Coca-Cola Makes 'On Trend' Bet with $5.1 Billion Costa Coffee Acquisition

Marcus Newton
September 2, 2018

Coca-Cola said Friday it will buy the Britain's biggest coffee company Costa from Whitbread for 3.9 billion pounds ($5.1 billion) in cash.

In a post titled "Why Coca-Cola is Acquiring Costa", Quincey noted that the fragmented nature of the coffee business, which is divided into a wide variety of formats and different regional brands, has made it challenging to build a global portfolio in the category.

Joining the Coca-Cola portfolio, Costa is a leading coffee brand first founded in London in 1971 that has since grown to include almost 4,000 retail outlets, a coffee vending operation, roastery, and home-brewed coffee formats.

RJ Corp group company Devyani International Ltd (DIL), which runs its foods franchise business, may exit the Costa Coffee relationship and sell the India rights, said two executives aware of the development.

Coca-Cola's British chief executive James Quincey, 53, said the move was "not an acquisition where we're looking for places to save costs in the business", but "to grow the business and our participation in the category". The Whitbread board unanimously backed the deal, which is expected to close in the first half of 2019.

While Costa has about 7,000 self-service machines in Britain and about 1,000 overseas, as well as its coffee shops, Coca-Cola has millions of vending machines around the world that it could use to sell Costa products. "Costa has strengths in many countries and in many key distribution channels of the coffee business".

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The move marks the end of Whitbread's 23-year ownership of Costa, which the group bought for £19m when it had just 39 shops.

Coca-Cola needed a coffee fix, but it could have gone for a better brew.

Quincey touted the benefits of having a retail platform with Costa because it supports the brand and creates growth in so-called "immediate consumption" outlets that are stationed anywhere from supermarkets to airports. JAB, the Luxembourg-based holding company that owns brands like Krispy Kreme and Peet's Coffee, bought United Kingdom sandwich and coffee chain Pret A Manger in May.

While a cappuccino costs around 30p less in Costa than its United Kingdom competitors, those prices level out when you get into difference sizes and flavours, The Guardian says. Coca-Cola said Costa would help plug a gap. Earlier this month, PepsiCo agreed to pay $3.2bn for SodaStream, which makes carbonated-water dispensers.

And for Whitbread investors, it's a deal they cheered on, with the shares soaring the most in nearly two decades, even as Coke shares were muted.

While Costa is "ubiquitous in the United Kingdom, the business has "plenty of opportunity to expand internationally, as Whitbread had been doing" says Patrick Mitchell-Fox, senior business analyst at IGD". The company also has RTD brands in foreign markets, such as Georgia in Japan.

Other reports by MaliBehiribAe

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