COMPANY LAW PROJECT

Topic- Joint Venture of Nestle and

Starbucks

Submitted to- Dr. Rita

Submitted by- Riya
349/19
BcomLLB
Semester-8
Section-E
ACKNOWLEDGEMENT

I would like to express my special thanks of gratitude to Dr. Rita, my project in

charge, who guided me through the project gave valuable suggestions and
guidance for the completion of this project. He helped me to understand the
intricate issues in project making besides effectively presenting it. My project
has been a success only because of his constant guidance. I am highly indebted
to Prof. Rajinder Kaur, Director, University Institute of Legal Studies, for
providing me with the opportunity to be able to make this project. I would like
to express my gratitude towards my parents & friends for their kind co-
operation and encouragement which helped me in completing this project.

Riya
349/19
 Index
-Joint Venture

 Introduction
 Purpose of the Joint Venture
 Types of Joint Ventures
(i) Project-Based Joint Venture
(ii) Functional Based Joint Venture
(iii) Vertical Joint Venture
(iv) Horizontal Joint Venture

-Joint Venture of Nestle and Starbucks

 Introduction
 The business structure of Starbucks
 The business structure of Nestle
 The deal
 Why was the details closed?
 Impact of the deal on both businesses

-Conclusion
Joint venture
The ultimate goal of any business is to grow their bottom line (net profits) and
keep on expanding to new market areas, which would get them a larger
customer base and better resources. Commonwealth alliance program (CAP)
Advisor-focused business solutions, powered by people wrote in a report that
strategic alliance accounted for a total of 20% of the revenue in all of 2005,
which amounts to a total of $40 trillion. This figure is steadily growing in the
years as more and more businesses are growing uniting in order to survive the
global competitive environment.

The Companies (Amendment) Bill, 2016 has modified the explanation given
under the existing section 2(6) as follows :

(a) The expression ‘significant influence’ means control of at least twenty per
cent of total voting power, or control of or participation in business decisions
under an agreement;

(b) The expression ‘joint venture’ means a joint arrangement whereby the
parties that have joint control of the arrangement have rights to the net assets of
the arrangement

Introduction
It is no secret that one of the most powerful tools to grow a business is Joint
Ventures (JVs). JVs can be said when specifically, one person teams up with
another person or an agreement between a group of people or between business
entities so that they can expand their business and have a larger market
presence.
The origins of JV can be traced back to the 1920s. This concept was first used
by the American Companies in particular and people in other export nations
followed suit. This concept of doing business spread around the world at the
end of the II World War. In the 1909s the term “joint venture” gained popularity
as the markets of Europe and China opened up.

Purpose of the joint venture

Parties in a joint venture come together in order to attain their business goals
which would be harder or costly to attain independently. When a joint venture is
established with an ideal partner this helps the party to leverage the resources of
the other partner to gain access to new markets, sharing each other’s capabilities
or strengthen their position in the current market to diversify into new
businesses.

In a Joint Venture, two or more business entities come together to form a new
business entity that is supposed to conduct a specific business, and the
ownership, risk, and rewards of this business are shared among the co-venturers
in the ratio as defined at the time of the creation of the venture, therefore it leads
to merging of knowhow and resources of the two entities for a mutual benefit.

A few key aspects of the Joint venture form of arrangement need to be

looked at carefully:

 The purpose of the joint venture is defined. It can be limited to one

specific project and therefore time-bound, or can be an arrangement of
conducting a specific kind of business as a going concern and therefore
 not time-bound. In the case of a time-bound arrangement, the venture
comes to an end when the project underlying the same comes to an end.
 Joint venture may not have a specific name, basically, most ventures are
for a limited period, and therefore giving a name to the same might not be
a good idea. An example of the same could be the DSP BlackRock Joint
Venture that was set up for a period of 10 years after which the Joint
Venture was split.
 The members of the Joint Venture are sometimes called the co-venturers
 The books of accounts of a Joint Venture can be maintained separately if
it is a long run Joint Venture while they can also be merged with those of
the co-venturers in case it is a short run Joint Venture or the value of the
transactions is not too significant.
 Joint venture can come into existence through any of the following ways:
o A foreign company comes into a new market by acquiring an
interest in a local company or the opposite is also true when the
local company wishes to expand its business into new avenues, it
can buy some interest into the already present foreign entity
o However, there can be a totally new company created for a new
business project to be undertaken by the coventurers.
o At times the government also enters into joint ventures with
corporate entities for their skill and expertise.
 Joint venture is a separate legal entity and therefore enjoys all the benefits
of a company such as acquiring assets in its own name, limited liability
and so on.
Types of Joint Ventures

