Coca-Cola just spent $5.1 billion on a massive British coffee chain, and it sets the scene for a battle with Starbucks

Costa Coffee is being acquired by Coca-Cola.

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Costa Coffee is being acquired by Coca-Cola.
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Ben Pruchnie / Getty Images

  • Coca-Cola announced on Friday that it would buy British coffee-shop chain Costa Coffee for $5.1 billion.
  • Analysts say the move is likely to have a major impact on Starbucks, especially as it looks to grow in China, a region that both coffee chains are looking to expand in to drive sales.
  • According to GlobalData, retail sales of hot drinks in China alone will hit $34.2 billion by 2022, and hot-drinks volumes across all channels have more than doubled there in the past five years.

Costa Coffee is to the UK what Starbucks is to the US.

It’s the coffee chain that’s so prevalent you’ll find it on most street corners of major cities and towns, in thousands of self-service machines in gas stations around the UK, and in national grocery stores as “ready-to-drink” products.

While it may be the leading chain in the UK, where it has more than 2,400 stores, its reach beyond that lags behind Starbucks, especially in the US, where it has no presence. In total, Costa Coffee has 3,882 stores in 32 countries.

The news that Coca-Cola is buying the chain from Whitbread for $5.1 billion has sent shockwaves around the coffee world as analysts consider Costa’s new potential for growth with Coca-Cola’s “distribution muscle” behind it – and, especially, what it will mean for Starbucks.

Global growth

While Starbucks is unlikely to be unseated from its position of power in the US market, analysts are expecting the new deal with Coca-Cola to allow Costa Coffee to better compete in its international markets, especially China, one of Starbucks’ key regions for growth.

“For the time being it is far more likely to offer a serious threat to Starbucks in China, where the coffee market still has significant potential and is growing fast,” Jonathan Davison, beverage analyst at GlobalData, wrote in a statement emailed to Business Insider on Friday.

Customers enter a Starbucks store in Shanghai on July 22, 2014.

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Customers enter a Starbucks store in Shanghai on July 22, 2014.
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REUTERS/Aly Song

Starbucks did not immediately respond to Business Insider’s request for comment.

According to GlobalData, retail sales of hot drinks in China alone will hit $34.2 billion by 2022, and hot-drinks volumes across all channels have more than doubled there in the past five years.

Both coffee chains are doubling down on expansion in China to drive growth. Starbucks, which is currently the leading chain with 2,800 locations in China, is aiming to double its store count to 6,000 locations and triple its revenues over the next five years.

Starbucks CEO Kevin Johnson said in May that the company is looking to push “a coffee culture in China where the reward will be healthy, long-term, profitable growth for decades to come,” CNN Money reported.

Earlier this month, Starbucks also announced a deal with Chinese e-commerce giant Alibaba to expand its delivery services throughout the country.

Meanwhile, Costa Coffee, the second-largest coffee chain in China with more than 400 locations, has its own expansion plans.

In October 2017 Costa Coffee bought Yueda, a Chinese coffee chain with which it had operated a joint venture in China for more than a decade. Several months later, in April, Costa Coffee CEO Allison Brittain announced that the company was looking to spin off from its parent company, Whitbread, in order to facilitate its expansion plans, pointing to China as a key area for growth.

“Costa will become a listed entity in its own right and the clear market leader in the out-of-home coffee market in the UK,” Brittain, said in a statement at the time. It will be “well positioned to build further on its strong international foundations with growth expected in China and Costa Express.”

costa coffee branches map

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Samantha Lee/Business Insider

Ready-to-drink products

While Costa will likely struggle to break into the US market in terms of opening physical locations, there’s an opportunity to sell its ready-to-drink products in stores, analysts say.

“The lack of any retail presence for Costa Coffee in the US means Starbucks has been able to dominate ready-to-drink coffee sales there up to now. Expect that to change in the coming years,” Davison told Business Insider.

This will be of particular importance to both Starbucks and Costa as the hot-coffee market is enduring a long-term decline in the US, he said.

These products also give Coca-Cola an opportunity to compete with PepsiCo, its biggest rival, which has a partnership with Starbucks to distribute its ready-to-drink products to stores. According to Davison, this relationship is yielding big wins in terms of sales to become a retail business worth more than $2 billion.

“Now Coca-Cola wants in on this market,” he said.