As Coca-Cola mulls Costa Coffee sale, what's gone wrong?

It was a watershed moment when Coca-Cola snapped up coffee giant Costa. 

The 2018 acquisition aimed to reduce Coca-Cola's reliance on sugary drinks, with CEO James Quincey promising the soft drinks giant would become a ‘total beverage company’, building “new capabilities and expertise in coffee”, including café culture and foodservice.

But over the weekend Sky News reported that Coca-Cola wants to sell off Costa, with its sources suggesting that initial talks had been held with a small number of potential bidders, including private equity funds. 

Why is Costa Coffee not working for Coca-Cola?

Last year, Coca-Cola reported a 3% decline in coffee sales, primarily due to the performance of Costa in the UK. 

Although not a major part of the business, Costa Coffee’s non food-to-go segment is also struggling. Sales of its ready-to-drink coffee products lost £4.7m on volumes down 23.2% following distribution losses last year [NIQ 52 w/e 28 December 2024].

Coca-Cola has been trying for some time to turn Costa’s performance around. 

During the company’s earnings call last month, Quincey said Costa had “not quite delivered” and was “not where we wanted it to be from an investment hypothesis point of view”.

“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,” he admitted.

Global investment bank Jefferies said that while Costa is a small part of Coca-Cola’s portfolio (3% of sales), it has "struggled to scale the Costa brand into a meaningful player in RTD coffee” (at less than 1% market share, per US NIQ). 

A report in the FT suggested Costa had been hit by rising costs and competition from upmarket rivals such as Gail's, as well as artisan coffee shops. But it’s an undeniably tough market right now for hospitality as a whole. New figures out last week showed more than 50% of all job losses since last year's budget were in the hospitality sector as it grapples with tax hikes and inflation. And Costa is also dealing with commodity price rises and weaker demand for coffee, with even budget chains such as Greggs and McDonald's struggling.

And you know there's a problem when the world's biggest coffee chain Starbucks is suffering. In in the UK it recorded a £35m loss and a 4% decline in revenue to £525.6m in 2024, while in the US sales declined by 2%. New CEO Brian Niccol is working on turnaround plans to improve sales, tackle low employee morale and make the customer experience better. 

So it’s not hard to see why the deal isn't working out for Coca-Cola.

Has the Costa brand grown tired?

In a sector as competitive and overcrowded as coffee, another issue has been the changing nature of consumer loyalty. One way to do this is through innovation. And in contrast with Starbucks, Pret a Manger and Caffè Nero, Costa has missed out on one of the biggest trends in recent years: the viral matcha iced latte. 

Perhaps the key takeaway here is that coffee and carbonated soft drinks don’t mix. 

But the sale talks come at an interesting time as Keurig Dr Pepper (KDP) today announced plans to acquire Dutch coffee company JDE Peet's for €15.7bn.

The move, which will see the soft drink and coffee businesses split into two independent companies, will “shake up the global coffee industry and create a stronger challenger for Nestlé”, according to Barclays.

By demerging its own coffee business and partnering with a big European player, KDP will gain the benefits of scale, while still being able to offer much-needed focus on the category, with two separate companies easier to run without distractions.

However, what works for one doesn't work for all. As a primarily out-of-home focused brand, Costa's success depends on increased footfall and strong customer experience, whereas Coca-Cola is a partner to the on and off-trade. That requires a different cultural mindset. 

While the pair might not be the right fit, Jefferies still believes coffee will "likely continue to play a role” for the business's bottlers in the RTD market.

But for Coca-Cola a sale won’t come without its financial challenges. Analysts told Sky News it could solidify a multibillion-pound loss on the £3.9bn figure it paid to Premier Inn owner Whitbread in 2018. One analyst suggested Coca-Cola faced a writedown of almost £2bn.

Clearly, betting on Costa has been a gamble that didn’t pay off for Coca-Cola. On the other, with a market capitalisation of $296n it can at least afford it.