Starbucks CEO sees Nestle deal as way to return value to shareholders

Starbucks CEO Kevin Johnson said Monday that its $7.15 billion deal with food giant Nestle will help return value to its shareholders

“This will increase the $15 billion we have committed to [return to shareholders] … to $20 billion over the next three years, cash returned to shareholders in the form of dividends and buybacks,” Johnson said Monday on CNBC’s “Squawk on the Street.”

When asked by CNBC’s Jim Cramer about why the coffee chain was not funneling the proceeds from the deal into growth initiatives rather than doing stock buybacks, Johnson highlighted the growth the company has seen.

“We have had great success over the five years or so with K-cups on the Keurig platform,” Johnson said. “This opportunity brings Starbucks coffee to the Nespresso platforms globally and there are more households in the install base of Dolce Gusto and Nespresso than Keurig.”

The deal gives Nestle the rights to sell Starbucks’ products, including single-serve coffees and teas as well as bagged beans, around the world. Nestle will continue to pay royalties to Starbucks after the initial fee.

“For Starbucks, the deal will help to drive brand recognition outside of its core North American and European markets as Nestle ramps up expansion using its distribution capacity,” Neil Saunders, managing director at GlobalData Retail, told CNBC via email.

Starbucks has struggled with slow sales in the U.S. for several quarters and relinquishing its retail business to another company allows it to focus more on its cafes.

In addition, Nestle has agreed to take on about 500 Starbucks employees who work in the consumer packaged goods segment as part of the deal.

“While Nestle’s coffee business is immense, its product line didn’t really align with the U.S. consumer market and Nestle lacked the star power that Starbucks brings,” David Henkes, principal at Technomic, told CNBC via email. “In my mind this is really about giving Nestle a much better foothold in the U.S. coffee market and creating a counterweight to JAB Holdings, which through its acquisition of Keurig/Green Mountain, Mondelez’s coffee business and others has come to be the primary coffee source for millions of consumers each day.”

JAB Holding, a privately held company and investment arm of the wealthy Reimann family, owns such brands as Keurig Green Mountain, Krispy Kreme Doughnuts and Peet’s Coffee & Tea. The company, which has been steadily building a coffee and breakfast empire over the last five years, scooped up Panera Bread for $7.5 billion last year.

Nestle has made plans to focus on higher-growth areas like pet care, infant nutrition and coffee. It sold its U.S. candy business to Italy’s Ferrero for about $2.8 billion in January.

“Look, we are excited about pet food, too,” Mark Schneider, CEO of Nestle, told CNBC. “This is one of the other growth categories we are very much involved in that market. So a lot of interesting things underway there.”