#1 – Project-Based Joint Venture

Under this type of Joint Venture, companies enter into a Joint Venture to
achieve a specific task, which can be an execution of any specific project or a
particular service to be offered together, Assignment, etc. Such collaboration is
usually undertaken between companies for an exclusive and specific purpose
only and, as such, ceases to exist once the particular project is completed. In
other words, these types of Joint Ventures are bound by time or a particular
project.

For Instance, Axon Limited, an industry pioneer in the development of

Residential projects, entered into an exclusive Joint Venture with Trump
Industries, an industry pioneer in the Marketing and Sales of Residential
projects, for their New Project, “Living Rise.” Under the said Venture, Axon
Limited will construct the Project “Living Rise,” and Trump Industries will be
the exclusive sales and marketing entity. Such types of Joint Ventures, which
are undertaken for a whole project, are examples of Project-Based ventures.

Example

Another example to understand this type of Joint Venture is reproduced below:

Cipla is a traditional pharmaceutical manufacturer and wants to enter the

booming biotech business. On the other hand, Biocon is a biotechnology firm.
Cipla intends to utilize the research and development resources of Biocon to
develop a particular drug for the treatment of some ailment. Now one way to
achieve this objective is to buy Biocon. Still, in that case, Cipla indirectly buys
many other areas in which Biocon caters, in which Cipla may not be interested.
It will also result in an expensive way of gaining the research capability that it
intends to gain from Biocon.

To make it a fruitful and synergized Joint Venture, the two companies, namely
Biocon, which has research capabilities, and Cipla, which has in place a
widespread marketing network, can come together and enter into a project-
based joint venture in which the two businesses come together for this one
activity and may not necessarily do anything else together in the future. By
doing such a venture, both can gain from each other’s resources.

#2 – Functional Based Joint Venture

Under this type of Joint Venture agreement, companies come together to

achieve a mutual benefit based on synergy in terms of functional expertise in
certain areas, which enables them to perform more efficiently and effectively.
The rationale companies focus on before entering such a Joint Venture is
whether the likelihood of performing better is more together than doing it
separately and more effectively.

Example

Company A specializes in the formulation business and has various patents

trademarked under its name but due to lack of funding the company is unable to
put such formulation to commercial usage. On the contrary, Company B is a
cash-rich Pharma company that lacks in-house patents but holds commercial
success experience and has adequate funding capacity. Together, these two
companies can mutually benefit and complement each other by entering into a
functional-based joint venture.
#3 – Vertical Joint Venture

Under this type of Joint Venture, transactions occur between buyers and
suppliers. It is usually preferred when bilateral trading is not beneficial or
economically viable. Normally in such Joint Ventures, maximum gain is
captured by suppliers, while buyers achieve limited gains. Under these types of
Ventures, different stages of an industry chain are integrated within to create
more economies of scale. Usually, Vertical Joint Ventures enjoy a higher
success rate and deepen the relationship between the Buyers and Suppliers,
which ultimately helps benefit the businesses by offering quality products and
services to customers at reasonable prices.

Example

Let’s understand the same with the help of an example:

Lincoln Corp has invested in certain machinery and capital instruments required
to produce Buyer specific products. Since Lincoln makes the investments
exclusively to meet the buyer’s needs (let’s say, Prawn International). By
entering into a Vertical Joint Venture with Prawn International, Lincoln Corp
can avoid the uncertainty associated with contracts, usually for a specified
period only, leading to discontinued business.

