Coca-Cola has agreed to buy Costa Coffee in a £3.9 billion bid to diversify its drinks portfolio and turn the UK’s largest coffee chain into a global brand. But tepid sales, stiff competition and a convoluted strategy could mean the coffee is served cold.
Costa, which boasts around 3,800 stores and 8,200 self-serve machines across more than 30 countries, stands to benefit from Coke’s marketing nous and worldwide relationships with bottlers, distributors and retailers. Coke CEO John Quincey believes Costa could ultimately capture the lion’s share of the $500 billion global coffee market with a combination of coffee shops, vending machines, canned coffee drinks, and coffee machines and beans for businesses and homes. As for Coke, owning Costa would reduce its reliance on sugary drinks - which have fallen out of favour with consumers and governments - and bolster the range of beverages it offers to restaurants, convenience stores and other customers.
The partnership may sound promising, but Costa faces several challenges. Excluding new stores and machines, its UK sales fell 2% in its latest quarter and inched up 1.2% in the year to March. Its underlying operating profit in the UK also slid 2.3% to £151 million in the latter period. The main headwind has been lower footfall on the high street and in shopping centres, but pressure from Starbucks, Caffè Nero and other rivals won’t have helped. Although Costa cafés in retail parks, drive-thrus and stations have fared better and the self-serve machine business is sprouting, Coke could struggle to grind out growth.
Given Coke’s lack of retail experience, managing thousands of cafés poses another challenge. Its solution is to retain Costa’s management team, trust them to run the retail business and empower them to recruit as needed. Coke executives argue Costa cafés will be critical to building the brand, delivering a great customer experience and developing coffee culture in regions such as Asia, and can also serve as proving grounds for new products and laboratories for tracking and analysing consumer behaviour. However, as the US market is saturated with coffee shops, they plan to focus on other parts of the coffee market there. The risks of separate management teams and different regional strategies include diluting Costa’s brand, sacrificing synergies between its divisions and losing sight of its overall mission.
Owning Costa would contribute to Coke’s goal of becoming a ‘total beverage provider’ to its customers, as it would be able to offer Costa’s coffee beans, espresso machines and self-serve coffee bars – plus new products such as chilled cans of Costa coffee - alongside its juices, iced teas, energy drinks, sodas and water brands. It could also stock and market its products in Costa cafés and supercharge Costa’s brand awareness and international growth. But Costa’s current weakness, fierce competition and a questionable growth plan could mean the combination results in a crash.