Coca-Cola buys Costa Coffee for $5.1B
- Coca-Cola will purchase Costa Coffee from UK drinks and hotels group Whitbread, for £3.9 billion ($5.1 billion), the companies said in a statement.
- Costa Coffee, a British multinational coffeehouse company founded in London in 1971, is one of the world's major coffee brands. Costa has almost 4,000 stores in 32 countries, and is currently being sold across Europe, the Asia Pacific, the Middle East and Africa.
- "Coffee is one of the strongest growing categories in the world and Coca-Cola needs to expand into coffee and hot drinks," Coca-Cola CEO James Quincey said in a video posted Friday. “While Costa isn’t present in every region, including North and South America, over time we are looking to bring Costa to more people in more places.”
With many CPG giants acquiring coffee brands this year, it seemed to be only a matter of time before Coca-Cola — which has not expanded its portfolio beyond beverages — got into the mix. And with Whitbread planning to spin off Costa Coffee into an independent company in order to focus on its hotel business, it was only a question of which CPG would buy it and when.
More big food and beverage companies are moving into the coffee business because it is trendy for consumers and a fast-growing money maker for brands to add to their portfolios. Coca-Cola is the newest member of that club.
One of the most notable deals came earlier this year when Nestlé purchased Starbucks’ line of retail products in a $7.15 billion deal. Nestlé has been charging into the segment — one where it already had a considerable lead — with other recent acquisitions, including Chameleon Cold-Brew and its majority stake in Blue Bottle Coffee.
But coffee is also getting popular in the Big Soda realm, with Keurig Green Mountain's $19 billion purchase of Dr Pepper Snapple, forming Keurig Dr Pepper. And while Coca-Cola has seen its sales rebound through rebranding work on Diet Coke and sparkling water innovations and M&A, it had no platform to compete with the new mega-drinks company.
Expanding into the coffee marketplace could be a smart move for the brand as sugar-conscious consumers move away from traditional soda. According to research from the National Coffee Association, gourmet coffee now represents half of all consumption for the first time in history. And coffee is growing by 6% a year, making it one of the fastest-growing beverage categories in the world, Quincey wrote in a blog post Friday.
So what’s next for Costa Coffee under Coca-Cola? It appears that the brand is looking to grow the company into more areas of the globe. This acquisition will give Coca-Cola a strong coffee platform across Europe, Asia Pacific, the Middle East and Africa, with "the opportunity for additional expansion," Coca-Cola said in a statement. Sooner rather than later, Costa Coffee could make a move to expand across North America. This acquisition means that it will likely be seen in the U.S.
“This is not an acquisition where we’re looking for places to save costs in the business. We’re buying Costa to grow the business and our participation in the category,” Quincey said.
As the second largest coffeehouse chain in the world, Costa Coffee offers Coca-Cola opportunities to not only expand its facilities, but also its offerings. Coffee has a variety of different retail products, from vending to coffee shops to roast-and-ground to instant. The deal may allow Coca-Cola to break into the retail market with its own locations — or it may divest that portion to a company with more expertise. Given Coca-Cola's expertise, the next move for the brand is likely to be expanding Costa ready-to-drink coffee across markets globally.
But did Coca-Cola pay too much for Costa? Considering that it paid 16.4 times Costa’s earnings before interest, taxes, depreciation and amortization for the previous fiscal year, the deal is certainly sweet for the British company.
"£3.9 billion is an undeniably rich valuation and likely far better than Costa could achieve as an independently listed company, valuing its earnings higher than those of the mighty Starbucks," Nicholas Hyett, equity analyst at Hargreaves Lansdown, wrote to Business Insider.
However, there are few companies that have the global reach and recognition as Costa. Whether Coca-Cola's premium matches the value of the deal is yet to be seen, though the soft drink company's stock trading has been slightly down on Friday morning.
In comments emailed to Food Dive, Howard Telford, head of soft drinks at Euromonitor International, said that this acquisition is furthering Coca-Cola's transformation into a "total beverage company," also shown through taking a stake in BodyArmor and the acquisition of Topo Chico.
During the last five years, specialty coffee shops have grown globally almost $20 billion, he wrote. There's a track record of success in bringing those brands to retail, and Telford predicted Coca-Cola would manage the coffee shop business separately.
"Longer term I think there are many possible advantages for Coca-Cola: perhaps RTD Costa branded beverages in the Coca-Cola system, using Costa’s expertise in bean-to-cup vending, and most importantly acquiring a true global coffee brand that has demonstrated strong growth outside the home,” he wrote.
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