#4 – Horizontal Joint Venture

Under this type of Joint Venture, the transaction happens between companies in
the same general line of business. They may use the products from the Joint
venture to sell to their customers or create an output that can be sold to the same
group of customers. Managing a horizontal joint Venture is usually
cumbersome and often results in disputes as the alliance is between partners in
the same line of business. Also, these types of Joint Ventures suffer from
opportunistic behaviour between the partners due to being in the same general
line of business. Under such types of Joint Ventures, both parties equally share
the gains.

Example

Let’s understand the same with the help of an example:

Base International is an Indian company that specializes in the steel extrusion

business and caters to various industrial units. Frank LLC is a US-based firm
specializing in the moulding of steel frames which has application in Industrial
Units. The two companies decided to enter into a Horizontal Joint Venture
under which Frank LLC, the foreign partner, will offer technical collaboration
and foreign exchange components. At the same time, Base International, the
Indian counterpart, will make available its site, local machinery, and product
parts. Together with a new steel extrusion product, the two companies will offer
to their existing clients. Thus by this type of Joint Venture, both firms were able
to sell the product in multiple markets and gain from each other expertise,
thereby putting resources to better usage.
Joint Venture of Starbucks and Nestle
Introduction
The present generation has successfully set the trend for all casual meet-ups and
formal meetings to go along with a hot cup of coffee at a fancy café with a
delightful ambiance, with Starbucks being one of the go-to places. Even at
workplaces, sipping on a hot cup of coffee with the Nestle brand printed on it
seems quite a cliché. Hardly have we ever wondered about the two brands
coming together. With Nestle acquiring one of the businesses of Starbucks, let’s
dwell on the business aspects of the deal while enjoying a cup of coffee!

The business structure of Starbucks

Starbucks has been successfully using its business structure to facilitate its
business development. Starbucks, the largest coffeehouse chain in the world,
follows a matrix organizational structure which is a combination of both
horizontal and vertical structures with overlapping divisions. Starbucks is one of
the companies to successfully implement the matrix structure, which is suited
for companies with diversified products and services. The grouping of
departments is based on different kinds of business functions as well as based
on the type of product. With a global-wide presence in as many as 70 nations,
they have also optimized their geographical divisions. Each geographical
division is headed by an executive who has the responsibility and freedom to
incorporate business strategies for the profitability of the business in that
particular region.

With time, Starbucks has evolved its business structure to suit the present
demand of the market. It has made certain strategic acquisitions in order to
expand its business, such as its acquisition of Ethos Water and Best Coffee of
Seattle, thus making its organizational structure specific to the needs of the
business.

The business structure of Nestle

The business structure of Nestle is much similar to that of Starbucks as the
business for most of the food and beverage business is divided based on
geographical zones such as the AMS Zone (dealing with America), the AOA
Zone (dealing with Asia, Oceania, and Sub-Saharan Africa), EMENA Zone
(Europe, Middle East, and North Africa). They also have strategic business
units for different branches of products such as the Nestle coffee brand and
Nestle Health Sciences.

There have been various strategic moves taken by Nestle to venture into diverse
markets. Nestle ventured into the cereal market as a step to reformulate its
global product portfolio. In pursuance of this objective, Nestle has set up a Joint
Venture known as Cereal Partners Worldwide, which is a partnership between
Nestle and General Mills, that has established itself as a global cereal company
producing some well-known household cereals such as Cheerios, Chocapic, etc.
Similarly, in 2016, Nestle created a JV called ‘Froneri’ with PAI Partners to
merge Nestle’s European ice-cream business and PAI’s ice-cream business
R&R, making Froneri one of the world’s largest ice-cream companies. In 2019,
Nestle decided to sell its US ice-cream business to Froneri. With the said
transaction, the successful business model of Froneri would be extended to the
US model, thus enabling Nestle to establish global leadership for itself in the
ice-cream business.
The deal
On May 7, 2018, an agreement was finalized between Nestle and Starbucks by
which Nestle acquired the rights to market Starbucks Consumer Packaged
Goods and Foodservice products globally. By this, Nestle also acquired the
rights to market the products outside Starbucks coffee shops. This transaction
was initiated to provide Nestle with the opportunity to establish leading market
positions in the premium roast, ground, and portioned coffee businesses. The
deal was closed on August 28, 2018. Through the deal, the two companies will
work closely together on the existing Starbucks range of roast and ground
coffee, whole beans as well as instant and portioned coffee. Through the
alliance, Nestle also aims at capitalizing on the experience and value that both
the companies bring and to work towards innovation.

