Costa: Coca-Cola’s caffeine buzz

Fizzy-drinks giant Coca-Cola is diversifying into coffee. But while this strategy makes sense, Costa may not provide it with much of a boost.


Coffee is "a rare safe haven in the food industry"

Fizzy-drinks giant Coca-Cola is diversifying into coffee. But while this strategy makes sense, Costa may not provide it with much of a boost. Alice Grhns reports.

Coca-Cola is venturing "outside its comfort zone in its pursuit of a caffeine buzz", say Sarah Halzack and Brooke Sutherland on Bloomberg. Last week the soft-drinks giant said it had agreed to acquire Costa Britain's biggest coffee chain from Whitbread for £3.9bn. The news triggered a 16% surge in Whitbread's shares. "It's not surprising" it wants to be a part of the coffee market. Consumers, egged on by health campaigners, are increasingly avoiding sugary drinks, and these days coffee is "a rare safe haven in the food industry".

The sale is a "triumph", says Lex in the Financial Times. It shows that Britain "can sell consumer products to Americans more mainstream than trenchcoats and Peter Rabbit tea towels". British coffee might once have "described a brew made from dandelion roots". That was then. Today, Costa is a mass-market cafe chain and coffee brand that has "bested Starbucks in the UK". Coca-Cola can now put Costa dispensers in places that already have its vending machines. It also has "the muscle" to allow Costa to succeed in Asia.

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Was Costa really the best choice?

Not so fast, say Aaron Back and Stephen Wilmot in The Wall Street Journal. Diversifying into coffee may make sense, but Coca-Cola "could have gone for a better brew". Costa isn't performing "particularly well" in the UK (where it derives 88% of its revenue); same-store sales fell 2% from a year earlier in the first quarter. And Costa comes with a huge network of shops. So it's no wonder analysts grilled the chief executive, James Quincey, about why Coca-Cola is entering a business in which it has no experience. The idea appears to be to develop canned and bottled coffees bearing the Costa brand, and to "plug these into Coca-Cola's global distribution and marketing capabilities".

But achieving a decent return for Coca-Cola's shareholders will be "a grind", says Carol Ryan on Breakingviews. In the year to March, Costa generated operating profits of £123m on revenue of about £1.3bn. To produce a reasonable after-tax return on its investment of around 8% by 2020, Coca-Cola needs to boost Costa's revenue growth to 20% a year from 8% in the last two years and double its operating margin.

It hardly helps that Coca-Cola is paying a hefty 16.4 times earnings for Costa; bigger rival Starbucks is on 15 times."The real boost" goes to Whitbread's shareholders, and especially activist investors Elliott Advisors and Sachem Head. They persuaded Whitbread to spin off its coffee business in the first place.

A new era begins at WPP


Mark Read: cheaper than Sorrell
(Image credit: Tolga Akmen)

New CEOs often use their first earnings announcement "to get all the bad news out of the way in one go", says Liam Proud on Breakingviews. The share price may swoon, but they get "a clean slate". Mark Read, the new boss of advertising giant WPP, opted for this "kitchen sink" approach this week when he dumped some of predecessor Martin Sorrell's baggage.

His second day in the job saw WPP's shares dive by 8% on news that sales in the firm's higher-margin North American business fell sharply in the first half of the year. Meanwhile, overall revenues rose by an annual 0.3% However, there may be "worse news ahead" Read's priorities are to invest in digital and data technology, unify the group's sprawling structure and reduce debt. All three aims will be hard to achieve without trimming the amount spent on dividends and share buybacks.

Still, with Read taking over shareholders should be "better off by about 0.6p-5.2p per share", says Matthew Vincent in the Financial Times. That is how much they stand to save on their new boss, who is set to earn £7m a year less than Martin Sorrell did in 2017.

"A new era is under way," says Alistair Osborne in The Times. Read, who used to run WPP's Wunderman agency, was one of the co-leaders thrust into the hot seat, alongside Andrew Scott, when Sorrell abruptly resigned. The duo have since "steadied the ship". The shares stood at £11.11 after Sorrell's exit; they're now £12.76. Still, we don't yet know if chairman Roberto Quarta "has taken the soft option by not hiring a new boss from outside".

City talk

US senator Bernie Sanders "has turned his sights on Jeff Bezos, wondering how the Amazon founder could be worth $150bn while some of his employees rely on food stamps", says Lex in the FT. Amazon insists Sanders is making "inaccurate and misleading accusations".But given Amazon's sheer size, "scrutiny of its business model should be expected". The company's core competency is logistics, requiring manual labour.It has nearly 600,000 employees and this year disclosed that its median employee earned $28,000 in 2017. At Facebook, the same figure was $240,000.

"The hot offers' at Footasylum are getting better by the day," says Alistair Osborne in The Times. The share price, however, fell by 51% in one day to 41p last week. Only last October the athleisure group raised £65.4m at 164p as it floated on Aim. It was the new venture of David Makin and John Wardle, the founders of JD Sports."No one much cared that Wardle sold all £8.2m of his direct holding." Nor that one of Makin's three children was CEO. Several profit warnings and delayed store openings later, this "family affair has bombed".

Shares in Dechra Pharmaceuticals fell around 15% this week as the veterinary drug maker warned that "contingency planning for a hard Brexit will lead to higher costs", says Julia Bradshaw inThe Daily Telegraph. The firm is investing £1m in new lab equipment to allow it to double test all medication that leaves the UK bound for Europe in the event of a no-deal Brexit. The overall cost of double testing implies an additional £500,000 of spending a year. "We are hoping there willbe some sort of mutual recognition of quality standards in pharmaceuticals and common sense will prevail," said CEO Ian Page.

Alice grew up in Stockholm and studied at the University of the Arts London, where she gained a first-class BA in Journalism. She has written for several publications in Stockholm and London, and joined MoneyWeek in 2017.