Coca-cola Just Became A Giant Threat To Starbucks After Buying One Of Europe's Biggest Coffee Chains

Posted: Aug 31, 2018

  • US beverage giant Coca-Cola will buy British coffee shop chain Costa in a surprise acquisition.
  • Costa, which is currently owned by Whitbread, is being sold for £3.9 billion ($5.1 billion).
  • Coca-Cola currently has no presence in the coffee market, and is using the deal to expand into the space.
  • The move is likely to cause ripples for major coffee chains in the US like Starbucks.

Shares in Whitbread jumped almost 20% at the open on the news.

Coca-Cola has announced a surprise move to buy Costa Coffee, one of Europe's largest cafe chains, from current owners Whitbread for £3.9 billion ($5.1 billion) in a move likely to send shockwaves through the coffee industry.

Whitbread, which also owns budget UK hotel chain Premier Inn, said that its board had unanimously approved the deal, and that it expects the sale to be completed by the first half of 2019.

"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," Whitbread's chief executive Alison Brittain said in a statement released to the stock market on Friday morning.

The £3.9 billion figure put on the deal represents a multiple of more than 16 times Costa's expected full-year earnings in 2018.

Whitbread had plans to spin out the Costa brand, but the sale to Coca-Cola has come as something of a surprise to many in the market, given that Coca-Cola currently has no presence in coffee. That lack of a presence is exactly why Coca-Cola wants to buy Costa, however.

Costa has over 3,800 stores globally, with 2,467 stores in the UK, and 1,415 international. It has zero footprint in the USA.

"Hot beverages is one of the few remaining segments of the total beverage landscape where Coca-Cola does not have a global brand," Coca-Cola CEO James Quincey said in a statement. "Costa gives us access to this market through a strong coffee platform."

Coca-Cola's move into coffee is part of a growing trend from soft drink manufacturers, who are trying to find ways of continuing to grow while consumers move away from sugary, fizzy drinks — which in many markets are now heavily taxed.

Earlier in August, for example, Pepsi paid $3.2 billion to buy SodaStream, which allows consumers to make their own carbonated beverages at home.

Coffee wars: The threat to Starbucks
Costa's sale to Coca-Cola is likely to be seen as a direct challenge to the dominance of Starbucks in the US coffee space. Costa has more UK stores than Starbucks, and prior to the takeover was already expanding globally. I n October 2017 it bought out Yueda, a Chinese coffee chain with which it had operated a joint venture in the country for over a decade.

Costa is the second largest coffee shop chain in China, although its presence there is currently dwarfed by Starbucks' 2,800 stores.

Not only does Coca-Cola's deal with Costa threaten Starbucks' store-based operations, but also its retail arm, which sells branded iced coffees and coffee drinks in convenience and grocery stores around the world.

In the UK, Costa operates thousands of self-service coffee machines in stores and gas stations, a model which could be expanded to the US.

By Will Martin
August 31, 2018

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