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Sunday Strategy 9th September 2018
Hi Friend,
Coca-Cola makes $5.1 billion move on Costa Coffee ...
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Coca-Cola is making a big move into coffee with the £3.9 billion pound ($5.1 billion) acquisition of Costa Coffee. For Coca-Cola, it’s a big push into the fiercely competitive retail coffee market market. It is Coke’s biggest acquisition for almost ten years,.
For Whitbread, it’s a great deal. Whitbread bought Costa in 1995 for £19 million pounds. It had 39 shops. Since then, the market in the U.K. has grown rapidly. The number of branded coffee outlets in the U.K. rose by 650 to 7,500 in 2017.
By the end of last financial year, Costa Coffee’s retail outlets had grown to almost 4,000 in 32 countries of which just over 2,000 were in the UK. Costa is market leader in the UK with a virtual 30% share, compared to Starbucks 12% and Caffè Nero 9%. It also operates a 8,000 self-service machines. It’s a great fit for the soft drinks owner.
Whitbread Plc announced a plan in April to spin off the business. Whitbread was under pressure from activist investors to effect a sale or spinoff. Coke moved quickly, “It’s been a very fast transaction,” said Whitbread CEO Alison Brittain.
Last year Costa Coffee had revenues of £1.3 billion and profits of £159 million. The company generated a return on capital of 46%. Coke is paying a three times multiple to revenue and a notional 25 times pre tax multiple to profits. It’s a good deal all round.
For Whitbread, the shares leapt by 16% on the news. The company is now capitalised at £8.5 billion. It still seems cheap. Premier Inns, last year had revenues of £2 billion with profits of 500 million. Net of the Coke cash, Whitbread is trading on a pre tax multiple of just seven. Even with the share jump there is upside value in the share price.
The Costa deal opens a new business line for Coke. Coca-Cola Chief Executive Officer James Quincey said the Costa transaction is a “serious and significant investment” in hot beverages, a market that still remains largely fragmented.
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| Coke eyes international potential ...
Coke
is keen to leverage Costa’s global reach as it becomes a retail brand
owner for the first time. More particularly Coke will be keen to
leverage it’s own international footprint.
Coke is the largest
company by far in the international drinks market. The Brand is valued
at some $68 billion, the company towers in valuation over Pepsi ($10.5
billion) and Nescafe ($6.6 billion).
Coke is under pressure to
establish itself in new markets. The Atlanta-based company is entering
the coffee-shop market at a time when competitors such as Starbucks are
well established.
Financially, it’s no big deal. Coca Cola has a
market cap of $190 billion. In 2016, the company had revenues of $46
billion and earnings of $7 billion dollars. Coke is splashing out just
nine months profits for Costa at a price which is earnings enhancing.
The
potential is huge. The real sweetener in the deal is the international
potential. Starbucks in their eyes, James Quincey will have a keen eye
on the market leader footprint.
Starbucks opened it’s first store
in Japan in 1966. The world market leader now has more than 25,000
stores in more than 75 countries. The company has 3,400 stores in China
with plans to double the store base at the rate of 500 per year.
Costa currently has 498 stores in China, with plans to increase that to 1,200 by 2022 under Whitbread ownership.
With
over 25,000 stores as a target, 20,000 to 30,000 stores could well be
in reach for Costa Coffee in the years ahead. Revenues could increase to
$ 7 billion with a profit target of $1 billion dollars for the
Whitbread exile.
According to the Costa Coffee web site, “Costa
is the nation's favourite coffee shop and the largest and fastest
growing coffee shop chain in the UK”.
Under James Quincey’s
leadership, the aim will be to make Costa the world’s favourite coffee
shop and the fastest growing coffee shop chain in South East Asia and
mainland China.
Dr John Ashcroft
Dimensions of Strategy
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