Coca-Cola moves into coffee with $6.9b deal

A Costa Coffee outlet in London. Coca-Cola is buying the British chain for £3.9 billion (S$6.94 billion). Costa operates more than 3,800 stores in 32 countries.
A Costa Coffee outlet in London. Coca-Cola is buying the British chain for £3.9 billion (S$6.94 billion). Costa operates more than 3,800 stores in 32 countries.PHOTO: BLOOMBERG

Soda giant faces crowded market as it buys Britain's Costa Coffee

Coca-Cola agreed to buy Britain's coffee-outlet leader Costa for £3.9 billion (S$6.94 billion) in its biggest acquisition in eight years, pushing the soda pioneer into the fiercely competitive java market.

Whitbread agreed to sell Costa Coffee, which operates more than 3,800 stores in 32 countries, rather than go ahead with a plan announced in April to spin it off as an independent company.

Whitbread shares soared the most in 19 years, rising as much as 19 per cent, as analysts said the business fetched a surprisingly high price.

Coke's annual sales have been in decline since 2012. The Atlanta-based firm is entering the coffee-outlet market to make up for waning soft-drink demand, even as competitors such as Starbucks and JAB have already cornered many key locations.

"Hot beverages is one of the few remaining segments of the total beverage landscape where Coca-Cola does not have a global brand," chief executive officer James Quincey said in a statement.

Makers of soft drinks are branching out as consumers seek alternatives to sugary sodas. Earlier this month, PepsiCo agreed to pay US$3.2 billion (S$4.4 billion) for SodaStream, which makes carbonated-water dispensers.

The Costa purchase is Coke's biggest push into operating stores, just as weak consumption in Britain forces retailers such as BHS out of business.

Whitbread had said in April that it would spin off Costa as an independent publicly traded company, turning its focus to its Premier Inn hotel operations under pressure from activist investors.

Coke's first overture came in June, Whitbread CEO Alison Brittain said on a call with journalists. "It's been a very fast transaction," she said. The spin-off would have taken as long as two years, the company had said.

The sale will yield a "substantial premium" to the value that would have been created through a spin-off, Whitbread said, adding that it will return most of the proceeds to shareholders. Whitbread bought Costa in 1995 for £19 million. At the time, it had 39 shops.

After missing out on the heady growth phase of coffee outlets, Coke is now entering a crowded market. Costa's like-for-like sales in Britain dropped 2 per cent in the company's first quarter as the retail market weakened.

Still, Costa outranks Starbucks in Britain - it also operates a business of 8,000 self-service machines - and is expanding in markets such as China.

Costa was one of the few big coffee chains up for sale after Nestle 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 US$7.2 billion to form an alliance with Starbucks that sells products in grocery stores.

Coke sells coffee under the Georgia brand in Japan and has some other local products for specific markets.

BLOOMBERG

A version of this article appeared in the print edition of The Straits Times on September 01, 2018, with the headline 'Coca-Cola moves into coffee with $6.9b deal'. Print Edition | Subscribe