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Coca-Cola Bets on Coffee With $5.1 Billion Deal for Costa Coca-Cola Bets on Coffee With $5.1 Billion Deal for Costa
(about 7 hours later)
LONDON — As consumers shy away more and more from sugary soft drinks, Coca-Cola has found a new way to cater to them: serve them coffee.LONDON — As consumers shy away more and more from sugary soft drinks, Coca-Cola has found a new way to cater to them: serve them coffee.
The American beverage titan said on Friday it planned to buy Costa, one of the world’s biggest coffee chains, for 3.9 billion pounds, or $5.1 billion. The American beverage titan said on Friday that it planned to buy Costa, one of the world’s biggest coffee chains, for 3.9 billion pounds, or $5.1 billion, in cash.
Soda purveyors have sought for years to find new products as consumer tastes have changed: PepsiCo, for instance, has refocused on healthier snack offerings, and earlier this month agreed to buy SodaStream for $3.2 billion. The deal — Coke’s biggest acquisition in almost a decade — shows just how much the company is willing to spend to keep up with changing tastes.
The deal puts Coke squarely into a red-hot battle in the coffee world, one that until now had been dominated by two food giants. One is Nestlé, which owns Nescafé and the high-end Blue Bottle chain. The other is JAB, the acquisitive European conglomerate that has snapped up Peet’s Coffee, Caribou Coffee, Stumptown and more. Coke’s sales have been falling for the past five years, as consumers spurn the sugary drinks that have long underpinned its business empire. That shift away from soda has forced the entire industry to find new businesses.
Now Coke has joined the fray, by making one of its largest-ever acquisitions. PepsiCo, for instance, has refocused on healthier snack offerings, and this month agreed to buy SodaStream, which now emphasizes its ability to make flavored sparkling water at home, for $3.2 billion.
In its sights is the fast-rising consumption of coffee around the world, as well as the myriad ways that java can be served, from coffee shops to pods. The company is betting that its vast distribution network can help it muscle into the business, serving up at-home products as well as stores. Coke, by contrast, has jumped squarely into a red-hot battle in the coffee world, where two food giants have spent tens of billions of dollars to build their empires.
One is Nestlé, which owns Nescafé and the high-end Blue Bottle chain, and which recently closed a $7.15 billion deal for the exclusive marketing rights to Starbucks products.
The other is JAB, the acquisitive European conglomerate that has remade the coffee industry through a spending spree that has seen it pick up Peet’s Coffee, Caribou Coffee, Stumptown and others.
In all of their sights is the fast-rising consumption of coffee around the world, as well as the myriad ways that java can be served, from complex creations in coffee shops to pods that can be dropped into machines at home. Coca-Cola, for its part, is betting that its vast distribution network can help it muscle into the business, serving up products in kitchens as well as stores.
“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,” James Quincey, Coke’s chief executive, wrote in a corporate blog post.“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,” James Quincey, Coke’s chief executive, wrote in a corporate blog post.
Its bet on coffee is to buy Britain’s biggest coffee chain. Founded as a roastery in London 47 years ago by two brothers, the company now trails only Starbucks and McDonald’s in its number of worldwide coffee locations. It has more than 2,400 stores in Britain and 1,400 in other markets around Europe and Asia, as well as 8,000 Costa Express self-serve machines. With JAB having snapped up so many coffee shops, Coke chose an obvious target: Britain’s biggest coffee chain, which itself helped convince a nation of tea drinkers to gulp a different kind of brew.
Coke itself had flirted with buying a coffee company before, in a way. It invested $1.25 billion in the maker of Keurig home coffee makers, to help pave the way for a Keurig Kold line of at-home soda machines. But that partnership faltered two years later, after the Kold proved a bust. (Keurig is now owned by JAB, which combined the business with its Dr Pepper Snapple arm.) Founded as a roastery in London 47 years ago by two brothers, Costa now trails only Starbucks and McDonald’s in its number of worldwide coffee locations.
Costa’s current owner is the British hospitality company Whitbread, which acquired the coffee chain in 1995, when it had just 39 stores. Since then, Whitbread has focused on expanding the business internationally. When Costa’s current owner, the British hospitality company Whitbread, bought the chain in 1995, it had just 39 stores. Now the coffee business has more than 2,400 outlets in Britain and 1,400 in other markets around Europe and Asia, as well as 8,000 Costa Express self-serve machines.
But in April, Whitbread said that it was considering spinning off or selling the business — amid pressure from activist shareholders like Elliott Associates — to focus on its faster-growing Premier Inn line of hotels. Most of the proceeds from the transaction will go to Whitbread shareholders, the company said in a statement. Its sales in Britain have been stagnant in recent years, as consumers have tightened their wallets amid concerns about inflation. Those who have continued buying cups of coffee have opted for the more artisanal experiences and products offered by upstarts, which have snatched a small but growing slice of the market.
Whitbread had responded over the last three years by building more international stores, trying to make the Costa brand more of a rival to Starbucks, particularly in China. Those expansion efforts were what drew the attention of the British-born Mr. Quincey.
“Costa is a good fit — and the best way — for Coca-Cola to add a global coffee platform that will complement our existing system,” he wrote.
Coke itself had flirted with buying a coffee company before, in a way. It invested $1.25 billion in the maker of Keurig home coffee makers, to help pave the way for a Keurig Kold line of at-home soda machines. But that partnership faltered two years later, after the Kold proved a bust. (Keurig is now owned by JAB, which combined the business with Dr Pepper Snapple this year.)
What made Friday’s deal possible was Whitbread announcing in April that it was spinning off the Costa business, amid pressure from activist shareholders like the hedge funds Elliott Management and Sachem Head, to focus on its faster-growing Premier Inn line of hotels.
Soon afterward, Whitbread heard from Coke, which offered a knockout price. The transaction values Costa at more than 16 times the pro forma earnings for its 2018 fiscal year. Given that offer and what Coke could do to accelerate Costa’s growth plans, starting talks made a huge amount of sense, according to Whitbread’s chief executive, Alison Brittain. (The bulk of the deal negotiations took place over just five weeks, she said in a telephone interview.)
“Costa gets all the scale and distribution and reach of Coca-Cola that the original business couldn’t do on its own,” Ms. Brittain said.
Investors in Whitbread appeared pleased with what Ms. Brittain told analysts was an “absolute stonking” deal: Shares in the British company were up as much as 19 percent on Friday.
“This transaction was a marriage made in heaven,” Ms. Brittain said in the interview.