Being big helps if you’re a coffee chain dealing with the impact of pandemic lockdowns. Costa should consider themselves fortunate therefore, that they sold to Coca Cola in January 2019 for £3.9bn, shortly before COVID struck, which would have strained the balance sheet of Whitbread, the previous owners.
As Coca Cola released their annual results recently, James Quincey, Coca Cola’s CEO, commented on the Costa business.
Clearly, COVID impacted not just our total business, but it impacted the Costa business, which is an almost entirely away-from-home business, and so it was very much a bit like our fountain business in the US.James Quincey, CEO, Coca Cola
Now the company wants to further diversify the product offering and revenue streams by capitalising on its brand name recognition. One of their approaches is to tap into the rapidly growing RTD market, as well as serve their range of hot drink products through vending machines branded as ‘Costa Express, which have proliferated in places like service stations and grocery stores.
I noticed the vending machines being heavily patronised at our local Supermarket during the lockdown period. Supermarkets, seen as part of the critical national infrastructure, remained open. Those vending revenues and coffee beans sold through the supermarkets may have been the majority of revenue the business saw during the period as Quincey explained during the earnings call
But, Coca Cola’s ambitions for the brand go much further than the UK, and they’ve introduced the RTD products to China, where more than 300,000 Costa ready-to-drink outlets, are now available in the country as of 2021.
And then last year, we began to install thousands of new machines. And then we’ve partnered with our bottlers to have Proud to Serve, where they provide the beans, the machines to the HORECA channel and we’ve launched ready-to-drink where it’s done really well in certain parts of the world.James Quincey, CEO, Coca Cola
So Quincy has been blown off-track by the events of recent years, but having deep pockets means they can be in it for the long haul. The strategy is not sophisticated, but they’re playing to their strengths by leveraging the brand, taking advantage of Coca Cola’s relationships and logistics network and partners, and diversifying.
Building a line of RTD products, installing Costa Express at key locations,, and selling home consumption products are possibly a more effective use of capital than increasing their commercial property portfolio. I remember reading some years back that McDonald’s internally considered themselves a property company because they owned the land they built on.
“Consumers think of McDonald’s as a burger restaurant, but in the business world, McDonald’s is considered a real estate company.”
I’m not sure of the wisdom of growing a commercial property portfolio right now with the uncertainties over how many people will return to the office. So Coca Cola’s approach makes more sense to me. Now they have an opportunity to grow Costa into a global coffee brand. The pandemic might have set them back a couple of years, but the next two years will be the defining moment to see how well the company can execute against their strategy.