Commentary

Cola-Cola Jolts Into Coffee With $5.1B Purchase Of U.K.'s Costa

Coca-Cola is paying Whitbread $5.1 billion for the Costa Limited coffee chain, which has grown to nearly 4,000 outlets in more than 30 countries around the world since its founding in London in 1971. 

As Coca-Cola points out in a subhead of the press release announcing the deal this morning, the acquisition “Offers Opportunities for Expansion of Costa Brand in Multiple Channels and Formats.”

It also “adds to Coca-Cola’s drive to diversify away from fizzy drinks and expand its options for increasingly health-conscious consumers, after countries started introducing sugar taxes,” write Reuters’ Kate Holton, Martinne Geller and Sangameswaran S.

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“Beyond coffee shops, Coca-Cola CEO James Quincey, himself a Briton who is familiar with the Costa brand, said Costa would provide an important growth platform ranging from beans to bottled drinks in what is one of the world’s fastest-growing drink categories, growing 6%,” they observe.

Indeed, “Whitbread had plans to spin out the Costa brand, but the sale to Coca-Cola has come as something of a surprise to many in the market, given that Coca-Cola currently has no presence in coffee. That lack of a presence is exactly why Coca-Cola wants to buy Costa, however,” writes Will Martin for Business Insider.

“The deal was unanimously agreed by the Whitbread board to be in the best interests of shareholders, the company said in a statement. It acquired the chain in 1995, for £19 million when it had only 39 shops,” CNBC’s Matt Clinch reports.

“Founded as a roastery in London 47 years ago by two brothers, the company now trails only Starbucks and McDonald’s in its number of worldwide coffee locations. It has more than 2,400 stores in Britain and 1,400 in other markets around Europe and Asia, as well as 8,000 Costa Express self-serve machines,” writes Michael de la Merced for the New York Times.

The deal is “priced at a punchy 16.4 times Costa's latest annual earnings,” CNBC’s Clinch writes. “Coca-Cola are one of the few companies in the world that could justify the valuation,” Hargreaves Lansdown equity analyst Nicholas Hyett tells him. “Its global reach should turbo-charge growth in the years to come, and hot drinks are one of the few areas of the wider beverages sector where the soft drinks giant doesn’t have a killer brand.”

The acquisition also immediately engages Coke in a battle that we’ve perhaps not seen since the height of the Cola Wars way back at the end of the 20th century.

“The move would mark the biggest brand acquisition in the history of Coca-Cola and a gamble that the soda giant can move into the crowded retail world and take on Starbucks Corp., which has more than 27,000 cafes around the globe,” point out Jennifer Maloney and Ian Walker for the Wall Street Journal.

“Coffee has been one of the frothiest markets for mergers and acquisitions activity over the past year, as competition between Swiss group Nestlé and JAB Holdings -- the private investment group that manages the wealth of Germany’s billionaire Reimann family -- has heated up,” Murad Ahmed and Cat Rutter Pooley observe for Financial Times.

“Nestlé’s deals include taking a majority stake in hipster roastery Blue Bottle and acquiring rights to sell Starbucks products, while JAB earlier this year struck a deal to combine its Keurig Green Mountain coffee business with soft drinks producer Dr Pepper Snapple,” they add.

Bloomberg’s Thomas Mulier offers yet another spin: “Coming after PepsiCo Inc.’s $3.2 billion agreement this month to buy SodaStream Ltd., a maker of carbonated-water dispensers, ‘it would appear that Coca-Cola is branching out slightly differently into the extremely competitive coffee market, where it is hoped that Coca-Cola’s brand, as well as its marketing might, will help maintain the Costa brand’s market share,’ said Michael Hewson, an analyst at CMC Markets, in a note.”

As frothy as coffee business may be as a business proposition, patrons are apparently wising up to the excesses of some of one its more popular concoctions. 

The Wall Street Journal’s Julie Jargon reports today that Starbucks “is putting its decadent Frappuccino on a diet, looking to reduce the drink’s high sugar levels, which have scared away increasingly health-conscious consumers and hurt sales.”

But, as Coca-Cola learned in the ’80s with its New Coke debacle, reformulation can be tricky. “It has been tough for Starbucks to lower the calories and keep the sweet taste that consumers expect,” Jargon writes.

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