Coke makes $5.1-billion bet on coffee market

New Delhi: Coca-Cola Co. is making an audacious move into coffee and retail outlets with the 3.9 billion pounds ($5.1 billion) purchase of UK coffee-shop leader Costa, its biggest acquisition in eight years that pushes the soda pioneer into a fiercely competitive java market.

The soft-drinks company swooped in after Whitbread Plc announced a plan in April to spin off the business. The transaction gives Coca-Cola instant heft in a business from which it was all but absent, with 3,800 stores in 32 countries and a foothold in China. Highlighting Coke’s desire to close the deal, Whitbread CEO Alison Brittain said the two sides signed just minutes before the announcement, after Coke first approached the other party in June. “It’s been a very fast transaction,” Brittain said on a call with journalists and analysts. And for Whitbread investors, it’s a deal they cheered on, with the shares soaring the most in almost two decades. A spinoff would have initially yielded smaller returns and might have taken as long as two years.
The Costa deal opens a new business line for a company synonymous with fizzy, sugary beverages like Coca-Cola, Sprite, or Fanta, underscoring the pressure to find new areas of growth as consumer tastes change.

Read more about the deal here

  • After missing out on the heady growth phase of coffee shops, Coca-Cola is entering when the market in countries like the UK and the US is crowded. Earlier this year, the British newspaper the Guardian ran a story titled “Have we reached peak Costa Coffee?”
  • Costa’s like-for-like sales in the UK dropped 2 percent in the company’s first quarter as the retail market weakened. Consumers in the UK are reducing spending due to inflation and concern that Brexit may hurt the economy.

Acquisition Spree

  • Costa was one of the few big coffee chains up for sale after Nestle SA and the Reimann family’s investment company JAB both went on acquisition sprees in the segment.
  • Nestle joined the trend of coffee giants taking aim at smaller niche producers, buying Blue Bottle Coffee and Chameleon Cold Brew. The Swiss food company also paid $7.2 billion to form an alliance with Starbucks that sells products in grocery stores.
  • Coke has dabbled in coffee before, with an unsuccessful attempt at selling java-flavored Coca-Cola Blak. Last year, it started selling Coca-Cola Coffee.