Coca-Cola to acquire Costa for US$5.1 billion, gains major footprint in coffee

31 Aug 2018 --- The Coca-Cola Company has reached a definitive agreement to acquire UK headquartered coffee chain Costa Limited for £3.9 billion (approximately $5.1 billion). Costa was founded in London in 1971 and has grown to become a major coffee brand across the world. Operations include a leading brand, nearly 4,000 retail outlets with highly trained baristas, a coffee vending operation, for-home coffee formats and Costa’s state-of-the-art roastery.

The acquisition of Costa from parent company Whitbread PLC will give Coca-Cola a strong coffee platform across parts of Europe, Asia Pacific, the Middle East and Africa, with the opportunity for additional expansion.

For Coca-Cola, the expected acquisition adds a scalable coffee platform with critical know-how and expertise in a fast-growing, on-trend category. Costa ranks as the leading coffee company in the United Kingdom and has a growing footprint in China, among other markets. Costa has a solid presence with Costa Express, which offers barista-quality coffee in a variety of on-the-go locations, including gas stations, movie theaters and travel hubs. Costa, in various formats, has the potential for further expansion with customers across the Coca-Cola system.

The acquisition will expand the existing Coca-Cola coffee lineup by adding another leading brand and platform. The portfolio already includes the market-leading Georgia brand in Japan, plus coffee products in many other countries.

Costa also provides Coca-Cola with strong expertise across the coffee supply chain, including sourcing, vending and distribution. This will be a complement to existing capabilities within the Coca-Cola system.

“Costa gives Coca-Cola new capabilities and expertise in coffee, and our system can create opportunities to grow the Costa brand worldwide,” says Coca-Cola President and CEO James Quincey. “Hot beverages is one of the few segments of the total beverage landscape where Coca-Cola does not have a global brand. Costa gives us access to this market with a strong coffee platform. Coffee helps us get into hot beverages. Coffee is one of the fastest-growing beverage categories in the world, at 6 percent. It’s also a category with many different elements, from vending to coffee shops to roast-and-ground to instant to pods and capsules.”

“In short, coffee is a big business with many formats,” explains Quincey. “It’s also a remarkably fragmented business. No single company in the world has a strong foothold across all parts of coffee. And that includes Coca-Cola. We have great brands like our ready-to-drink Georgia coffee lineup in Japan, but Coca-Cola doesn’t have a broad, global portfolio in this growing category.”

“Today, with the growth in coffee and hot beverages, it’s more important than ever that Coca-Cola make a serious and significant investment in the category, because it’s the right thing to do to serve our consumers with more of the drinks they want, which in turn helps our customers,” he notes.

“Costa is a good fit – and the best way – for Coca-Cola to add a global coffee platform that will complement our existing system. A platform means Costa isn’t just one thing. Not just a brand. Not just a retail operation. Not just vending. Not just a coffee roaster.”

“A platform is all of those things and more. Costa is a platform with a great supply chain in coffee, a world-class roastery, a strong retail presence and a vending system. Costa has strengths in many countries and in many key distribution channels of the coffee business,” he states. 

“I know many people aren’t familiar with Costa, especially if they live in North and South America, where Costa isn’t part of the marketplace. But Costa has a deep heritage, especially in its home market of the UK, where it is the leading coffee company.” So, by acquiring Costa, Coca-Cola will add a retail footprint in parts of the world, according to Quincey.

“The Costa team and I are extremely excited to be joining The Coca-Cola Company,” said Costa Managing Director Dominic Paul. “Costa is a fantastic business with committed and passionate associates, a great track record and enormous global potential. Being part of the Coca-Cola system will enable us to grow the business farther and faster. I would like to say a huge thank you to our customers and to everyone in the Costa team who have helped us build the business to this position, and I look forward to the next exciting chapter in Costa’s vision of Inspiring the World to Love Great Coffee.”

Upon the closing, The Coca-Cola Company will acquire all issued and outstanding shares of Costa Limited, a wholly owned subsidiary of Whitbread. This subsidiary contains all of the existing operating businesses of Costa. Whitbread will be seeking shareholder approval for the transaction, which is expected to take place by mid-October. The deal is subject to customary closing conditions, including antitrust approvals in the European Union and China. It is expected to close in the first half of 2019.

Coca-Cola expects the transaction to be slightly accretive in the first full year, not taking into account any impact from purchase accounting. For the fiscal year 2018 (ending March 1, 2018), Costa generated revenue and EBITDA of £1.3 billion and £238 million GBP, respectively. This equates to roughly $1.7 billion in revenue and $312 million in EBITDA.

Because Coca-Cola expects the transaction to close in the first half of 2019, there is no change to 2018 guidance. The company’s long-term targets also remain unchanged. 

Coffee is attracting recent interest among major players not traditionally active in the space. Back in May, for example, Nestlé launched a new cold-brew coffee that is all-natural with high-quality ingredients that have been crafted into a ready-to-drink coffee beverage, tapping into the growing trend of bringing the coffeehouse experience into the fridge.

Innova Market Insights tipped “Beyond the Coffeehouse” as the #5 trend for this year and the new US roll-out of Nestlé’s latest product taps into this.

Coffee is trending among Millennial and Generation Z consumers and with the experiential associations of coffee we are seeing their application as ingredients more often and made in ways that are more convenient to consume and moving from the coffeehouse to the home.

The coffee sector is undergoing somewhat of a renaissance, with a focus on upscaling premium coffee experiences or remaking them in the comfort of consumer homes and several major acquisitions taking place last year among key manufacturers, including Nestlé and Unilever. The focus seems to be on upscaling premium coffees, exploiting the growing market for cold-brewed coffee and the sector has experienced dramatic growth in recent years. Youth interest is vital as it demonstrates the potential for coffee among this audience. 

Not only that, with the taste and experiential associations of coffee and the healthy image of tea, the industry is increasingly using coffee and tea as ingredients and flavors outside the hot drinks and iced tea and coffee sub-categories across a wide variety of products as varied as energy bars, yogurt and jam.

Earlier this week, FoodIngredientsFirst published a key interview with Andre Eiermann, winner of the 2017 Swiss Barista Championship and a board member of the Swiss Specialty Coffee Association, who believes that Central Europe has a mature coffee culture that is becoming more artisan. You can read more on this here.