Coca-Cola Enhances Coffee Portfolio, Adds Costa

Wide-moat

In our view, the deal (which is expected to close in the first half of 2019) should bolster Coca-Cola's presence in the fast-growing coffee category, particularly in the U.K., where Costa holds more than a one third share of coffee houses. We find merit in the strategy underlying the deal, given the robust growth prospects in the global coffee and tea space. At present, management estimates Coca-Cola controls a 15% share of the ready-to-drink tea and coffee category (which represents around 15% of the overall coffee and tea market, versus a nearly two thirds contribution from out of home consumption) and that coffee and tea account for around 7% of the firm's retail value mix (and just 3% in the Europe, Middle East, and Africa segment). However, Costa should materially enhance Coca-Cola's position in this landscape; 72% of its revenue is generated in U.K. stores (2,422 outlets), with an additional 16% of sales from U.K. express locations (serving coffee in on-the-go locations, like gas stations and movie theaters).

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