Why would Coca-Cola sell Costa Coffee? What is the key summary?
- Coca-Cola purchased Costa Coffee in January 2019 for PS3.9 billion
- Costa did not meet its expectations, posting a PS9.6m loss before tax
- Analysts claim Coca-Cola underestimated the complexity of and cost associated with the café market.
- Costa’s innovation and recovery lags behind COVID-19, causing losses to worsen.
- The sale reflects a wider trend in CPG to streamline portfolios and focus on core growth.
Last week, rumours began to circulate that Coca-Cola was planning to sell Costa Coffee. It had been reported that the beverage giant has held talks with several potential bidders.
Two major asset managers, Apollo Global Management, and KKR, have expressed an interest to take over the UK coffee industry, with more than 2,000 shops in the UK and 3,000 globally.
Coca-Cola purchased Costa Coffee for PS3.9bn in January 2019 (EUR4.4bn). The relationship did not meet the expectations. Coca-Cola CEO James Quincey announced in July that Costa “didn’t quite deliver” and “wasn’t where we wanted to be on an investment hypothesis standpoint”.
What went wrong between Coca-Cola & Costa? What can we learn from the failed merger of Coca-Cola and Costa?
(VV Shots/Image: Getty/VV Shots) Rumour has it that Coca-Cola will be selling Costa Coffee. (VV Shots/Image: Getty/VV Shots)
What did Coca-Cola and Costa do wrong?
Coca-Cola acquired Costa Coffee to fill a gap within its beverage portfolio.
Coca-Cola’s failure to grasp the market that it entered is a problem.
Nandini Choudhury is the principal consultant at Future Market Insights for food and beverages. She says, “The strategy failed almost instantly.”
Analysts believe that Coca-Cola paid too much (PS3.9bn), as the chain was facing a slowdown in growth, intense competition, including from US coffee brand Starbucks, British sandwich chain Pret A Manger and boutique coffee shops, especially popular among younger customers.
Choudhury says that Coca-Cola undervalued the capital-intensive nature of its cafe business, and how demanding it is in terms of operations and costs.
COVID-19, an unexpected event, magnified the weaknesses of these stores, leading to store closings, rent increases, and a shift in consumer consumption from retail outlets to home.
Coca-Cola underestimated how capital-intensive the café business was and how demanding it is in terms of operations.
Nandini Roy Choudhury, Future Market Insights
Costa’s inability to adapt to the changes has exacerbated this problem.
Choudhury says that Costa lagged behind competitors in terms of innovation and expansion internationally, even as they recovered from digital ordering and premium positioning.
Costa Express vending machine, closely aligned to Coca-Cola distribution strengths (2023 revenue: 1.2bn PS – pre-tax losses: 9.6m PS) were not enough to offset the already large losses.
The revenues remained lower than before the acquisition, while profitability plummeted into losses. This was a sharp contrast with Coca-Cola, which is known for its high-margin business.
The retail café sector also differs fundamentally from Coca-Cola’s core beverage business. Costa Coffee is built around operational excellence. This includes managing leases and labour, handling logistics for fresh foods, and providing consistent customer service. High daily transaction volume, site selection that is optimal, and the capability to quickly adapt to local tastes are all factors in determining profitability.
Coca-Cola has been thriving for more than a century on an asset-light business model. The company’s main focus is on producing beverage concentrates. It also focuses on building brand equity globally and working with distributors and bottlers to shoulder capital expenses, labor, and logistics. This results in a high-margin, lean and scalable business with little exposure to retail challenges.
Choudhury says that the purchase was a victim of strategic hubris. Coca-Cola attempted to graft an asset-light model with a retail chain that was service-heavy onto a brand-driven, asset-light model. The cultures did not blend.
Coca-Cola found it difficult to successfully integrate Costa because of this stark difference.
Choudhury says that the Costa Express vending machines fit into Coca-Cola’s distribution model. This network leverages its efficiency and scale. The cafe estate required a completely different skill-set, which Coca-Cola did not have internally or had developed enough after the acquisition.
Coca-Cola underestimated how complex it is to run a retail business that relies heavily on service. This underperformance is not only due to macroeconomic factors, but it also shows a mismatch in the DNA between Coca-Cola’s and Costa Coffee’s operations.
Choudhury says that Costa Coffee was a brave but ultimately unsuitable extension of retail services for Coca-Cola.
Costa Coffee is facing intense competition and slowing growth from US coffee brand Starbucks, British sandwich chain Pret A Manger and boutique cafe chains. (Image: Getty/martinrlee)
Trends in food and beverages
This potential sale comes after a series of major sales by food and drink companies. Unilever has decided to sell its ice-cream business, along with several other well-known food brands. Kellogg Company was split into Kellanova and WK Kellogg. Just this morning, the food giant Kraft Heinz announced plans to split into two publicly-traded companies via a tax-free spinning off.
There could still be some announcements in the future.
Choudhury says that the reported sale of Costa Coffee is in line with a trend where large CPG companies are reassessing their portfolios and simplifying them. The sector is moving from vast, diversified models to leaner ones that concentrate on strengths and high-margin areas of growth.
(Image: Getty/monticelllo) The sale of Costa Coffee to Coca-Cola is a rumoured move by the beverage giant, following a number of other major sell-offs of food and beverages companies including Unilever. (Image: Getty/monticelllo)
Buy for dominance of the market
Some companies have buck the trend by acquiring assets instead of spinning off their assets.
Keurig Dr Pepper’s purchase of JDE Peet’s shows some companies still have a spending strategy, based on a market-dominating approach.
Mars, Inc. has announced that it is buying the snack brand Kellanova, while Ferrero Group plans to purchase cereal manufacturer WK Kellogg.
Choudhury says that “These contradictory moves are a reflection of a shared reality.” Companies are being pushed to be at the top of a particular category, or leave it entirely.
Who will be the next one to act? Keep an eye on this page to see what happens.