Starbucks has been working on a closely guarded secret for 20 years – Via Ready Brew instant coffee. A month after its launch, Nestle, the maker of Taster’s Choice, has begun an aggressive campaign against the new interloper. This campaign includes free samples of Nescafe’s “sticks,” direct mailings, and Web commercials.

QUESTIONS:

1. How should Nestle account for the free samples of coffee?
2. Starbucks rolled out Via after 20 years of secretive internal research and development (R&D). Assuming that Starbucks spent a million dollars each year for the R&D, how would this be reflected in their financial statements?
3. Use some of the following facts laid out in the article:

Assume that Starbucks and Nestle are the only major companies in the instant coffee industry, which generates $21 billion worldwide in annual sales with 5% in the U.S.

Starbucks sells a 12-pack of single-serve pouches for $9.95.

Nestle sells seven 12-packs of single-serve pouches for $12.16.

If Nestle sells seven 12-packs for every one 12-pack sold by Starbucks, what amount of U.S. sales would each company share? How many pouches should be produced by each company to meet this demand?

SOURCE: Andrejczak, M. “Instant-Coffee War: Nestle Takes Aim at Starbucks,” Wall Street Journal – Market Watch (Retrievable online at http://www.marketwatch.com/story/instant-coffee-war-brewing-nestle-vs-starbucks-2009-11-18)