According to the news report by CNN Money, The Coca Cola Co. (Coke) has agreed to buy the UK coffee chain, Costa Coffee, owned by drinks and hotels conglomerate Whitbread, for a sum of £3.9 billion (~$5.1 billion).
The coffee chain operates almost 4,000 retail stores across 32 countries around the world. Besides the retail stores, Costa also operates smaller on-the-go outlets, for home coffee products and a roastery.
And with this acquisition, Coke stated that their company was going to get a strong platform in the coffee industry across Europe, the Middle East, Asia Pacific and Africa.
Whitbread had acquired Costa in 1995 and it said that it was planning to use the money from this sale of the coffee chain to Coke to expand its other major brand, the Premier Inn hotel chain.
This deal between the two companies is not yet finalized though, as it is pending approval from shareholders as well as regulators. Coke and Whitbread said that they were expecting the deal to be closed in the first half of next year.
Coke in now entering a market that is crowded with coffee majors. Coke will go into direct competition with coffee giant Starbucks as well as other global coffee brands. Additionally, the majors in the coffee industry have been forming alliances that are changing the space.
Earlier in 2018, Starbucks and Nestle entered into a $7.2 billion agreement to enter a global coffee alliance. According to this deal, Nestle will have the rights to market, sell as well as distribute Starbucks products across the world.
Then in May, the Luxembourg based JAB, a holding company that owns brands such as Krispy Kreme as well as Peet’s Coffee, bought over Pret A Manger, the UK based sandwich and coffee retail chain. Additionally, another brand owned by JAB – Keurig – merged its business operations with one of Coke’s US competitors – Dr. Pepper Snapple – in January this year.
Coke’s Chief Executive Officer James Quincy stated during the announcement of this deal that the hot beverages segment was one of the few segments that Coke did not have a global presence. With Costa, now Coca Cola could also compete on the global coffee platform.
MarketWatch reports that UK’s CMC Markets’ analyst Michael Hewson, Coke, like a lot of its competitors, is looking at ways to diversify from its core business. Sugary drinks such as Coke’s flagship brands have been attracting censure from the government as well as social activists and nutritionists.
The rising global obesity problems are being directly attributed to the consumption of such beverages. In fact, there is a growing number of states in the US that are now imposing special taxes on sodas as well as other sugary beverages.
Hewson is also skeptical about Coke’s success in the coffee business, as he warns that this space is “extremely competitive”.
Coke’s acquisition is taking place after its biggest competitor PepsiCo announced earlier this month that it was acquiring the Israeli Do-It-Yourself seltzer company SodaStream for a sum of $3.2 billion.
Markets.com’s chief market analyst Neil Wilson feels that this acquisition is Coca Cola’s attempt at jumping into a “frothy market” that it has missed out on so far, and that gaining a brand such as Costa Coffee which has a rapidly increasing global presence was the ideal way to make an entrance.
Right now, investors are not that worried about how much of an impact this deal will have on the market leader Starbucks. In fact, the market’s reaction was rather muted about this deal, with the coffee giant’s shares only falling by 1.4% in pre-market trading.