- Nestlé acquired a 68% stake in Blue Bottle Coffee in 2017
- It recently closed its second-oldest store in San Francisco, shortly after launching a ‘craft’ instant product
- Nestlé is targeting the premium at-home market without compromising on convenience
WHEN NESTLÉ bought a majority stake in specialty coffee pioneers Blue Bottle Coffee, it wasn’t entirely clear what would happen next.
With its steadfast commitment to serving only the best-quality coffees – sometimes using an iridescent syphon – the latter had raised the bar for what specialty could be, not just in its native United States, but in Asia too. In 2015, eager customers were reportedly waiting up to four hours for a cup of coffee from Blue Bottle’s Tokyo store.
Nestlé placed huge value on the brand. Its 68% stake cost somewhere in the region of $700 million, putting it among the company’s largest acquisitions of the decade. However, anyone who thought it would be business as usual has since been proved wrong.
Blue Bottle prompted a collective gasp in the coffee industry last October when it announced the launch of a “craft” instant coffee, claiming to have “cracked the code” and made the “espresso machine obsolete”. This was followed by news last week that it would be closing its second-oldest location in San Francisco, 15 years after opening.
The launch of an instant coffee range and the rolling back of physical stores have Nestlé’s prints all over them. The Swiss food giant already dominates the instant coffee market, with its freeze-dried Gold range boasting over half a century on the shelves.
Now, by leveraging a well-known brand in the specialty coffee space, Nestlé appears to be after the more discerning consumer. It recently collaborated with specialty coffee brands in the UK for its “independent coffee shop” line and has added an “exceedingly rare” small-batch coffee from Yemen to its instant range.
By directly controlling Blue Bottle Coffee, Nestlé has the power to use the brand however it wishes. The question, however, is whether there is genuine innovation taking place – or if it is just another marketing masterclass by one of the world’s largest corporations.
Distribution, not innovation
Innovation in coffee is rare, particularly when it comes to instant. Pioneered by Nestlé’s own coffee arm, Nescafé, the format has changed little since Swiss chemist Max Morgenthaler developed it at the behest of the Brazilian government in the 1930s.
Its purpose was to provide ultimate convenience, doing away with the need for grinders, scales, and fancy brewing equipment. All instant coffee required was hot water and a cup. Therefore, by its very nature, the scope for what can be changed is limited.
“Freeze-dried and spray-dried ‘instant’ coffee is the norm and has been for decades,” says Glen Poss, the founder and CTO of Disruptive Coffee Technologies. “The tech end is pretty much the same today.”
In the case of Blue Bottle Coffee, he explains that any “innovation” stems from the name, rather than the product itself. “Technically it’s just another of any ‘premium’, freeze-dried instant coffee. Its base stock might be a ‘premium’, but what it has is the name. Blue Bottle has an image with a name that is related to quality. It speaks to the café crowd and that age group.”
Indeed, despite claiming to have worked on its craft instant for several years, Blue Bottle only admits to two factors that make it stand out: extraction and drying.
“Taking a gentle approach to extracting by using milder temperatures and pressure, and treating the coffee more delicately and as purely as possible, the quality of the output improved exponentially,” the company stated in a press release. “Blue Bottle also lengthened the freeze-drying process, which results in a higher quality product and ultimately a better-tasting cup.”
To Jake Leonti, a food & beverage expert and editor-in-chief of CoffeeTalk Magazine, looking to Nestlé’s acquisition as a springboard for instant coffee innovation misses the point.
“Nestlé is already a master at distribution around the world; they are not masters of innovation,” he explains. “That’s why they buy companies that have already done something innovative. They bought Blue Bottle to get into cold brew and to have a high-end specialty brand to play with.”
Instead, he suggests that innovation comes from its decision about which coffees to use. “The leap that Blue Bottle has made is that they are not just putting blends or less sophisticated specialty coffees in instant format,” Jake explains.
“Blue Bottle is taking one of the most expensive coffees in the world and selling it as instant. This goes against all other strategies around this format and it could change not only how we think about instant but how we create value in coffee in general. That’s the innovation.”
Dominating the at-home market
This dynamic also goes some way to explaining why Blue Bottle Coffee has started closing its stores. In addition to the most recent closure in San Francisco, it completely pulled out of Miami in 2019. It also shut down its Oakland-based wholesale operation in 2021.
“The value is already in the brand,” Jake says. “The distribution channels are already paved, now they have a new car to drive through them. Nestlé is much more interested in selling a finished product through their existing distribution channel rather than operating cafés – they have become more of a liability than an asset.”
Even before the outbreak of Covid-19 and the social distancing measures that ensued, the at-home market was rising considerably. In the UK, most people (65%) stated a preference for drinking coffee at home in 2019. A year later, this had grown to 80%.
Nestlé clearly understands the value of retail and, in particular, the at-home coffee market. Hot on the heels of its Blue Bottle Coffee acquisition, it paid Starbucks $7.1bn for exclusive rights to its branded retail packaged coffee. In 2021, via its capsule brand Nespresso, Nestlé invested more than $100 million in expanding its production centre.
Jake believes the trend of scaling down Blue Bottle’s coffee shops and ramping up the home market is therefore likely to continue.
“I would not be surprised if they continued to shrink their footprint of retail locations in the US, while focusing more on direct-to-consumer products,” he says. “They will probably continue with the shops in Japan and keep one or two locations in major US cities.
“Coffee shops are heavy in up-front expenses and human resources – two of the most challenging commodities in the current climate. Consumer products are not heavy in either of those, which makes products very attractive.”
However, Blue Bottle stores won’t be disappearing for good anytime soon. In order to make the value proposition of its craft instant coffee work, it needs a physical reminder of why consumers should fork out more for jars featuring the little blue logo. Otherwise, it is just another instant coffee crowding the shelves.
“What Nestlé is looking to do, in my opinion, is to dominate all segments of the coffee market,” Glen adds. “When you look at Blue Bottle it’s just a brand – but it is a good brand that has a great image. What Nestlé is doing is taking that brand that used to be only in café and putting it into people’s homes. It is changing the rules – again.”
