Coca-Cola to buy coffee chain Costa for $5.1 bn

LONDON: Coca-Cola Co has agreed to buy coffee chain Costa for $5.1 billion to extend its push into healthier drinks and take on the likes of Starbucks and Nestle in the booming global coffee market.
The purchase from Britain’s Whitbread of Costa’s almost 4,000 outlets thrusts the world’s biggest soda company into one of the few bright spots in the sluggish packaged food and drinks sector.
Paying about £1 billion ($1.3 billion) more than some analysts had expected, Coke will use its distribution network to supercharge Costa’s expansion as it chases current coffee chain market leader Starbucks and its almost 29,000 stores across 77 markets.
Beyond coffee shops, Coca-Cola CEO James Quincey, himself a Briton familiar with the UK 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 around 6 per cent a year. Coke sells Georgia coffee in Japan, but wanted a bigger platform.
“Coca-Cola doesn’t have a broad, global portfolio in this growing category,” Quincey said in a blog post highlighting Costa’s retail footprint, roastery, supply chain and Costa Express vending system, which the company plans to expand.
But Coca-Cola will face a fight, as rivals are also bulking up in a fragmented market, keen to attract young people prepared to pay out for barista-made drinks and developing tastes for ever more exotic coffees.
Nestle, the market leader in packaged coffee, for example, has sealed a $7 billion licensing deal for Starbucks’ retail business, while Europe’s billionaire Reimann clan has built the JAB empire spanning coffee brands such as Kenco, Douwe Egberts and soft-drink maker Dr Pepper Snapple.
Operating a retail chain marks a new challenge for 132-year-old Atlanta-based Coca-Cola, which mostly sells soft drink concentrates to a network of franchised bottlers.
Other packaged goods firms with restaurant footprints include Nestle, with its stake in upscale coffee chain Blue Bottle, and Unilever with gelato chain Grom.
In the key US market, an expansion of Costa shops into the country would be a threat for Starbucks, McDonalds and JAB, which owns a string of chains including Peet’s and Caribou.
Meanwhile, a roll-out of canned or bottled coffee drinks through Coke’s bottling system could upset the dominance of a joint venture between Starbucks and PepsiCo.
The purchase of the biggest coffee chain behind Starbucks 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.
Whitbread shares leapt as much as 19 per cent to a 2-1/2 year high of 48 pounds on news of the deal, which analysts said was priced at a punchy 16.4 times Costa’s latest annual earnings. Coke shares were up more than 1 per cent in pre-market trading.
“Coca-Cola are one of the few companies in the world that could justify the valuation,” said Nicholas Hyett, equity analyst at Hargreaves Lansdown.
“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. Costa will get lots of care and attention.”
Whitbread had been in the process of demerging Costa from its hotel group Premier Inn, and the sale marks the latest transformation in a business that was established in 1742 as a brewer and which has also owned sports clubs and restaurants.
Whitbread bought Costa, founded in 1971 in London by Italian brothers Sergio and Bruno Costa, for £19 million. It only had 39 shops then, but now its maroon shop front is one of the most ubiquitous sights on British high streets, with 2,422 outlets in the UK and a further 1,399 in international markets, operated as franchises, joint ventures and wholesale outlets.
— Reuters