When James Freeman, the storied founder of Blue Bottle Coffee, launched his company in 2002 from a potting shed in Oakland, California, the premise was simple: To produce fresh, high-end coffee using single-origin beans, an alternative to what was then available on the commercial market.

It might come as some surprise, then, that the same roaster is now owned by Nestle--the $90 billion food giant that counts Stouffer's (frozen pizza) and Nescafé as subsidiaries.

On Thursday, Nestle announced that it would acquire a majority (68 percent) stake in Blue Bottle. Although terms of the deal were not disclosed, Blue Bottle says the cash will go toward continuing to expand across North America and Japan, where it already has locations in Tokyo. By the end of the year, the roaster aims to have 55 stores, up from its current 40.

Meanwhile, for Nestle, the acquisition is part of a broader strategy to attract more savvy Millennial consumers, and grow its business in the U.S. In June, the company acquired a minority stake in Freshly, a health food maker, and earlier this month it acquired the plant-based food startup Sweet Earth.

Interest in artisanal.

That Nestle took an interest in Blue Bottle reflects the burgeoning market for so-called "third wave" coffee. Once a small niche, third-wave makers now account for 15 to 20 percent of all coffee consumed in the U.S., according to the Specialty Coffee Association. Blue Bottle had already caught the eye of Silicon Valley's elite, raising some $120 million in capital from investors such as Twitter co-founder Ev Williams and Instagram's Kevin Systrom. Indeed, the entrepreneur-filled coffee arms race has attracted more than $300 million in venture capital since 2010, as techies come up with new innovations such as automated pour-overs and draft lattes in a can.

Yet some customers are now concerned that Blue Bottle, which has long held that mass-produced coffee is the enemy, could lose its edge under the Nestle umbrella. Certainly, it remains to be seen whether the business--which said it was on track to grow revenues by 70 percent this year--will continue to operate truly independently. "It feels like a sell out," says Colin Blaney, a New York-based video producer and coffee connoisseur who subscribes to Blue Bottle. "As with countless other small- to medium-size businesses that have been acquired by mega-conglomerates, there will likely be a compromise in quality."

Blue Bottle's CEO, Bryan Meehan, who is staying on post-merger, acknowledges to Inc. that these concerns are understandable. Prior to joining the coffee business, the Irishman had launched the organic food store Fresh and Wild in London; it was acquired by Whole Foods in 2004. "I see how big organizations think about small companies," he says, suggesting that his own experience could help Blue Bottle avoid the corporate-takeover fate. "I've been through this before, and I know what can happen."

It's certainly not the first time a startup billing itself as "artisanal"--that is, an indie alternative to mainstream corporate giants--has ended up selling to the latter group. In 2015, coffee enthusiasts were similarly up in arms when the specialty chain Stumptown Coffee Roasters agreed to be acquired by Peet's Coffee. At the time, Stumptown said the deal would help it to continue expanding with its "hub and spoke" strategy of opening stores around roasting facilities.

To be sure, craft businesses tend to have investors that are expecting big returns, even as the products are uniquely expensive to make. In an earlier interview with Inc., Blue Bottle's Meehan conceded that the cost of putting together a single package of the company's pre-ground "Perfect Coffee," which it began selling last year, has limited its ability to sell on some third-party sites. In many cases, "selling out" to a larger entity can help small craft businesses satisfy investor demands without disrupting the supply chain.

Staying true.

A concern that an artisanal startup could lose its integrity after an acquisition is not unfounded, though. Consider the San Francisco health bakery chain La Boulange, which sold to Starbucks in 2012. The coffee giant ultimately decided to shut down those bakeries in 2015 (it maintains the brand name). And when ice cream maker Ben and Jerry's sold to the consumer products giant Unilever for $326 million in 2000, the gourmet chain was forced to make unprecedented layoffs. It also reportedly altered some of its closely held political sensibilities.

Meehan insists this will not be Blue Bottle's fate. "We are a standalone entity," he says. "Nestle has a huge history, but what I'm interested in is the Nestle of the future. They're doing tremendous things for a business of their size." What's more, Meehan says that as part of the deal, he has veto power over any change Nestle might want to make to the company's product or organizational structure moving forward.

For its part, Nestle also stressed in a press release about the acquisition that Bottle Coffee would continue to operate as a standalone entity, as its "passion for quality coffee and mission-based outlook make for a highly successful brand."

Not everyone is convinced. "[James] Freeman has spent most of his life building a legacy that, in my opinion, has ushered in the best coffee that this country has ever seen," says Blaney, the Blue Bottle customer and video producer. "[He's sold it] to Nestle, a company that appears to stand on the opposite end of the spectrum."

Published on: Sep 15, 2017