Coke Adds Coffee to Its Drinks Mix in $5.1 Billion Deal Soda giant to buy U.K.-b
ID: 2814789 • Letter: C
Question
Coke Adds Coffee to Its Drinks Mix in $5.1 Billion Deal
Soda giant to buy U.K.-based Costa coffee chain and plans to roll out its cappuccino vending machines
Coca-Cola Co. KO -0.01% made the largest brand acquisition in its history, saying Friday that it would pay $5.1 billion for British coffee-shop chain Costa as the soda giant moves further from its soft-drink roots and joins a growing group of consumer-goods companies that are betting big on coffee.
The deal gives Coke a large brick-and-mortar retail presence and puts it in direct competition with Starbucks Corp. , which has more than 27,000 cafes around the globe. Costa serves its red-and-white cups of coffee through its roughly 3,800 cafes, including about 2,500 in the U.K. and a growing presence in China. Founded in London in 1971, Costa also sells coffee in grocery stores and gas stations.
Some analysts questioned the rationale for paying what they said was such a steep price for Costa given that it is so heavily concentrated in the U.K. and little-known in many other big markets. They also questioned why Coke would enter the crowded world of physical retail, where it has no experience.
In an interview, Coca-Cola CEO James Quincey said the transaction was a bet on the fast-growing and still fragmented global coffee business. “This is a coffee strategy, not a retail strategy,” said Mr. Quincey, a Briton who took over as Coke’s CEO in May 2017.
Mr. Quincey said Coke has no current plans to open Costa coffee shops in the U.S., but the company will bring Costa coffee vending machines and beans to U.S. gas stations, college campuses and quick-service restaurants.
The CEO acknowledged that expanding into retail would pose a challenge for the beverage manufacturer, which currently relies on distributors, grocers and restaurants to sell its drinks. Retail is “clearly not our expertise,” he said, adding that Coke would keep Costa’s retail management team in place.
“Consumers continue to want to spend more money on beverages,” Mr. Quincey said. “They just want greater diversity” including “coffee in its various formats.”
Coke and its soda rivals have been searching for growth as consumers shift away from sugary soft drinks. PepsiCo Inc. in August agreed to buy seltzer-machine maker SodaStreamInternational Ltd. for $3.2 billion. Smaller rival Dr Pepper Snapple merged this summer with Keurig, the coffee company that popularized single-serve K-cups.
Coke already sells Dunkin’ Donuts bottled coffee in the U.S. and a ready-to-drink coffee brand called Georgia that is popular in Japan, but Mr. Quincey said the company was missing out on the much larger hot-coffee market. In a conference call Friday, he said Coke plans to expand Costa’s network of cafes in developing markets including China and use Costa’s self-serve vending machines, which grind beans and steam milk, to sell hot drinks around the world. It also will sell Costa-branded bottled drinks and coffee beans. Rival PepsiCo has a longstanding partnership with Starbucks to sell its ready-to-drink beverages.
Coffee has recently been a hot industry for deal making. Nestlé SA this year bought the rights to sell Starbucks in grocery and retail stores for more than $7 billion. JAB Holding Co., a European holding company, has also moved aggressively to buy up coffee assets.
Coke is buying Costa from British leisure groupWhitbread PLC, which also owns the Premier Inn hotel brand in the U.K. and Germany. The company, which first flagged a possible Costa spinoff in April, said it would return most of the money to its shareholders. Its shares closed up nearly 15% on Friday.
Whitbread had been pressured by activist investors to split with its coffee business. Coke approached the company about a potential acquisition in June, executives said.
Whitbread Chief Executive Alison Brittain said that Coke wasn’t the only interested party, but suggested that the U.S. drinks giant’s global reach allowed it to offer the most attractive deal. The agreement, expected to be completed in the first half of 2019, was signed just eight minutes before it was announced early Friday.
Costa generated revenue of £1.3 billion ($1.69 billion) in the year ended March 1 and earnings before interest, taxes, depreciation and amortization of £238 million. About 72% of its revenue came from its U.K. stores, according to a Coke presentation. By comparison, Starbucks had $22.4 billion in revenue in its last fiscal year and Coca-Cola had $35.4 billion.
Costa same-store sales have been flat, though overall sales have continued to grow as the company added outlets, including overseas, and expanded its express-coffee-machine network. Some of the sales through those machines —there are more than 7,000 in the U.K.—have cannibalized business from existing outlets, Ms. Brittain said on a conference call.
Costa has more locations in the U.K. than Starbucks but the brand is little known in North or South America, where Starbucks has more than 16,000 locations. Costa’s biggest international market is China, where it has about 450 stores, but there too it is dwarfed by Starbucks’ approximately 3,000 locations.
