The $5.1 billion deal that gives Coca-Cola instant heft in the coffee industry began on the sidelines of the Microsoft CEO Summit. Although it gets 3,800 stores in 32 countries and a foothold in China, its U.S. focus is expected to be ready-to-drink coffee beverages.
A secretive summit in Seattle began Coca-Cola’s whirlwind pursuit of Costa coffee.
The U.S. beverage giant’s CEO, James Quincey, first spoke to his counterpart at Costa’s British parent company in May about adding coffee to the soda pioneer’s lineup, according to people familiar with the matter.
Quincey and Alison Brittain, who heads up Whitbread, were at the Microsoft CEO Summit, an exclusive meeting of business leaders in the city that just happens to be the headquarters of Costa’s largest rival, Starbucks.
The companies went public with their news eight minutes after signing on the dotted line, because “we just had an absolutely stonking deal that we needed to announce,” Brittain told analysts Friday, using a British colloquialism “stonking” for impressive. Negotiations had been under way for months, she said.
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Quincey, who had been weighing an expansion into java since he took over last year, had spent the better part of a year studying the industry before zeroing in on Costa. It’s a business that will give it instant heft in the coffee industry, with 3,800 stores in 32 countries and a foothold in China.
Americans shouldn’t expect to see a Costa on every corner, however.
Following Coca-Cola’s $5.1 billion purchase of the ubiquitous U.K. coffee chain, the company plans to target the fast-growing ready-to-drink coffee market in the U.S., rather than set up stand-alone shops like new rival Starbucks.
“There are a lot of developed coffee shops here, both in terms of physical outlets and in terms of ritual and habit,” Quincey said on a call with analysts on Friday. “I think the opportunity in the U.S. is more about increasing our ability to be a total beverage provider to the immediate consumption channels in all their different forms.”
Expanding Coke’s ready-to-drink bottled-coffee lineup has been on Quincey’s radar since he took over the soda giant in 2017. With the Costa acquisition, Coke will aim its expanded products at the millions of vending machines and convenience stores that cover the U.S., especially as consumers turn away from the sugary sodas that they used to purchase from the very same locations.
Like its rivals PepsiCo and Dr Pepper, Coke has been diversifying its portfolio of brands as consumption of soda continues to slide. That has included a push into coffee, like a partnership with Dunkin’ Donuts to create a line of ready-to-drink bottled coffees.
Coffee consumption has been on the rise in the U.S., with consumers willing to pay up for premium drinks. And bottled coffees produce higher profit margins than some other beverages. The ready-to-drink category has exploded over the last five years, jumping nearly 90 percent to hit $3.6 billion in 2017.
The decision to push into bottled coffee in the U.S. instead of physical coffeehouses comes at a time when Starbucks has faced slowing growth. The world’s largest coffee-shop chain has been looking to China to drive its expansion. And after years of jokes about a Starbucks on every corner, it’s said it will close about 150 company-operated stores in densely penetrated U.S. markets next fiscal year.
For Coke, the Costa deal may have resulted from past lessons learned. The Atlanta-based soda giant owned 17 percent of Keurig before it was taken private by JAB Holding in 2016. Coca-Cola’s partial ownership spurred talk that it might buy the brand outright.
Instead, Coke made about $25.5 million on the JAB acquisition. Coke had been working with Keurig on a since-scrapped cold version of the coffee brewer’s single-serve machine. Dr Pepper and Keurig merged this year to create another big beverage company that could nip at PepsiCo and Coke’s heels.
Coke is the biggest shareholder at Monster Beverage, a maker of energy drinks. If they had to do it over again, they’d likely buy out the entire company, said Ken Shea, an analyst at Bloomberg Intelligence. And with the Costa deal, Quincey took a bolder step, paying up to give the soda giant a firm foothold in the coffee market.
“Coffee is growing and they know they have to be committed to it,” Shea said. “This represents a more aggressive Coca-Cola — they know they need to move faster.”