Coca-Cola plans to operate a “connected but integrated” strategy for Costa coffee following its acquisition of the company that will see it focus away from retail and instead on building the global brand.
Speaking on an investor call today (31 August), Coca-Cola CEO James Quincey said Coke has learned lessons from the past on how best to manage an acquisition. He explained: “At times we have bought things and tried to make them fit and have not done justice to their category. So first things first we need to see how we win in the coffee market.”
Coca-Cola revealed is to buy the Costa coffee chain this morning from owner Whitbread in a deal worth £3.9bn.
The acquisition of Costa is Coca-Cola’s latest attempt to diversify its portfolio away from its core business of sparkling drinks. It follows similar moves by rivals, including PepsiCo’s purchase of carbonated water maker SodaStream. Nestle has also delved into the coffee chain market, with its deal with Starbucks to market the US coffee maker’s packaged coffees and teas around the world closing on Tuesday (28 August).
It seems Coca-Cola is mirroring Nestle’s approach in hoping to bring a coffee brand to the world stage, with Quincey emphasising throughout the call that the acquisition will not focus on retail and that current management will be largely left to handle stores.
He explained: “It is important to remember this is a coffee strategy not a retail strategy. We need to leave the people who know what they’re doing to do what they know.”
The big opportunity for Coke is in the out-of-home market, which Quincey said currently only accounts for 20% of the overall coffee industry. The company will be exploring what platforms it can leverage to grow that area – from products to food service and vending.
Trish Caddy, UK food service analyst at Mintel, agrees that should be a key area of focus: “In an increasingly competitive marketplace, the acquisition of Costa Coffee would extend Coca-Cola’s presence in the coffee and restaurant space. For Costa, the deal will accelerate its position in ready-to-drink beverages through Coca-Cola’s distribution channels.”
Why invest in the coffee market?
Quincey described coffee as the “missing piece” to Coca-Cola’s overall portfolio as it looks to become a total beverage company. He explained: “Coffee is a significant on-trend profitable category and Costa is a strong scaleable coffee platform which can engage with consumers across multiple channels.”
According to Euromonitor, coffee value sales are expected to grow by 15.6% between 2017 and 2022. That compares to a soft drinks market that is expected to rise by 13.4% over the same period. However, that market include not only Coke’s core carbonated drinks but also juices.
For carbonated drinks, sales are expected to rise by a smaller 5.7% to $171.4bn in 2022, and for cola that growth is even smaller at 4.4%.
Quincey said: “We’ve traditionally talked about non alcoholic beverages – of which we have a strong market share – but wherever you look you see young adults are interested in beverages as long as it’s diverse. So our vision was to go beyond our current non -alcoholic drinks to the next step, which is hot and cold beverages. “
Maxine Vogt, research analyst at Euromonitor International agreed that hot drinks are a missing part of Coke’s portfolio. He added: “Hot beverages are one of the few remaining segments of the total beverage landscape where Coca-Cola does not have a global brand and Costa gives them access to this market through a strong coffee platform.”
Quincey’s comments on the trend among young adults echoes figures from Mintel that show Costa is most popular with younger consumers. The chain is currently the most popular coffee shop in the UK with 48% of consumers buying a hot drink from Costa in the three months to October 2017, with consumers aged 18 to 24 most likely to have bought a hot drink from Costa.
Coca-Cola’s move into coffee comes in the same week the government once again put fizzy drink makers in the spotlight over their role in the health of young people. On Wednesday, the government launched an investigation into whether it should ban the sale of energy drinks such as Relentless, which is owned by Coke, to children in England. It has already been hit by the sugar tax in the UK and other markets.
While there are key areas that Costa can learn from Coke on building a global brand, there are also ways Coke can learn from Costa. This will be the first time Coke has run a retail business, albeit at arm’s length, and there are opportunities to get closer to customers by selling direct.
“This will be the first Coke business from direct-to-consumer sales, which will be interesting for the rest of our business,” he said. “We’ve got a lot of work left to do. There is a lot more stuff we need to work out like exactly which countries and which formats and in which order.”