Coca-Cola has high expectations for Costa when it bought it in 2018 from Whitbread for £3.9 billion.
Costa Coffee might have a new owner soon. The coffee brand may change ownership once again as reports emerge that Coca-Cola has engaged with potential buyers to discuss a discounted sale of the chain.
The American beverage company is reportedly working with financial advisors to review Costa, the largest coffee chain in the United Kingdom (UK), which could lead to its sale.
Coca-Cola has high expectations for Costa when it bought it in 2018 from Whitbread, the owner of the Premier Inn hotel chain, for £3.9 billion.
The takeover turned the soft drink giant into the biggest player in the UK’s coffee shop market, while also establishing a foothold in one of the fastest-growing drinks categories globally. The global coffee shop market is valued at $165 billion (£127 billion) alone.
However, the coffee chain suffered due to rising costs, particularly from increasing coffee bean prices and intense competition on the high street in traditional retail stores. The price of arabica beans, the most consumed variety, increased to $3.44 (£2.70) per pound, an 80% increase this year. Additionally, the cost of robusta beans, used in instant coffee, has doubled this year, reaching $5,694 per metric ton.
The price pressure comes after predictions of a thinner harvest for the year, following poor weather that affected the largest coffee producers, Brazil and Vietnam. The pressure on prices was evident as consumer demand for coffee rose.
Alison Brittain, the CEO of Whitbread, which owns Costa Coffee, mentioned that the coffee chain has spoken to many buyers, but Coke’s interest in acquiring the 4,000-store chain was seen as a “dream deal” for the investors.
It is one of the blockbuster deals for the soft drink manufacturer to reinvent itself. Similarly, PepsiCo acquired a fizzy soda maker, SodaStream, and Swiss food group Nestle signed a $7.3 billion agreement to license Starbucks-packaged coffees and teas globally.
The potential sale of Costa could be a multibillion-pound loss for Coca-Cola, as per City analysts. One analyst stated that the company might only sell around £2 billion, half of what it initially bought for.
Coca-Cola CEO James Quincey informed investors that Costa has not met expectations and is not aligned with the company’s investment goals. He further added that the company was considering strategies to grow in the coffee market.
The investment bank Lazard is reportedly helping Coca-Cola to review potential options for Costa and assessing buyer interest. Initial offers are expected in the early autumn, although the report noted that the drinks company might opt against proceeding with the sale.
Costa has more than 2,000 locations in the United Kingdom and employs nearly 18,000 employees. However, alongside increasing expenses, it also faces competition from premium brands such as Pret A Manger and Gail’s.
Costa gave a turnover of £1.2 billion during 2023, as per the most recent annual accounts submitted to Companies House, reflecting a 9% increase from the previous year.
However, it reported a pretax loss of £9.6 million, which is a stark contrast to the £245.9 million profit it had earned the previous year. Costa blamed the loss on inflationary pressures and write-downs on certain investments.
Costa, which was founded in 1971 by Italian siblings Sergio and Bruno Costa, was sold to Whitbread for £19 million in 1995. When Coca-Cola bought the business, Quincey was optimistic about the significant opportunity it would get, which would increase its valuation.
Even though Costa’s financial performance was giving mixed signals, it still paid out £85 million in dividends to its chief.
Coca-Cola and Lazard were asked to respond with a comment, but they have not responded.