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What is the future for Costa Coffee after Coca-Cola deal?

05/09/2018
What is the future for Costa Coffee after Coca-Cola deal?

It has been described as a “signature deal” but the UK’s largest coffee shop chain Costa Coffee being sold to the world’s largest beverage company Coca-Cola came as a shock to many in the sector last week.

The £3.9 billion deal, which is expected to conclude in the first half of 2019, will see the soft drinks giant move into the hot beverage sector taking over the 4,000-strong international coffee chain, which has sites in the United Kingdom, China and other markets across Europe, Asia Pacific, the Middle East and Africa.

Some have even described the acquisition as the most important strategic move in the US beverage makers history.

When news broke of the deal Coca-Cola said the acquisition added a scalable coffee platform with “critical know-how and expertise in a fast-growing, on-trend category”.

But concern was raised about the ability of Coca-Cola to operate in a retail environment.

According to a report in the FT, Coca-Cola president and CEO Quincey acknowledged this and said he planned to keep the management team of UK-based Costa in place. “We’ve got to leave the people who know what they’re doing to do what they know how to do,” he said.

But retail is only one piece of Costa's capabilities, according to the drinks giant, as the company’s portfolio includes a coffee vending business, at-home coffee solutions and a new roaster in Essex.

“It’s not about having the largest number of stores,” Quincey said. “It’s about having the right number of stores to build the brand profitably in places we want to be and synergistically work across the four coffee segments [coffee shops, coffee vending, ready-to-drink coffee and at-home].

“We see an opportunity for a global brand to reach over all four [coffee segments].”

Until now, Coca-Cola has competed in ready-to-drink (RTD) coffee in a relatively small segment of the global coffee and tea business. Its portfolio already includes the market-leading Georgia brand in Japan, plus coffee products in other countries.

“We think Costa unlocks the entrance for us into the fast-growing, half-a-trillion-dollar category,” Quincey said. “It’s a great brand with great-tasting coffee. Costa … presents opportunity for tremendous value creation by combining that platform with their brand capabilities and our market expertise and global reach.”

But what is the future for Costa and the UK coffee market under this deal?

Clive Black, head of research at Shore Capital, said that Coke-Costa feels quite a “signature deal.”

“Big corporate American FMCG is going through an important phase, something quite existential,” he told Coffee Business World.

“Much of its heritage is saturated fat, sugar and salt sold through the traditional on and off trade.”

But the consumer world is changing with well-being at the fore.

“Costa brings Coke access to a new customer silo and scope to effectively cross-sell its beverage brands if it is sensible and sensitive to its markets,” he says.

While many in the UK scratched their heads over the deal, Black said it is part of a wider change where traditional retail and foodservice are fusing.

“For the coffee shop market it will be interesting to see how Coke behaves with Costa, how the consumer reacts, if at all, and how the competition evolves,” he said.

But, as with many food and beverage categories, more local, “entrepreneurial and agile businesses” are eating away at the big brands, he says. 

“Time will tell" if it is right for Coca-Cola and the rest of the coffee cup market, he added.

"Ultimately, will the British coffee cup drinker notice and like the fact that already super size Costa is owned by super size Coke?" he said. "Such an amalgam may not be the worst development for those small scale coffee entrepreneurs.”                                    

Anita Atkins, brand director at the 22-strong Boston Tea Party chain,  said: “It will be interesting to see what happens, what they bring and what changes are afoot. We will keep our eyes peeled.”

One question still to be asked is what will happen to the soft drink options with Costa Coffee?

Time will tell. The deal is still subject to customary closing conditions, including antitrust approvals in the European Union and China.

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