales. Since 2022, Nestle has already launched premium instant coffee under the Blue Bottle brand and rolled out Nespresso-compatible capsules, emphasizing an image of "coffee to drink at home." Coca-Cola is also likely to retain canned coffee and vending machine business rights even if it sells Costa.
Reuters, citing IB industry sources, said, "Going forward, global food companies will return to a model where, rather than taking on the risk of operating stores themselves, they leverage strong brand power to dominate shelves at supermarkets and convenience stores."