Coca-Cola brews new plan with $5-bn UK-based coffee chain Costa buy

The $5.1-bn deal is the biggest purchase in 8 yrs for the world's largest beverage firm

Coca-Cola announced on Friday it was acquiring UK-based coffee chain Costa for $5.1 billion, giving it straight access to the dynamic and competitive coffee retail market, a new area for the world's largest beverage company.  The acquisition, Coca-Cola's biggest in eight years, points to bold bets the company is willing to take as it seeks alternatives to fizzy drinks, say experts.

Costa Coffee is the UK’s largest coffee retailer with a presence in over 30 countries across Europe, Africa, Middle East and Asia-Pacific, including China and India. 

This is the second transaction involving a consumer products company and a coffee retailer after Nestlé struck a $7.15 billion global deal in May to sell Starbucks’ coffee products outside its cafes, in shops and supermarkets.

Coca-Cola said it was open to additional expansion into new markets and would consider new product formats following the acquisition of Costa. “The acquisition will expand the existing Coca-Cola coffee lineup by adding another leading brand and platform. Costa also gives Coca-Cola new capabilities and expertise in coffee, and our system can create opportunities to grow the Costa brand worldwide,” Coca-Cola President and CEO James Quincey said while announcing the deal.

From an India perspective, Coca-Cola is likely to rejuvenate the brand, according to industry sources, as it looks to consolidate its presence in the Rs20 billion domestic coffee retail market, which is growing at 11-12 per cent per annum. 

“The acquisition will help scale up Costa, as Coca-Cola is a large player here and has a good understanding of the Indian market and consumer. Coca-Cola, of course, will diversify into healthier drinks with the acquisition, something it is already doing. The company will also get access to distribution channels (via retail stores of Costa) through the transaction. 

This way it can push its own portfolio of products,” said Abneesh Roy, senior vice-president, research (institutional equities), Edelweiss.

Global majors such as Starbucks and McCafe (from McDonald’s) have a headstart in the domestic market with over 124 and 150 stores, respectively, in the country, competing with homegrown players such as Café Coffee Day, which has over 1,700 stores.

Costa Coffee, which has been in India for nearly a decade and a half, has around 100 stores, run by Ravi Jaipuria’s Devyani International under a franchisee agreement with the previous owner of Costa (Whitbread). 

Coca-Cola, industry sources say, could renegotiate new terms with Costa’s existing franchisee partners (including Jaipuria in India) or may even buy out the franchisee’s interest altogether in the venture, depending on how the original deal (between Whitbread and the franchisee) has been structured. Jaipuria was not immediately available for comment. 

In 2014, Costa and Jaipuria were close to terminating their “exclusive” franchisee agreement after the latter declined committing more investment into the business.