Coca-Cola (KO) bet big on Costa Coffee. Now it’s rethinking the whole deal.
“We’re in the mode of reflecting on what we’ve learned, thinking about how we might want to find new avenues to grow in the coffee category while continuing to run the cost of business successfully,” CEO James Quincey said on this week’s earnings call.
“It’s still a lot of money we put down, and we wanted that money to work as hard as possible,” he added.
The $5.1 billion acquisition in 2018 was one of Quincy’s first gambles as chief executive. The move was supposed to give Coca-Cola a “strong” foothold in the global coffee market, from retail stores to ready-to-drink (RTD) cans.
But execution and growth have stalled. Costa reeled in £1.3 billion (then $1.7 billion) of revenue in fiscal year 2018 but reported £1.22 billion for fiscal year 2023.
“Costa did a great job in the UK with things like lattes and cappuccinos, but that just isn’t really the case in the U.S. The competition is tough, and their US strategy hasn’t gained the traction they hoped for, ” Rothschild & Co Redburn analyst Charlie Higgs said.
In the US, Costa’s business is focused on a B2B and packaged goods approach. Costa Professional offers equipment and support to businesses and reportedly has 250 Smart Café coffee vending machines around the country. In 2024, it launched an RTD iced coffee line featuring canned lattes and cold brews in retailers like Amazon Fresh (AMZN) and Walgreens (WBA).
Globally, Costa operates more than 4,000 stores in over 50 countries, plus more than 14,000 Smart Café self-serve machines. The company offers a range of RTD beverages across Europe and Asia.
“Coke bought that coffee business right before COVID,” Beverage Digest editor Duane Stanford told Yahoo Finance. “Companies were pulling back to save, there was a shortage, and supply chains were tough. The last thing you were going to do was put ready-to-drink coffee in the market.”
After lockdowns eased, Costa’s margins were hit again, this time by steep inflation, Higgs said.
Prices for arabica coffee have whipsawed in recent years, driven by extreme weather events and supply disruptions. After spiking in 2022, it plunged to around $1.50 per pound by mid-2023, surged again by over 70% in 2024 to $2.50, and then soared to record highs of about $4.30 per pound in early 2025.
Those struggles are now raising questions about whether Coca-Cola should keep Costa.
“Given the tenor of comments and the lack of traction so far, I think it’s fair to assume they wouldn’t get back what they paid,” Consumer Edge senior analyst Connor Rattigan told Yahoo Finance.
Source link
