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Costa packet for Coca-Cola

For some time Whitbread CEO Allison Brittain has swatted aside speculation that the company should divest itself of its Costa Coffee business saying that it didn’t make sense to do so in the middle of a restructuring programme.

In April she bowed to investor pressure but said that the process could take up to two years to complete, insisting that it would make more sense once the roof was back on, and the rewiring had been done.

It is therefore with some surprise that investors are digesting today’s announcement from Coca-Cola that they have agreed a deal to buy the coffee chain for $5.1bn. It would appear that the US business, like a lot of its peers, is looking to diversify away from its core business of sugary drinks, an area that has been increasingly attracting government ire due to a rising global obesity problem.

Investors certainly appear to like the deal, not surprising given the pledge that most of the proceeds look set to be returned to shareholders, with the shares rising strongly on the open hitting their highest levels since December 2015.

Coco-Cola’s sector peer Pepsico has already gone down the Sodastream route and it would appear that Coca Cola is branching out slightly differently into the extremely competitive coffee market, where it is hoped that Coca Cola’s brand, as well as its marketing might will help maintain the Costa brands market share.

The timing is certainly fortuitous for Whitbread where coffee sales have been struggling recently, in June the company reported a 2% decline in like for like sales, probably down to the hot weather, but the coffee business has seen margins shrink due to increasing competition from other chains, like Starbucks and Nero, as well as a growing number of independent specialist coffee shops.

Now that investors have got their wish in monetising the coffee brand, pressure will inevitably become more focussed on the Premier Inn brand which has been undergoing a significant rebranding, as well as opening up new revenue opportunities in Germany and China. It is to be hoped that some of the proceeds will also go towards helping to continue the improvements in the Premier Inn brand where a rolling improvement process has been in place for quite some time now.

At its most recent numbers Premier Inn saw sales grow by 4.3%, though these were driven by an increase in rooms, with the like for like numbers proving to be a little disappointing.

The recent hot weather could well have gone some way to improving matters as more people opt to holiday here in the UK, rather than go abroad.


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