Platforms, Not Products – What Coca-Cola's Acquisition of Costa Means for Beverage M&A

Beverage companies have traditionally used M&A as a means of adding strategic brands to their portfolio that build the company’s strength in its core category and deliver some element of cost synergy. Although this strategy has worked well, there are two important reasons to change the growth path. First, for global champions, growth within their core category is becoming more difficult, given consumer sentiment and regulatory concerns. More importantly, the beverage marketplace is changing at breakneck speed, and companies must position themselves today for the future, or risk missing out on the next wave of growth. Think of Kodak missing out on the shift towards digital cameras. Changing consumer trends, new technologies, and blurred lines between categories are creating a new playing field that requires a new approach.

Beverage companies are increasingly recognising that the route to the consumer is changing, and M&A is being used to position the company for the effects of these changes. PepsiCo’s acquisition of Sodastream is not just a sparkling water play – it is a move to open up the at-home, direct-to-consumer channel. The deal between DPSG and Keurig combines the traditional distribution power and portfolio of a carbonated soft drinks (CSD) company with at-home coffee and e-commerce expertise. The Heineken acquisition of Punch Taverns allows the brand owner to have greater control of the product offering, a greater share of the margin, and potentially more insight into consumer behavior. The theme is clear: portfolio-building for today’s global beverage companies includes different product segments, distribution channels, geographies, technologies, and more – it’s not just about creating an effective price ladder.

On 31 August, Coca-Cola acquired Costa for USD 5.1bn. With this acquisition, Coca-Cola is “[adding] a global coffee platform that will complement our existing system. […] A platform means Costa isn’t just one thing. Not just a brand,” according to CEO James Quincey.[1] Costa provides Coca-Cola with a position in the large hot-beverages category. With both companies broadly serving the same consumer group, the ready-to-drink (RTD) Costa products and Coca-Cola brands can be sold simultaneously. In Asia, new Costa outlets can help with the sale of Coca-Cola products. Thirdly, the deal has some horizontal characteristics, with Costa deriving some benefits from Coca-Cola’s purchasing power, manufacturing, and distribution capabilities.

Costa is a platform with the ability to compete in coffee shops, at-home coffee, vending, and RTD. This is the power of platform M&A – it opens up new ways to reach the consumer. Coffee-vending will strengthen the convenience channel and potentially open up new foodservice opportunities. Roast and ground coffee opens up the at-home channels, RTD coffee helps drive the morning segment, and the coffee club app provides a digital connection.

This acquisition moves Coca-Cola towards a large and fast-growing part of the non-alcoholic market and reduces its risk profile by diminishing the overreliance on CSD.

[1] https://www.coca-colacompany.com/stories/james-quincey-on-costa

Coffee, once a stand-alone category, is rapidly becoming an integral part of the broader beverage industry. Consider that among the largest global players – JAB, Nestle, Coca-Cola, and Starbucks – only Starbucks does not have significant operations outside of coffee (the JV with Pepsi on RTD coffee helps here). It will become increasingly difficult for a mid-size roaster to compete against companies with a much wider range of capabilities than a stand-alone coffee company.

As we have written in our recent article Blurring Category Lines – The Next Generation of Beverage Companies, beverage segments are less defined than ever, and an increase in platform M&A has the power to reshape the entire beverage landscape. On a large scale, there is the potential to combine beer and soft drinks – a particularly attractive option in low-volume emerging markets – or to combine beer and spirits to open up complementary alcohol occasions.

But of course, beverage companies can be much more creative than that, as Constellation’s investment in Canadian cannabis producer Canopy illustrates. We also expect companies to pursue targets that can add e-commerce capabilities, provide access to the at-home channel, or even serve as a greater source of consumer information.

With all of the recent changes in technology, routes-to-market, and consumer preferences, companies must be more creative than ever to position themselves for future growth, and M&A will be a critical means to achieve this goal.