Why can’t Coca-Cola sell Costa? It’s a simple enough question – but the answer is far from straightforward.
On paper, Costa Coffee is an extremely attractive proposition for potential buyers – it is the largest UK coffee house chain by a country mile, far outstripping its nearest local rivals Caffè Nero and Pret a Manger, as well as utterly dwarfing Starbuck’s considerable presence on the British market.
All this goes a long way towards explaining why the soft drinks leviathan purchased Costa from Whitbread back in 2019 – but why does it suddenly want to sell what should be an immensely promising multi-national coffee chain?
The 2020s have proved incredibly complex economically for the hospitality industry, with complications arising from Brexit, Covid and the cost-of-living crisis all contributing their own market pressures; but has Costa’s UK hegemony simply run its course?
With an increasingly popular and diversified coffee market in both the UK and globally – perhaps the coffee chain mega brand simply can’t command the same market share as it might’ve done 15 years ago.
Too much too soon?
One perhaps quite painful fact is clear – Britons, and much of the Western world simply have a lot less money to play with than they might have done ten, or even 15 years ago.
And in the grand scheme of things, coffee houses are rather superfluous. That’s without taking into account the ever-increasing premium coffee competition on UK high street, with the likes of Black Sheep Coffee and Krispy Kreme splintering the market away from the traditional ‘big three’.
Unlike other UK chains, Costa has grown to become a genuine international player – it now boasts over 4,000 locations across 38 countries.
In an era dominated by shrinkflation and diminishing profit margins and footfall – maybe Costa is simply too bloated an entity to be attractive as whole?
“On paper, a footprint of more than 4,000 stores across 50 markets signals brand reach and resilience. In practice, investors tend to look past headline numbers and focus on unit economics and capital efficiency, and that’s where Costa has struggled to convince,” commentedThird Bridge global sector lead, Alex Smith.
“According to the expert we spoke with last year, the estate is highly polarised. Drive-through formats and Costa Express have performed strongly, while high-street and some international coffee shop locations have underperformed materially.”
He continued: “That uneven performance creates operational complexity, higher overheads, and weaker returns on capital.”
Wondering whether the popular brand has simply run out of steam, Shore Capital analyst Clive Black added: “Costa’s platform makes it quite mature in the UK, in particular, which has to be taken into account in terms of what is left for the next man when selling a business.
“Perhaps more concerning, is the strength of alternative brands, many more authentic and artisanal, which eat into Costa’s addressable market.”
Has Coke done right by Costa?
Coca-Cola will have had high hopes then, in 2019 when it took Costa off Whitbread’s hands for the princely sum of around £4 billion. So why is Coke now happy to sell up for a cut-rate deal, setting an asking price of only £2 billion?
The lack of any serious, concrete interest manifesting itself is perhaps a clear an indicator as any.
Despite entering into advanced negotiations with the likes of Asda owner TDR Capital, and Bain Capital’s special situations fund, which owns Gail’s Bakery and PizzaExpress; no concrete offers were tabled – and Coca-Cola has opted to keep Costa, for now, instead of selling below asking price.
But why hasn’t Costa Coffee delivered for the US firm over the past seven years? Sure there have been significant economic headwinds, but other coffee houses have thrived in these conditions. Maybe Coke simply hasn’t given Costa the support it needed during these choppy financial waters, and is now paying the price?
Black certainly believes that this might be the case: “Coke has not been a good owner for Costa, it seemed to lack commitment to the brand’s development early doors in favour of core beverages, in a market that has become more not less competitive. As such, Coke maybe did not understand what it was buying and how to make 1+1=3.”
Smith agreed: “When Coca-Cola acquired Costa, the strategic logic was compelling: coffee was one of the fastest-growing global beverage categories, and Costa offered exposure across coffee shops, ready-to-drink (RTD), at-home and self-serve formats. The expert we spoke with suggests the under delivery stems more from a mismatch between Coca-Cola’s core strengths and the operational realities of running a hospitality business.
“Coca-Cola has added clear value in scalable, FMCG-style platforms such as Costa Express and RTD coffee, both of which have grown profitably. By contrast, the coffee shop business, particularly in the UK, has remained capital-intensive, labour-heavy and operationally complex, with slower growth and weaker margins than Coke likely anticipated.”
Noting the economic shock of Covid shortly after acquisition, Smith added: “The expert noted that Costa has arguably been run too much through an FMCG lens, focusing on product and promotions rather than hospitality fundamentals like service speed, store design and in-store experience. Underinvestment in these areas diluted the value proposition and limited recovery as footfall returned.”
What next for Costa?
So what lies in store for Costa now that its sale has been ignominiously aborted? Despite everything, it is still the biggest player on its domestic scene and currently claims a whopping 38.3% UK market share.
But as Smith explained, its revenue streams are now much more diverse than they might have been ten years ago – with Costa Express outlets and its RTD offering proving increasingly popular with the public.
Does this mean that Costa might be broken up? Restructured perhaps into something more manageable for Coca-Cola, which seems to have had its attention elsewhere at times – and now wants as pain-free a way out as possible, but as we have seen – not at any price.
Or perhaps Coca-Cola should re-focus its efforts and take a proper shot at managing one of most successful hospitality businesses of the last 50 years.
In any case, it stands to gain much more by raising the brands value through concerted, streamlined efforts than letting it coast until (if) a buyer willing to fork out £2 billion is found.
Summarising the situation rather succinctly, Julian Wild, director at Wilkin Chapman Rollits predicts a sweeping, unabashed approach restructuring from Coke: “Coca-Cola bought Costa at the height of the market and seriously overpaid. The froth has gone off the coffee craze and Costa has underperformed.
“There are no buyers at the price they want, so the sale has been aborted. Next step will be to take a knife to Costa’s cost base, and a radical reshaping of the business seems inevitable.”
Echoing Wild’s thoughts, Black warns that Coke needs to take better care of Costa, lest it “rue even the low prices recent suitors offered”.
Concluding, he added: “Today’s Coke management are paying a heavy price for an ill thought-through acquisition.”
