04 September, 2018
Coca-Cola look set to buy British multinational Costa Coffee for a staggering £3.9bn. The deal marks a key time in Coca-Cola's history, as it aims to break into the coffee market. The deal allows the global giant other opportunities for revenue and is thought to have come about in order to try and combat falling revenues on their portfolio of sugary drinks.
As you will no doubt have heard from extensive media coverage, the UK Government has recently introduced a new tax on drinks with too high a sugar content, labelled as a 'sugar tax'. This new tax is to account for the sudden hike in price in fizzy drinks, such as Coke, Fanta and Sprite, all three of which are owned by Coca-Cola. For drinks with more than 5g of sugar per 100ml, a tax of 18p per litre is applied with a tax of 24p a litre for drinks with 8g or more per 100ml.
This isn't the first move of a large 'sugar focused' manufacturer looking to reinvent themselves, PepsiCo recently bought the fizzy drinks maker SodaStream and the Swiss food giant Nestlé has struck a $7.3bn deal to license Starbucks-packaged coffees and teas internationally.
By diversifying into coffee, Coca-Cola look to establish themselves in an already heavily saturated market. However, it has been commented that Coca-Cola may be too late to the coffee party. The global market size of the industry has steadied in recent years and, according to the Financial Times, is projected to increase from roughly £70bn to £78bn from now to 2022. In contrast, the UK market size grew in turnover by 7.3% in 2017 and the number of coffee shops in the UK has grown from 10,000 in 2007 to 24,000 today, with 10% of those being Costa shops. So this begs the question, will Coca-Cola look to penetrate into the American market, or will it focus on the UK?
The deal is predicted to complete in the first half of 2019. The deal comes as a win-win for both parties, as Costa will now have the investment power of Coca-Cola behind it. Whitbread PLC, the previous owner of Costa Coffee, received a handsome price for the company, much higher than it had anticipated in its earlier proposals to demerge the Company, and can now concentrate on its faster growing brand - Premier Inn.
Alison Brittan, CEO of Whitbread PLC has commented that the acquisition could represent the perfect fit for both Coca-Cola and the Costa brand and has predicted Costa appearing in vending machines, hotels, restaurants, pubs, cafes - in all the places you see Coca-Cola today.
There is a genuine possibility that taxes on sugary drinks will continue to rise, so Coca-Cola will either have to increase their diversification efforts, or attempt to find an alternative recipe for their best-selling fizzy drinks to avoid UK taxes. Either way when the deal completes in the first half of next year Coca-Cola will own 4,000 Costa stores in 32 countries, with more than 2,400 of those in the UK, as well as more than 8,000 self-serve Express machines and so certainly has a good start on any reinvention.
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