Can Coca-Cola Compete — and Win — in the Global Coffee Business?

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Coca-Cola Co. (NYSE: KO) has reached an agreement to acquire Costa, a subsidiary of U.K.-traded Whitbread, for $5.1 billion in cash. The deal is expected to close in the first half of next year following approval by Whitbread shareholders.

The Costa brand includes more than 4,000 stores worldwide, including about 2,500 in the United Kingdom, along with other outlets in gas stations, movie theaters and travel hubs. Costa also has outlets in other European countries, the Asia Pacific, the Middle East and Africa.

While Coke touts the acquisition as a move into the market for hot beverages, it may be the company’s play to gain a toehold in the European market, where it starts in a virtual tie with Starbucks Corp. (NASDAQ: SBUX). Globally, however, Starbucks has more than 27,000 stores. Costa has no stores in the United States.

At the end of June, Starbucks reported that it had 496 company-operated stores in its Europe, Middle East and Africa region along with 2,741 licensed stores. Starbucks has been putting a massive effort behind doubling its store count in China to around 6,000 stores in 230 Chinese cities by the end of its 2022 fiscal year. Costa’s footprint in China amounts to about 450 stores.

Coca-Cola CEO James Quincey said:

Costa gives Coca-Cola new capabilities and expertise in coffee, and our system can create opportunities to grow the Costa brand worldwide. 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.

Coca-Cola plans to keep Costa’s management team, recognizing the fact that Coke has little experience running a retail operation.

To make this investment pay off, Coke is going to have to commit more cash to expanding Costa’s business, and it will have to be very smart about where it chooses to expand. The companies gave no hint as to where that might be, but the choice may make the difference between a brilliant move and one that bleeds cash for no discernible purpose.

Whitbread stock jumped 18% in London following the announcement, while Coca-Cola shares traded down about 0.1% at $44.89 early Friday morning, in a 52-week range of $41.45 to $48.62 and with a consensus price target of $50.72.

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