Coke’s Costa deal is a taste of things to come
Global brands are taking divergent approaches in response to changing consumer habits
Alistair Gray and James Fontanella-Khan in New York SEPTEMBER 2, 2018 Print this page11
Coca-Cola’s £3.9bn deal to buy the Costa Coffee chain has highlighted the lengths to which food and drinks companies are going to keep pace with rapidly changing consumer habits that are upending business models across the sector.
Although the purchase price is small in the context of Coke’s $191bn market capitalisation, some bankers described the acquisition as among the most important strategic moves the US beverage maker has made in its 132-year history.
The Atlanta-based group’s decision to take on Starbucks, Nestlé and JAB Holdings in the fast-growing yet highly competitive coffee market capped a busy dealmaking fortnight in consumer industries.
A series of proposed transactions has shown how established western brands are taking divergent approaches in response to demand for fresher and healthier products and the transformative rise of digital marketing.
“Companies are grasping with how to deal with the changes,” said Ali Dibadj, analyst at Bernstein in New York. “There are a lot of weird combinations happening.”
Many consumer companies are expanding into territories or products with brighter growth prospects. Ten days before Coke reached its agreement on Friday to buy Costa, its arch-rival PepsiCo struck a $3.2bn deal to buy Nasdaq-listed SodaStream, which makes sparkling-water dispensers.
Some other consumer goods stalwarts, however, are doubling down on traditional strengths.
The day before the Costa deal, Campbell Soup announced a strategic about-turn. After stumbling in a push into refrigerated products, Campbell now plans to refocus on packaged foods such as its eponymous canned soup. The New York-listed company set out plans to sell its portfolio of fresh brands, from carrot snacks to hummus, along with overseas assets.
Given such mis-steps, those companies that are branching into new areas are encountering inevitable scrutiny.
In Coke’s case, the acquisition of UK-focused Costa prompted questions on Wall Street about how the consumer goods company will manage a shift into bricks and mortar retail, where it lacks experience.
Costa will increase the group’s headcount by about a third, adding another 20,000 or so employees on top of its existing total of about 62,000, and require it to maintain an expanding network of 3,800 stores.
James Quincey, Coke’s chief executive, said the acquisition of the coffee company from London-listed Whitbread had a “very compelling strategic rationale”.
“There’s opportunity for great value creation, through the combination of Costa’s capabilities and Coca-Cola’s marketing expertise and global reach,” he said.
Its purchase of Costa is part of the fizzy drink maker’s effort to reposition itself as a “total beverage company”.