In the midst of the share buy-back process of Nestle, the deal was finalized for
the slump sale of the Consumer Packaged Goods and Food Services products
of Starbucks for an upfront payment of USD 7.15 Billion to Starbucks along
with additional royalties, for the right to sell Starbucks products around the
globe. This deal helped Starbucks to raise capital from $15 billion to $20 billion
which is intended to use to give back to its shareholders in the form of
dividends and buy-backs by 2020. The transaction was a smooth and efficient
integration, without the transfer of any fixed assets.

The agreement covers Starbucks packaged coffee and tea brands, excluding
Ready-to-Drink products and all sales of any products within Starbucks coffee
shops. After the finalization of the deal, it was stipulated that over 500
employees of Starbucks in the US and Europe will join the Seattle and London
based Nestle office respectively.
Why was the deal closed?
The deal is a big win for Starbucks as Nestle has the capacity to expand the
coffee giant’s name into diversified markets. By this deal, Nestle would want to
secure its position as a leading coffee brand by strategically integrating with
Starbucks as well as promoting it. This deal also signifies the integration of two
direct-to-consumer brands that convey their value directly to the consumers.
There is also the incentive for Nestle to tap into the best resources of consumer
based coffee and increase the profits. Considering it from the perspective of
competition from other players, this deal would enable the two strong entities to
handle the distribution, control, and marketing of Starbucks, thus increasing
their outreach and their brand value as two separate entities as well. Also with
Nestle being in the market for more than three decades worldwide and being
one of the most trusted coffee brands, promoting another brand is all the more a
lucrative option for both Starbucks and Nestle.

Impact of the deal on both businesses

By acquiring the stake of Starbucks, Nestle aimed at exploring growth
opportunities in the premium products offered by Starbucks. As per a statement
of the CEO of Starbucks, this alliance will help more and more people around
the globe to enjoy the Starbuck experience at home through the wide reach of
Nestle. This synergy was a significant step for Nestle as post the deal, Nestle
would bring three coffee brands to the market. Also, both the players being
global leaders in the coffee business would help Nestle in outsourcing
sustainable coffee for a huge group of consumers.
Conclusion
So we understand that the Joint venture is most of the times a limited period
agreement between two or more business entities but at times it may not be time
bound. The purpose of the venture is clearly defined and the risk and reward
sharing ratio is clear in the agreement to the joint venture. Further, Joint
Venture is more or less another form of a business combination such as mergers
and acquisition and in theory even in they are defined distinctly, in practice,
they tend to have a lot of overlaps.

Acquisitions and mergers are the effective means for the acquisition of
resources, diversifying into different markets as well as having a sustainable
competitive advantage over other players in the same market, as is evident from
the present transaction. The creation of joint ventures as done by Nestle helps
the companies to solely focus on a particular portfolio of products without the
added responsibility of incorporating a whole new entity, along with the
advantages of sharing resources, skills, and funds to sustain the business. It is
through such integrations that innovations in products take place, breaking the
stagnation of monotony with the introduction of fresh and exciting products.
This no doubt involves a lot of strategic planning for ensuring greater revenue
and outreach to the maximum number of people. Thus, such integrations are
always welcome by the end consumers.
Reference:
1. https://www.icsi.edu/media/webmodules/publicatio
ns/A13ChapterPages.pdf
2. https://consumergoods.com/expansion-brewing-
nestle-acquire-seattles-best-coffee-starbucks
3. https://www.educba.com/types-of-joint-venture/
4. https://blog.ipleaders.in/strategic-brunch-starbucks-
nestle/
5. https://www.nestle.com/media/pressreleases/allpress
releases/starbucks-rtd-coffee-beverages-southeast-
asia-oceania-latin-america
6. https://stories.starbucks.com/press/2018/starbucks-
and-nestle-form-global-coffee-alliance/