Innovate or Buy? How M&A are shaping corporate innovation– October 02, 2017
It seems like every time you turn around, that cool brand you just discovered or that small, hip company you’ve prided yourself on buying for the past few years is being bought up by big corporate conglomerates. The recent one added to the list is Blue Bottle Coffee, which Nestlé just purchased for around $500 million.
The specialty coffee roaster, founded by James Freeman, follows in the footsteps of companies like Honest Tea, Bonobos, and Dollar Shave Club who all got acquired by large corporations. The trend for entrepreneurs not to take the traditional IPO exit, but opt for Mergers and Acquisitions has meant that markets are consolidating. This is especially true in the coffee sector, which is primarily controlled by JAB and Nestle. While Nestlé owned Nescafe and Nespresso, which could rival with JAB’s Keurig, Krispy Kreme, and Panera coffee lines, its portfolio was missing a brand that could compete in the third-wave coffee arena with Intelligentsia, Stumptown, and Peet’s. With Blue Bottle, Nestlé now has a player in the high-quality and artisanal world of coffee.
While a move like this will always be met with bemoans that Blue Bottle essentially sold its soul to the corporate devil, deals like this are not totally negative and can help boost innovation tremendously. The arrangement provides Blue Bottle with Nestlé’s capital and expertise, which can help the company as it forges the future of its products. According to the terms of the deal, Freeman and Bryan Meehan, the Blue Bottle’s CEO, will continue to hold the reins of the company, which is essential for the company to continue its success.
In fact this hands-off approach is the only way these acquisitions make financial sense to either party. Conglomerates purchase small companies because they offer customers something that the corporation could never be able to create. If Nestlé had the competency to produce a hip coffee roastery, it wouldn’t need to buy Blue Bottle but would create its own. Blue Bottle has cracked the coffee retailing code, with its successful cafés, brewing equipment lines, and packaged coffees. Nestlé only needs to step in where its expertise is needed like scalability.
As existing companies struggle to innovate, they should look to how these conglomerates operate. When they see they lack a competency, they acquire a company that has it in order to boost their position in the market. This means that a clothing company, for example, who has no expertise in sustainable fabric shouldn’t set off to figure it out themselves, but instead join forces with an emerging and innovative textile manufacturer. Partnerships like this, where established producers and budding entrepreneurs work together have synergistic effects that can revolutionize industries.
So if Nestlé sticks to the terms of agreement, Blue Bottle fans can really only whine about the acquisition over principle, because for consumers the deal should result in better coffee and products. And in the future when new companies take over cool emerging brands, as long as they allow them to keep operating as entrepreneurs and not force upon them the established corporate way of doing things, we should expect exceptional results.