Coca-Cola's $ 3.9 billion acquisition of Costa Coffee has taken a significant turn. Atlanta-based Coca-Cola is obviously best known for its soft drink portfolio, found in supermarkets, newsstands, hotels, bars and restaurants around the world.
Costa, headquartered in the UK, has 3,800 coffee shops in over 30 countries, with about two thirds in the UK home market. Both companies may be just about drinks, but that's just the only overlap on their farms.
The logic for Costa's current owner, Whitbread, is simple enough. It came under pressure from investors to focus on the hotel business and have no more coffee. General Manager, Alison Brittain, says the price tag has achieved a substantial premium over the alternative, which is simply out of the ordinary ̵
The Coca-Cola Company has relied on its famous coke drinks for growth since its inception in 1892. The strength of the Coca-Cola brand – by Interbrand valued nearly $ 70 billion (£ 54 billion) – has always been a double-edged sword. A small percentage of the increase in cola could have a tremendous impact on sales and profits, and therefore take precedence over brands with high growth potential but smaller current sales volumes.
Coca-Cola has more than 500 soft drink brands from Fuse Tea to Oasis to Powerade, but none is close to the Coke brand in terms of awareness, sales and profits. When Coca-Cola CEO James Quincey says he wants to turn the Coca-Cola Company into a beverage company, he tries to address this difficulty. Although the company already has some smaller coffee brands in certain countries, the acquisition of Costa is on a different level: it communicates with everyone in the company and beyond, it is serious.
The inequality of the portfolio is not the only reason for the overall beverage strategy. The company's strength still lies in carbonated carbonated drinks. Total carbonated beverage sales continue to grow worldwide, but only between 2% and 3%. And in developed markets like the US, they are declining. As people move on to a healthier lifestyle, there is concern that this will happen everywhere.
At the same time, global beverage growth was mainly due to still drinks – water, juice and coffee. Worldwide coffee sales are expected to grow by 6% per year over the next few years. Selling coffee to coffee drinkers seems to be an easier task than persuading them to drink Coca-Cola.
Linked to this are the threats against the biggest Coca-Cola business through negative publicity. The Coca-Cola Company mainly sells ready-to-drink canned or plastic bottles. And it has come under tremendous pressure from activists who are worried about the environment.
Arch rival PepsiCo recently announced a $ 3.2 billion acquisition of Sodastream, whose CEO Daniel Birnbaum recently said:
Plastic bottles deserve the treatment of cigarettes. These bottles deserve warnings on them. Disposable bottled water should be illegal, and I believe there will be a time in our lifetime if that is the case.
PepsiCo clearly wants to turn up the eco-friendly dial. As Costa produces coffee instead of ready-to-drink bottled coffee on-site, Coca-Cola will also enjoy this benefit.
Then there is sugar. Non-alcoholic beverage manufacturers have been stunned by governments and campaign makers with rising sugar pressure in their products. Some countries have introduced a sugar tax. While it is common to drink coffee with sugar, the coffee is not in the line of fire, as are carbonated drinks.
It is true that Coca-Cola is dealing with the ethical problems of growing coffee, causing new headaches. But Costa is being honored for its coffee ethic, so Coca-Cola does not seem to be buying someone else's problem. The deal also increases the company's involvement in beverage stores that rely on commodities whose price can be volatile – while Coca-Cola's production price is fairly stable, a drink that relies on coffee beans is a little less. Undoubtedly, the board would argue that the benefits outweigh the disadvantages.
With Costa comes a wealth of skills that the Coca-Cola Company does not yet own. Costa is a retail company. It is in the service business. It sells directly to consumers. Nespresso, another product sold directly to consumers, was unique to Nestlé, which was otherwise only sold to resellers such as retailers and wholesalers. The experience of working directly with Nespresso and what they have learned from it has encouraged Nestlé to sell other products online to consumers.
Coca-Cola has a well-developed network of third-party bottlers, the manufacture, sale and distribution of its drinks (full disclosure: I have educational links with one of them). So when it comes to strengthening the relationship between The Coca-Cola Company and its end users, it could bring even more benefits than Nestlé.
All in all, the intention of the acquisition looks good – access to growth, diversification, expansion of the product portfolio, environmental and health benefits. But what about this bonus?
Quincey says the company can create opportunities to grow the Costa brand globally. This would bring it beyond its UK core presence to more than 30 other countries.
John W Walsh, Professor of Marketing, IMD Business School
This article was originally published on The Conversation Read the original article.