Costa packet: Coca-Cola boosts UK coffee potential

By Rod Addy contact

- Last updated on GMT

Costa’s Rainforest Alliance-certified coffee beans
Costa’s Rainforest Alliance-certified coffee beans
Coca-Cola has boosted its UK coffee presence with the $5.1bn (£3.9bn) purchase of Costa Limited from parent company Whitbread plc.

The Coca-Cola Company announced the deal today (August 31), stating that it would give it a strong global coffee platform for growth, with Costa present in 31 countries. Prior to the acquisition, Coca-Cola’s coffee portfolio already included the market-leading Georgia brand in Japan, plus products in many other countries.

“This is a big deal for Coca-Cola and a strategic play to further expand beyond soft drinks and move into the hot drinks sector,”​ said Fraser McKevitt, head of retail and consumer insight at Kantar Worldpanel.

“Coca-Cola doesn’t currently have any coffee outlets in its arsenal and this is an opportunity for the business to plug that gap and tap into this growing market. The out-of-home coffee market is not one to be underestimated: worth £6.3bn a year in Great Britain and growing by 4.3%, our nation’s taste for coffee doesn’t look set to turn any time soon. 

‘New formats’

“By acquiring a favourite out of home coffee brand, Coca Cola is leap-frogging its way to having a substantial hot drinks offer and bolting on the UK’s favourite coffee brand. It also offers intriguing possibilities for the Costa name to appear in new formats, such as chilled variants, and reach a wider audience through Coca-Cola’s well-established distribution network.”

Comparing Costa’s clout to its larger rival, market research provider Euromonitor stressed: “Since 2009, Whitbread’s Costa Coffee has ranked as the second largest specialist coffee shop in the world trailing only Starbucks.”

Euromonitor highlighted the fact that Starbucks commanded a 46.1% value share of the specialist coffee shop market globally, whereas Costa Coffee held 3.1%.

However, Euromonitor said Costa Coffee was Whitbread’s most lucrative consumer foodservice offering. The company had continued slow-roasting the Mocha Italian blend of Arabica and Robusta beans developed by the Costa brothers more than 40 years ago.

Growth opportunities

All regions are expected to offer growth opportunities in specialist coffee shops,”​ Euromonitor commented. “… North America will contribute another $2.5bn in absolute value growth, while Western Europe will see a more moderate $1.2bn increase.

“Although Costa does not have any presence in North America, its performance in Western Europe continues to be very strong as it leads all other specialist coffee shops in the region in terms of absolute value growth since 2008.

“The majority of global value will stem from Asia Pacific, where Costa’s position is decreasing, despite consistent and significant value growth due primarily to the accelerated growth of the top player, Starbucks, in China.

“While Asia Pacific will continue to be important for Costa’s future prospects, the Middle East, where Costa trails Starbucks by less than a percentage point likewise offers potential as does Eastern Europe where Costa, as well as fellow Whitbread brand Coffee Heaven, also enjoys a solid consumer base.”

Costa's UK production

Costa opened a roasting facility in Basildon, Essex, in March 2017 that quadrupled its production capacity from 11,000t of coffee a year to 45,000t. The facility is located 14 miles from Tilbury docks, where the raw coffee beans it imports are delivered. The Paradise Street facility covers 7,961m2​ and enables Costa to produce coffee for 2.1bn cups of coffee a year. It is expected to operate for the next 20-30 years, with potential to grow total UK coffee production to 60,000t a year.

China

Coca-Cola said the expected acquisition gave it critical know-how and expertise in a fast-growing, on-trend category. “Costa ranks as the leading coffee company in the UK and has a growing footprint in China, among other markets,” ​it stated.

Costa had a solid presence with Costa Express, which offered barista-quality coffee in a variety of on-the-go locations, including petrol stations, cinemas and travel hubs. Costa, in various formats, had the potential for further expansion with customers across the Coca-Cola system, the soft drinks giant claimed.

The company said Costa’s sourcing, vending and distribution capabilities would complement its own.

“Costa gives Coca-Cola new capabilities and expertise in coffee and our system can create opportunities to grow the Costa brand worldwide,” ​said Coca-Cola president and chief executive officer James Quincey.

“Hot beverages is one of the few segments of the total beverage landscape where Coca-Cola does not have a global brand. Costa gives us access to this market with a strong coffee platform.”

‘Global potential’

Costa managing director Dominic Paul said: “Costa is a fantastic business with committed and passionate associates, a great track record and enormous global potential. Being part of the Coca-Cola system will enable us to grow the business farther and faster.”

Whitbread chief executive Alison Brittain, said: “This transaction is great news for shareholders as it recognises the strategic value we have developed in the Costa brand and its international growth potential and accelerates the realisation of value for shareholders in cash.

“The sale of Costa to Coca-Cola is another successful landmark in the 276-year history of Whitbread. Whitbread acquired Costa in 1995, for £19m when it had only 39 shops … In more recent years, we have been focused on building Costa into a leading multi-channel, international coffee brand. This has resulted in this unique strategic opportunity to combine the Costa brand with Coca-Cola’s global scale, product and distribution capabilities.

“This combination will ensure new product development, continued growth in the UK and more rapid expansion overseas. As a result of this strategic sale our teams, pensioners, suppliers, shareholders and other stakeholders will all have the opportunity to share in the benefits.”

The deal is subject to the usual regulatory approvals, including antitrust approvals in the EU and China and is expected to close in the first half of 2019.

Nestlé/Starbucks deal

Coca-Cola’s announcement of its agreement to acquire Costa comes hot on the heels of Nestlé securing the perpetual rights to market Starbucks Consumer Packaged Goods and Foodservice products globally, outside of the company’s coffee shops.

Announced on August 28, Nestlé said the alliance would allow the two companies to work closely together on the existing Starbucks range of roast and ground coffee, whole beans as well as instant and portioned coffee. The move would also capitalise on the experience and capabilities of both companies to work on developing products for coffee lovers globally.

The agreement boosted its coffee portfolio in the North American premium roast and ground and portioned coffee business and enabled Starbucks to expand globally in grocery and foodservice, Nestlé claimed.

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