Coca-Cola’s surprise purchase of Costa Coffee, the world’s no.2 coffee chain, is an intriguing move for a business that has no track record as a retailer. The price of £3.9 billion (16 times Costa’s annual earnings) suggests Coca-Cola see a big opportunity. So should Starbucks, the leading global coffee chain, be scared?
Room for two in China?
Both Starbucks and Coca-Cola will be focused on China, but there will be plenty of growth to share. Chinese coffee consumption is increasing 20% annually and cafe availability is a long way off US levels. (Starbucks’s has 3,300 outlets in China vs 12,000 in the U.S). Growth potential also extends beyond ‘out of home’ with Starbucks recently partnering with Alibaba’s shopping platform for coffee ‘on a call’ delivery.
The good news for Coca-Cola is Costa already has a presence and ambition in China with 400 shop locations. Nonetheless, it is a significant bet for Coca-Cola, who start a long way behind and without the brand benefit of being part of the premium Nespresso range in China.
Different availability strategies?
Perhaps the biggest contribution from Costa will be the building and retaining of distribution in retailers that drive impulse sales. Coca-Cola’s CEO James Quincey has already indicated the company will bring brand vending machines to U.S. petrol stations, college campuses and quick-service restaurants.
Vending is where Costa has a very good fit for Coca-Cola. Costa has focused on locating Costa Express vending machines as an entry level ‘micro coffee shop’ franchise in petrol stations and convenience stores. More than 8,000 have been introduced globally.
In contrast Starbucks has partnered with vending company Selecta to position their brand as a larger, premium on-the-go solution. Put another way, Starbucks is not targeting the smallest spaces in restaurants, petrol stations and convenience stores where Coca-Cola’s drinks cabinets and trade customers will be found.
With Costa, Coca-Cola can offer retail customers additional traffic to their shops and greater revenue from their beverage range. There will also be synergies from vending and chiller cabinet management that is starting to use smart technology to ensure optimum ranges and merchandising for customers.
Ready for ready-to-drink?
Ready-to-drink could be one area where Coca-Cola may find its ambitions overlap significantly with Starbucks.
Coca-Cola already owns Georgia Coffee, a canned coffee product that is apparently the highest-grossing, ready-to-drink coffee product in the world. Launched decades ago in Japan it is surpassing $1 billion in annual sales.
Costa gives the business another credible and perhaps more stretchable coffee brand for a growing ready-to-drink category that features a long established PepsiCo and Starbucks partnership.
In conclusion, with a big head start in China, differences in distribution priorities and the huge scope for growth there appears little reason for Starbucks to panic just yet.
Coca-Cola’s impulsive move, however, makes a lot of sense. Past boundaries between coffee and Coca-Cola’s other beverages have now become blurred. Costa is certainly a logical addition for a “total beverage company” that aims to give “people more of the drinks they want.”