Costa’s presence in China presents a growth opportunity for Coke, GlobalData analyst Jonathan Davison said. Hot-drinks-sales volume has more than doubled in volume there over the past five years, said Mr. Davison, who estimates the Chinese retail hot-drinks market will reach $34 billion by 2022.
Coke said it expects the deal to add slightly to its earnings the following year. The company said it wasn’t changing its long-term financial targets.
When Mr. Quincey took over Coke from longtime leader Muhtar Kent, he pledged to speed the development of products beyond its namesake cola brand. The company’s revenue has declined for several years, as it shed bottling operations and battled slowing soda volumes.
Coke’s biggest brand acquisition until now was its $4.1 billion purchase in 2007 of Glaceau, the company behind the vitaminwater and smartwater brands. The company has struck smaller deals since Mr. Quincey took over, including buying Mexican seltzer maker Topo Chico and taking a stake in BodyArmor, a Gatorade rival.
Coca-Cola shares fell 38 cents Friday to $44.57. The stock has slipped 2% over the past year, missing out on a broad stock-market rally that has lifted the S&P 500 Index more than 17% to record highs.
Questions
1. Identify and briefly outline THREE (3) factors that would contribute to Coke’s decision to acquire a different line of product other than in the carbonated beverage product line. 6 points
2. Briefly explain TWO (2) possible reasons why Coke “would enter the crowded world of physical retail, where it has no experience”. 4 points
3. Briefly explain ONE advantage and ONE disadvantage to Coke having a “distribution strategy” as opposed to a “retail strategy” 4 points
4. Identify and briefly explain THREE (3) benefits that the acquisition of Costa by Coke would have on the Costa coffee brand. 6 points
5. Identify TWO (2) concerns that you have regarding Coke’s acquisition of Costa and propose ONE (1) recommendation on how Coke may address EACH concern.
Explanation / Answer
1. A growing market in China:
Costa has its biggest international presence in china with almost 450 stores. This presence poses a great opportunity for Coke to serve the Chinese market. Moreover, over the past five years, Chinese hot drinks sale has doubled and has been estimated to reach $3 billion by the end of 2022
Competitor Presence:
Coke’s competitors have already tapped this particular market earlier. For example, PepsiCo has decided to buy seltzer-machine maker SodaStreamInternational Ltd., Dr Pepper Snapple merged with Keurig, the coffee company that popularized single-serve K-cups. In addition to this, PepsiCo. already has a long time partnership with Starbucks to sell its ready to drink beverages.
Shifting choice of the consumers:
Considering consumer choices, it can be seen that, they are shifting their tastes from the sugary soft drinks towards the hot coffee drinks. In order to take advantage of this changing trend, it is important for Coke to acquire Costa Coffee to server this particular market.
2. Considering the changing tastes among the consumers, they are nowadays preferring more of the hot drinks rather than the sugary drinks and majority of them are sold through the retail market structure,. So, it is important for Coke to enter this market. Moreover, Costa Coffee already has a major presence in China and UK which will help Coke and it has plans to bring Costa Coffee vending machines to US.
Coke already has a grip over the bottled coffee market by selling Dunkin’ Donuts bottled coffee in the U.S. and a ready-to-drink coffee brand called Georgia in Japan. Since it was missing out on the hot coffee drinks market, it is important for them enter this retail business by acquiring Costa Coffee.
3. Consumer Convenience is one of the biggest advantages of distribution strategy that Coke follows. If coke had separate stores for its products then consumers would have to visit those stores to buy the products which could be time consuming. But in case of this distribution system, the products are easily available to the consumers through the retail and the wholesales stores, hypermarkets, supermarkets etc. Moreover, some of the retail chain’s profit highly depends on the distribution of Coke products.
Distribution expenses are one of the major reasons that could be considered as a disadvantage. Not all the retail outlets sell the same quality every time, but the amount of products distributed to them remains almost the same ans so the cost or expense becomes higher than the revenue
4. Expansion to the Americas:
One of the major advantage that Costa Coffee will have due to this acquisition is the expansion in the US market. Although it has sufficient presence in UK, but in USA, Starbucks have captured the market. After this acquisition, Coke will bring in the Costa Coffee vending machines and beans to the USA gas stations, college campuses and quick-service restaurants. Other than this, it also has plans to expand the Costa brand to almost 30 countries
To focus on the main business areas:
Costa Coffee’s holding company Whitbread has been facing serious pressures to sell off the Coffee business to focus more on the hotel business. Moreover, the company is receiving premium pricing and has been overvalued by Coke to be acquired.
Costa’s recent flat revenue:
From this acquisition Costa will have the opportunity to grow its revenue which has become flat during the last few years. Since it could not much expand its stores outside UK, it focuses on the vending machines for those regions. With this acquisition, Coke will definitely increase the distribution of Costa’s vending machines and its beans which will help them to improve their revenue.