Coca-Cola buys Costa Coffee: what it means for Starbucks

Costa
Coffee is being acquired by Coca-Cola.
Ben Pruchnie / Getty
Images

• Coca-Cola announced
  on Friday that it would buy British coffee-shop chain
  Costa
  Coffee for 
  $5.1 billion.
• Analysts say the move is likely to have a major impact
  on Starbucks,
  especially as it looks to grow in China, a region that both
  coffee chains are looking to expand in to drive
  sales. 
• According to GlobalData, retail sales of hot
  drinks in China alone will hit $34.2 billion by 2022, and
  hot-drinks volumes across all channels have more than doubled
  there in the past five years.

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Costa Coffee is to the UK what Starbucks
is to the US. 

It’s the coffee chain that’s so prevalent you’ll find it on most
street corners of major cities and towns, in thousands of
self-service machines in gas stations around the UK, and in
national grocery stores as “ready-to-drink” products.

While it may be the leading chain in the UK, where it has more
than 2,400 stores, its reach beyond that lags behind Starbucks,
especially in the US, where it has no presence. In total, Costa
Coffee has 3,912 stores in 31 countries. 

The news that Coca-Cola
is buying the chain from Whitbread for
$5.1 billion has sent shockwaves around the coffee world
as analysts consider Costa’s new potential for growth with
Coca-Cola’s “distribution
muscle” behind it — and, especially, what it will mean for
Starbucks.

Global growth

While Starbucks is unlikely to be unseated from its position of
power in the US market, analysts are expecting the new deal with
Coca-Cola to allow Costa Coffee to better compete in its
international markets, especially China, one of Starbucks’ key
regions for growth. 

“For the time being it is far more likely to offer a
serious threat to Starbucks in China, where the coffee market
still has significant potential and is growing fast,” Jonathan
Davison, beverage analyst at GlobalData, wrote in a
statement emailed to Business Insider on Friday.

Customers
enter a Starbucks store in Shanghai on July 22,
2014.
REUTERS/Aly
Song

Starbucks did not immediately respond to Business Insider’s
request for comment. 

According to GlobalData, retail sales of hot drinks in
China alone will hit $34.2 billion by 2022, and hot-drinks
volumes across all channels have more than doubled there in the
past five years.

Both coffee chains are doubling down on expansion in China
to drive growth. 
Starbucks, which is currently
the leading chain with 2,800
locations in China, is 
aiming to double its
store count to 6,000 locations and triple its revenues over the
next five years. 

Starbucks CEO Kevin Johnson said in May that the company is
looking to push “a coffee culture in China where the
reward will be healthy, long-term, profitable growth for decades
to come,”
CNN Money reported.

Earlier this month, Starbucks also announced a deal with
Chinese e-commerce giant Alibaba to expand its delivery services
throughout the country. 

Meanwhile, Costa Coffee, the second-largest coffee chain in
China with more
than 400 locations, has its own expansion plans. 

In October 2017 Costa Coffee bought Yueda,
 a
Chinese coffee chain with which it had operated a joint venture
in China for more than a decade. Several months later, in April,
Costa Coffee CEO Allison Brittain announced that the company was
looking to spin off from its parent company, Whitbread, in order
to facilitate its expansion plans, pointing to China as
a key area for growth. 

“Costa will become a listed entity in its own right and the clear
market leader in the out-of-home coffee market in the UK,”
Brittain,
said in
a statement at the time. It will be “well
positioned to build further on its strong international
foundations with growth expected in China and Costa
Express.”

Ready-to-drink products

While Costa will likely struggle to break into the US market in
terms of opening physical locations, there’s an opportunity to
sell its ready-to-drink products in stores, analysts say. 

“The lack of any retail presence for Costa Coffee in the US means
Starbucks has been able to dominate ready-to-drink coffee sales
there up to now. Expect that to change in the coming years,”
Davison told Business Insider.

This will be of particular importance to both Starbucks and Costa
as the hot-coffee market is enduring a long-term decline in the
US, he said. 

These products also give Coca-Cola an opportunity to compete with
PepsiCo, its biggest rival, which has a partnership with
Starbucks to distribute its ready-to-drink products to
stores. According to Davison, this relationship is yielding big
wins in terms of sales to become a retail business worth more
than $2 billion. 

“Now Coca-Cola wants in on this market,” he said.