Coke’s ‘Costa-Lot’ Coffee Experiment*

News that Coca-Cola (KO:US) has put Costa Coffee into the starting blocks for a sale, brings to an end a rare stumble by the American beverage giant, as well as a fairly strange experiment.

Costa, originally founded in 1971 as a roaster and supplier to specialist Italian coffee shops, was bought by Whitbread in 1995 during its messy conglomerate phase, when the former brewer owned everything from gyms to steak houses. Former Chief Executive, Alison Britain, successfully broke up the sprawling leisure group selling assets to focus almost exclusively on its Premier Inn mid-market hotel brand. And then along came Coke.

Costa Coffee was always among the more successful parts of the Whitbread family, growing to become a dominant force in the mass-mid coffee retailing market. Whilst not under pressure to sell the chain as part of a fire sale, Britain was on record as saying Coke’s nearly $5bn offer for Costa was akin to ‘going up the aisle with a very large ring on our finger’. The Whitbread share price soared as news broke.

The mystery is why. In the words of much-loved character CJ in the ‘Fall and Rise of Reginald Perrin’, Coke didn’t get where it is today by pandering to the often-fickle whims of retail customers. Coke’s success is driven by it being a wholly B2B enterprise. Guardian of the sacred recipe, and then franchising bottling to external parties before exercising its formidable distribution model, Coke only serviced hospitality businesses; pubs, bars, restaurants, hotels and other leisure emporia – it never dealt with, well, ordinary customers. At the time, several commentators expressed bemusement but the argument had some, if limited, logic. Coke, although fairly diversified, saw entry into the lucrative hot drinks segment as providing a strong additional beverage play to its range of fizzy drinks and waters. However, what has become abundantly clear is that since 2019 when the chain was bought, there has been no clear vision of what to do with it. Externally at least, there has been little brand or shop refreshment, and little or no investment in what now feels a very tired consumer offer of limited, processed food and fairly indifferent coffee.

Timing is everything, and clearly the decision to acquire Costa in 2019 at such a premium, in hindsight was a very poor timing decision. A year later, COVID broke and the world shut down, depriving habit-shapers of their daily caffeine hit. As the country lurched from lockdown to lockdown, this was followed by the ‘cost of living’ crisis in which the economics of coffee retailing, in an already saturated market made less and less sense. Costa, although the leading chain, with over 4,000 outlets in 31 countries (over 2,700 in the UK alone), became squeezed between the ‘cheap-and-cheerful’ lower price offer of Greggs and McDonalds, and the boutique, premium-artisanal segment from the likes of Black Sheep and Gail’s.

During its ownership Coke appears to have achieved practically nothing with sales falling as the entire market began to distress from over saturation and unreasonable costs (the £4 latte being, perhaps, the straw that finally broke the Costa-camel’s back).

Coke now appears to be offloading its troubled coffee-child for the knockdown price of $1.5-2bn, suggesting a deep discount on the $5bn paid. Costa, bought and sold by the same Coke CEO, James Quincey, represents a rare stumble for a company not used to (but not unheard of) failure. ‘It’s not where we wanted it to be from an investment hypothesis point of view’ he mused. Poor timing, a basic failure to understand the market, piling in to retail where it had no expertise, and then not really having a clue ‘how to make coffee work’ have all played their part in Coke’s ‘Costa-lot’ experiment.

WHITEFRIARS has held a position in KO:US for over 15 years