How Costa Coffee turned into a $5.1B headache for Coca-Cola
What's the story
Coca-Cola's $5.1 billion acquisition of Costa Coffee, the UK's answer to Starbucks, has turned out to be a costly miscalculation. The deal was a major bet by former Coke CEO James Quincey to enter the global coffee and tea market. However, instead of dominating this half-a-trillion-dollar industry with "barista-in-a-box" espresso vending machines and bottled coffee, Coca-Cola has struggled to make its mark.
Operational hurdles
Costa's vending machines
The introduction of Costa's vending machines has been more complex and costly than expected for Coca-Cola bottlers.
Instead of grabbing a major slice of the nearly $23 billion ready-to-drink coffee market, Coca-Cola has been overshadowed by its biggest rival.
PepsiCo and Starbucks joint venture Frappucino leads the US market, while Costa remains relatively unknown in the country.
Market performance
Coca-Cola's coffee shops in the UK
Currently, Coca-Cola runs over 2,700 Costa coffee shops mainly in the UK and Ireland. Despite a failed sale attempt late last year, revenue has been rising.
The company's new CEO, Henrique Braun, is cutting costs, which some former employees see as a sign of another potential sale in the coming months.
However, Coca-Cola has denied any intention to sell Costa Coffee saying it's an integral part of their beverage strategy.
Expansion strategy
When Coca-Cola acquired Costa Coffee
When Coca-Cola acquired Costa Coffee in August 2018, it had big plans to grow the brand globally through its bottlers.
The company had only been competing in a small segment of the global coffee and tea market, which it estimated at $570 billion.
Quincey had said at the time that with Costa, they were getting more than just a brand but a platform to scale up their operations.
Pandemic fallout
Impact of COVID-19 pandemic on Costa Coffee
The COVID-19 pandemic severely impacted Costa Coffee's business, as its UK coffee shops were shut down in 2020. This led to a major loss of revenue for the company.
While Express vending machines performed well post-pandemic, the recovery wasn't great for Costa under Coca-Cola's ownership.
The company also lagged behind on refurbishing its shops during this period.
Expansion challenges
Why Coca-Cola didn't open coffee shops in US?
Coca-Cola was hesitant to open many coffee shops in the US, fearing it would create problems with McDonald's, one of its most valued customers.
Instead, the company focused on expanding Costa Express vending machines.
However, American consumers were not used to high-quality espresso-based coffee from vending machines and weren't willing to pay coffee-shop prices for them either.
Brand challenges
Introduction of BaristaBot
Without cafes in the US, Costa Coffee had virtually no brand recognition.
The machines were complex and expensive to maintain daily.
Bottlers used to low maintenance for soda vending machines found it hard to handle the daily upkeep required for Costa Express machines.
Despite these hurdles, Coca-Cola kept investing in new frontiers such as developing a "BaristaBot."