Why is Coca Cola considering buying out Café Coffee Day?

Back in 1996, Coca Cola Company’s iconic CEO Roberto C Goizueta spoke of Coke’s growth ambitions in terms of the quantum of human fluid consumption. He said, humans need 64 ounces of liquid a day to live and the Coca Cola Company supplies fewer than two ounces worldwide. So the possibilities of growth were infinite.

Clearly the world's largest beverage company is still thirsty for growth. After decades of dominance of the carbonated soft drinks category the company has taken definitive steps to diversify into other refreshment beverages – juices, water, energy drinks, diary, and coffee. Everything except beer and alcoholic beverages.

But what seems to be a more definitive shift is that Coke is looking at all drink-age occasions, and is now heavily focused on categories that were hitherto peripheral to their core offering - the carbonated soft drink or CSDs like Coca Cola, Diet Coke, Fanta, Sprite, etc. So coffee, tea, and dairy are on the table now.

Last week Coke entered into exclusive talks for acquiring a significant stake in India’s largest coffee chain - Café Coffee Day. The CCD chain that was set up in 1996 now comprises 1750 stores across India with 60,000 vending machines. It also has outlets in Europe and in Egypt, Malaysia and Nepal. CCD – promoted by VG Siddhartha – is vertically integrated, owning over 20,000 acres of coffee plantations in Karnataka’s Chikmagalur region besides other curing and roasting facilities, and reported a turnover of Rs 1,814 crore in the fiscal 2019.

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If CCD does get valued at Rs 10,000 crore, as is being reported, the valuation would stand at about four to four and a half times its fiscal 2019 revenue and 33 times its EBITDA. Coca Cola will certainly pay a premium for majority ownership and typically will not will settle for being a minority shareholder. For Coffee day Enterprises (CDEL) – the owners of the CCD chain, which has a market cap of around Rs. 4,800 crore – they still will retain their control of the back end plantations, curing and processing businesses and a minority stake.

This acquisition, besides giving Coke leadership in the Indian coffee service business, also opens the 1,750 CCD stores to Coca Cola’s existing products; Coke also gains entry into many offices and work spaces where CCD’s dispensing machines are placed.

Interestingly, Coca Cola has recently announced plans to release a line extension Coca Cola Coffee in more than 25 markets around the world by the end of 2019. The drink, which blends Coke with coffee, has slightly less caffeine than a normal cup of coffee but more than a single serve of coke. As James Quincey, Coke’s Global CEO, says, “...the drink is designed to reach consumers during specific occasions and channels like the mid-afternoon energy slump at work.”

Coke already owns the Georgia coffee brand, with worldwide revenues of over US$1 billion, which is offered out of vending machines and in September 2018 acquired global coffee chain Costa’s Coffee at $5.1 billion from UK’s Whitbread PLC.

In 1996, Starbucks and PepsiCo started the Ready-to-Drink (RTD) coffee category with the launch of the iconic Frappuccino coffee drink. What started as a nascent category has grown to be a more than $2 billion retail business worldwide. Part of Coke's focus on coffee is also driven by the fact that Coke does not have significant play or partnerships in the RTD coffee category.

Both Coke and PepsiCo, globally, already have existing dairy businesses. Coca Cola distributed “Fairlife” in the US and Canadian markets and introduced Vio, a flavoured milk brand, in India, last year.

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So with Coke making definitive forays into “hot” beverages and indeed into the beverage service business, the conversion of the world’s cola majors into total beverage companies is complete. Of course with 3G capital, the owners of Anheuser-Busch InBev, – itself an entity formed by merging four brewing giants Anheuser Busch, InBev, AmBev and SAB Miller – the world leader in beer, may be eyeing Coke or Pepsi to make them an even more comprehensive ‘total beverage company.’

But that, hopefully, is sometime away. So have a drink and chill.

(The author is an angel investor and a business and marketing strategist. He has had a ringside view of the beverage market when he was executive vice president, marketing, with PepsiCo India).