Nestlé Targets High-End Coffee by Taking Majority Stake in Blue Bottle

By MICHAEL J. de la MERCED and OLIVER STRAND
The NY Times
September 14, 2017

In 2002, James Freeman gave up on being a professional clarinetist and began pursuing his other passion, roasting coffee.

Mr. Freeman started out in a 183-square-foot potting shed in Oakland, Calif., and named his newborn business Blue Bottle Coffee, after a storied Viennese coffee house. Fifteen years later, Blue Bottle has grown beyond a one-man coffee shop. It is now one of the best-known purveyors of artisanal coffee that, in Mr. Freeman’s words, doesn’t taste like “flea shampoo.”

And it now has a huge new owner: Nestlé, the Swiss food giant, which announced on Thursday that it had bought a majority stake in Blue Bottle.

It is one of the surest signs yet of how so-called third-wave specialty coffee — the kind that inspires almost monastic devotion to pour-over brews and perfectly steeped drinks — has become a hot business.

The rapidly expanding niche accounts for 15 to 20 percent of coffee consumed in the United States, according to the Specialty Coffee Association. Perhaps more important than the sector’s rapid growth is that it commands higher prices and generates bigger profit margins.

That has drawn the interest of big business. Starbucks has introduced its upscale Reserve brand of coffee bars to fight off upstarts, and JAB Holdings, a family-owned European conglomerate, has been assembling a coffee empire that now includes the mainstream Jacob Douwe Egberts, Peet’s Coffee & Tea brands and Stumptown Coffee Roasters, a high-end mainstay.

Taking a majority stake in Blue Bottle will help Nestlé expand an existing foothold built around the Nescafé and Nespresso line of products to a flourishing new industry with a highly dedicated consumer base (read: millennials).

The investment is also meant to shore up the Swiss conglomerate’s presence in North America, where it has struggled.

For Blue Bottle, the deal not only brings in a major new backer with products that include KitKat chocolate bars and Stouffer’s frozen pizzas. Having Nestlé as a majority owner will also help Blue Bottle buttress its expansion plans, which run from opening new outlets across North America and Asia to selling roasted beans and New Orleans-style cold-brew drinks in stores.

“Their commitment to us was, ‘We love what you do, we want to help you grow,’ ” Mr. Freeman said in a telephone interview on Wednesday. “One of the biggest food companies in the world has really voted in favor of very delicious coffee.”

Under the terms of the deal, Nestlé is acquiring 68 percent of Blue Bottle; the coffee company’s management and employees will own the rest. Neither side would disclose financial terms.

Although Blue Bottle is one of the most important players in the third-wave coffee sector, it has distinguished itself from its rivals in significant ways. It has spurned many of the hallmarks of high-end shops — barista competitions, lengthy travelogues about journeys to find the perfect small coffee farm — while emphasizing the aesthetics and experience of a well-prepared cup.

The strategy is a reflection of the company’s founder, a soft-spoken, classically trained musician who began roasting coffee as a hobby while on the road with traveling orchestras. Mr. Freeman’s approach has less of the rebellious rock ‘n’ roll attitude displayed by competitors like Stumptown, and more of the quiet calm that one might associate with a slowly but well-brewed cup of coffee.

Other people in the industry have derided Mr. Freeman for what some consider the florid language that Blue Bottle uses in its marketing materials and for a perceived lack of seriousness. But Mr. Freeman’s approach has drawn fans, particularly among customers who are either unfamiliar with, or disdainful of, the sanctimony of other high-end coffee purveyors.

“I notice in other places they’re friendly toward the younger hipster types but to the older folk, they’re a little dismissive,” said Michele Carlstrom, a customer at a Blue Bottle store in Brooklyn.

Blue Bottle stores are clean and tastefully modern, largely because of Mr. Freeman’s enthusiasm for Japanese aesthetics. And the company has opened most of them in areas convenient to professionals, including the Ferry Building in San Francisco and Rockefeller Center in Midtown Manhattan.

“I guess if you’re thinking about going to have the most luxurious coffee in the morning, we always come here,” said another Brooklyn customer, Zahra Tangorra. “They pay attention. It’s a refined, nice product. It’s also just a good, lovely, neighborhood vibe.”

Blue Bottle has also helped drive trends within the industry, particularly in the case of cold-brew iced coffee.

The company’s approach has fueled enormous growth. Blue Bottle expects to nearly double its store count this year, to 55 outlets from 29. And it has continued to develop ready-to-drink products, as well as an online subscription business for its roasted beans.

Its ground coffees include blends that cost $17 for 12 ounces, to “single-origin” coffees that retail for $40 for the same quantity. By comparison, Dunkin’ Donuts’ “Original Blend” costs $8.99 a pound.

Mr. Freeman and Blue Bottle’s chief executive, Bryan Meehan, said they expected a 70 percent increase in sales this year.

Although most of the company’s existing stores are in the United States, Blue Bottle has managed to crack one of the fussiest markets for high-end coffee: Japan, where it now runs six stores. Mr. Meehan recalled how just the announcement that it was opening a roastery in Japan attracted hundreds of barista applicants.

Blue Bottle’s fan base extends beyond the customers in its shops. In recent years, the company has raised more than $100 million from investors that have included big funds like Fidelity and Google’s venture arm and technology moguls like Kevin Systrom, a founder of Instagram, and Ev Williams, the former chief executive of Twitter.

The fervor for the company led to what Mr. Meehan said were almost weekly approaches by financial suitors. Then in February, Mr. Meehan received a call: Would he be interested in meeting with Mark Schneider, Nestlé’s chief executive?

Mr. Meehan and Mr. Freeman took the Nestlé chief on a tour of some Blue Bottle cafes in Brooklyn. Over lunch, Mr. Schneider made his case, saying his company was serious about wanting a partnership.

Months later, Mr. Freeman was at Nestlé headquarters on Lake Geneva, where executives eagerly demonstrated their own knowledge of the coffee business.

For Nestlé, which has been under pressure from investors like the hedge fund manager Daniel S. Loeb, Blue Bottle is the latest effort to refresh the conglomerate’s product line. In the past few months, it has acquired start-ups like Sweet Earth, a maker of frozen vegetarian foods, and Freshly, a service that delivers healthy meals.

Increasing coffee sales, particularly in North America, has been a priority for Nestlé for the past three years, an effort that began with a big push for Nespresso.

Nestlé has not previously had a presence in the high-end coffee market. But in courting Mr. Freeman and Mr. Meehan, the company emphasized its 151-year expertise in selling consumer goods and its vast international reach.

Crucially, Blue Bottle will now probably never have to deal with going public in a stock offering, a prospect that appeared to horrify Mr. Freeman.

“Everything that I’ve seen and read, it seems like a way of living in hell without dying,” he said.

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