Why Coke's purchase of Costa Coffee could be a strategic masterstroke, and what it reveals about the brand's future...
(This piece is completely my own personal opinion and amateur analysis. If you have any alternative thoughts or points, please do leave a comment below!)
In the white hot heat of the stock market, showing consistent growth is critical. Acquisitions are often a quick way to 'buy growth' and drive up the share price.
Yet some of the most impactful acquisitions in business history came out of the blue and looked foolish at the time. In order to do something really innovative, you almost have to take that risk.
Take Facebook's purchase of Instagram in 2012 as an example. Zuck and co spent a (cool) billion dollars on a photo sharing app with only (!) 30 million users and zero revenue. The move was ridiculed by some who failed to see the opportunity (including myself).
Even comedian John Stewart got onto the bandwagon, mocking the move during an episode of The Daily Show.
“A billion dollars of money?! For a thing that kind of ruins your pictures?”
6 years later, it looks like one of Facebook's smartest strategic plays. Insta has a booming advertising business and is a cooler, more brand friendly version of Facebook. A place where it's less likely your aunt will comment on your status.
Coke's acquisition of Costa Coffee this week has drawn some similar surprise and ridicule. Why would the world's largest soft drinks brand need to purchase a business with ￡150 million in profit for $5.1 billion? Why does it need to get into retail, a business it has little expertise in besides selling to? Shouldn't Coke be focusing on protecting its core business?
These questions are valid. On the surface this seems like a strange move.
But look under the hood. I believe this purchase will be an espresso shot for the company.
Here are the four reasons why...
1) They've just bought an enormous real world testing lab...
NPD is the lifeblood of the global soft drinks market at the moment. Tastes and trends change rapidly. Modern consumers crave novelty in the form of new flavours.
In this climate, speed kills competitors. As Scott Galloway points out in 'The Four'...
the ability to test, learn, refine and scale or kill a new product or service at breakneck pace is a critical skill for the world's most rapidly growing companies.
They use data, apply human intelligence and orient themselves accordingly. They make small capped bets, test the outcome and then rapidly scale up the winners.
Look at Amazon, who can tweak something on their site and instantly have thousands of user feedback cases.
Look at fast fashion brands like Zara, Topshop and H&M, who rely on high velocity decision making and predictive analytics from stores around the world to keep up with fashion.
Smart modern companies are built to move and learn fast.
How does this apply to Coke/Costa?
As part of the never ending quest to find the new hit and drive growth, Coke launched 500 new drinks last year alone.
500 new drinks that had to be developed, designed, sold to retailers, shipped and feedback measured on.
Most were killed slowly.
That's expensive and time consuming.
Now, Coca Cola has just purchased a brand with over 3,400 stores (including 450 in China). But don't think of these stores just as a global retail footprint.
Think of them one of the world's biggest test labs for new products.
Imagine you're a product manager in Coke tasked with creating successful new drinks. Think about the opportunity to test products around the world, see the reaction instantly in sales data and feedback, then apply these learnings at scale to both the Costa chain, but also Coke's wider business.
Invaluable.
2) Growth in a market that's not fizzy, sugary drinks...
The fizzy, sugary soft drinks market is going flat. Consumer trends like sugar avoidance and healthier eating are having an impact. Regulations on advertising and government sugar taxes are making the market less lucrative.
Americans are now drinking more bottled water than soda.
This isn't good news for Coke - fizzy drinks still account for almost three-quarters of its sales.
However, there is another high frequency drinks market that's growing. Coffee is one of the most consumed beverages in developed countries.
Here's coffee's growth per country in the next 5 years:
More importantly, the highest proportion of that consumption comes from those aged between 19 and 34 years. And even more importantly a lot of the growth in the coffee market is coming from Asia, where Coke isn't as strong due to different local tastes and slightly weaker distribution.
These are the fabled high value harder to reach 'millennials' that Coke has been trying, and failing to connect with.
Sure Costa isn't exactly a cool brand like Blue Bottle, which recently sold to Nestle. But given Coke's unparalleled prowess in branding mass drinks products, this purchase represents a huge opportunity to drive fresh growth outside the core business.
As Coke chief executive James Quincey said "hot beverages is one of the few segments of the total beverage landscape where Coca-Cola does not have a global brand. Costa gives us access to this market with a strong coffee platform."
3) Acquired expertise in RTD coffee...
There's another reason why Costa's actual product and expertise in coffee is lucrative. Already huge in Japan, ready to drink coffee is about to explode.
According to Euromonitor, 'cold brew and premium latte style beverages in North America constitute a rising market. There will also be a push to accelerate the development of RTD coffee in Western Europe.'
Already in the US, since Starbucks brought in cold-brew coffee across the US in 2015 sales have grown by 25pc annually.
In the UK, niche brands like Honest and 'Jimmy's Ice Coffee' have claimed market share, while Britvic has launched Cafe Spark, an energy drink that's infused with coffee beans.
But this deal offers Coke a head start in a booming market. According to Alison Brittain, CEO of Costa's parent company Whitbread, the deal happened because Coke has "no coffee in its range", and she expects Coke to "use the Costa name to create a range of ready-to-drink, cold-brew coffees".
If global warming keeps heating the planet up and people turn away from the hot stuff, Coke will be there with a cold coffee pick me up.
4) The enormous distribution opportunity...
And finally, this acquisition offers Coke the opportunity to sell a lucrative, high frequency beverage to retailers, restaurants, cafes and pubs through its enormous and powerful distribution chain.
In announcing the deal, Quincey said that Coke are "looking to bring Costa to more people in more places.”
Brittain went one step further, making Coke's intentions even clearer. "You could see Costa absolutely everywhere, in vending machines, hotels, restaurants, pubs, cafes – in all the places you see Coke today."
Costa's knowledge of the coffee supply chain, including sourcing, vending and distribution, will be paired with Coke's ability to get the product into the right place. This almost guarantees a huge route to market and instant sales. Most brands have to struggle for distribution in the on trade. Coke literally just have to turn on that tap.
If Byron Sharp is right and physical availability is important for brand growth, then they're onto a winner.
It might also be a chance for Coke to eat into Nespresso's dominance in the lucrative capsule, direct to consumer market too.
It's not all sweet though. Certainly, there are problems with Costa's core business. The chain is uniquely tied to the high street and shopping mall, two parts of retail that are in trouble as e-commerce grows. Less people shopping means less cups of coffee.
Also unlike Starbucks, Costa's coffee and service are not known to be particularly appealing. Many of the stores are said to be sterile and unwelcoming.
But, and this is the crucial point, Coke hasn't purchased it for the taste of its coffee, warmth of its staff or potential store growth. Improvements in these areas would be added bonuses.
Rather, there are four other, far more lucrative reasons why the company splashed out.
Costa can provide the business with a huge caffeine hit, but without the crash and burn afterwards.
If all goes to play, I think this could turn out very well for both brands.
Shane O'Leary
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