Is Nestle Taking Aim at Starbucks' Territory?

It's hard to imagine any company being a real threat to a chain as dominant as Starbucks (NASDAQ: SBUX), but the restaurant industry is a fickle space. In this segment from the Motley Fool Money radio show, host Chris Hill, Supernova and Million Dollar Portfolio's Matt Argersinger, Total Income's Ron Gross, and Motley Fool Pro and Options' Jeff Fischer consider whether Starbucks' plans for its artisanal Reserve chain are in any danger now that upstart Blue Bottle Coffee has the backing of global Fortune 500 company Nestle.

A full transcript follows the video.

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This video was recorded on Sept. 15, 2017.

Chris Hill: Nestle is known for its wide portfolio of consumer brands, including Stouffer's frozen pizza, Friskies cat food, and Kit Kat candy bars. This week, Nestle went for the high end of the coffee market by acquiring a majority stake in Blue Bottle Coffee. Jeff, how worried should the people at Starbucks be?

Jeff Fischer: Not unworried. Is that a word?

Ron Gross: It is now.

Fischer: [laughs] I would have some concern even before this, because specialty, higher-end coffee chains are growing in popularity and growing in number. That said, there are going to be about 50 Blue Bottle cafes by the end of this year, and they're mostly on the coasts. Nestle bought a 68% stake for about, reportedly $500 million, with plans to grow the store base significantly. So, Starbucks should have its eye on this trend, and it does. It's offering its own high-end store experience and coffee experience as well. But, another issue would be the way a brand ages over time, and Starbucks has been hot for so long that it's bound to cool. And it has in many regards. If something new comes along and replaces it as your daily habit, that's hard to then get it back in their favor.

Hill: We've talked before about how the number of public companies has dwindled over time, and one of the interesting parts of the Blue Bottle Coffee story is, James Freeman, the founder, he was asked in the wake of this deal, why wouldn't you look to go public? And he said, "Everything that I've seen and read, it seems like a way of living in hell without dying."

Gross: [laughs] That might be an exaggeration, but the sentiment is well taken.

Hill: James Freeman, not someone who's aspiring to become a public company CEO.

Fischer: No. He was a clarinet player before this, and he followed his other passion of coffee. It's disappointing, though, because Blue Bottle is a company I was watching, hoping that someday it would go public, and this is another case where investors like us are taken out of the mix as far as getting rewarded from a growing company. That said, he also said, we're going to maintain control, we're not going to be selling Nestle bars in our cafes, we're going to be doing everything we want to do. That sounds a little naive to me, when you've sold 68% of your company to a giant like Nestle who's going to want to then drive your results.

Chris Hill owns shares of Starbucks. Jeff Fischer owns shares of Starbucks. Ron Gross has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Starbucks. The Motley Fool has a disclosure policy.