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Coca-Cola purchase COSTA COFFEE
Published on: 2018-09-06
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031A branded Costa Coffee cup sits next to a can of classic Coca-Cola, manufactured by The Coca-Cola Co., in this arranged photo at a Costa Costa coffee shop in London, U.K., on Friday, Aug. 31, 2018. Coca-Cola Co. agreed to buy the U.K. chain Costa Coffee for $5.1 billion.

Coca-Cola’s purchase of the UK-based coffee chain Costa Coffee could slow down Starbucks momentum in its hottest market, China.

032The reason for this is obvious: Costa Coffee has 450 stores in China already. Add Coca-Cola’s long presence there and deep pockets, and China could see the pace of new store openings by Costa Coffee speed up.

Coca-Cola’s move into the coffee business comes at a time when Starbucks is encountering market saturation at home. Its stores are on almost every neighborhood corner and they’re beginning to take sales away from each other.

Starbucks has been expanding its presence in China where it has been opening stores at a fast pace. But Costa Coffee is already there. And Coca-Cola’s acquisition is expected to intensify the competition for a piece of the market, slowing Starbucks’ momentum.

The US5

The US$5.1 billion Costa deal is Coca-Cola's first attempt to expand into the coffee business.

With over 1.3 billion people and rising incomes, China has been a mouth-watering market for Starbucks and other overseas merchants. But winning the minds and the wallets of Chinese consumers isn’t as easy as it seems on the surface. China is a diverse rather than a homogeneous consumer market, which consists of three segments:

--The highly globalized segment, in which Chinese consumers display similar preferences and tastes with consumers in highly developed countries. This segment extends over three eastern regions: The Pearl River Delta, which includes Hong Kong, Guangzhou and Shenzhen; the Yangtze River Delta, which includes Shanghai and nearby cities; and the Beijing-Tianjin region.

--The highly localized segment, in which consumers maintain their local preferences and tastes. This segment may be found in the most remote rural areas of central and western China.

--The semi-global market segment, in which consumers display a mix of global and local preferences. This segment is a collection of “mega-cities” like Fuzhou, Zibo, Qingdao, Shantou, Dalian and Huizhou.

open costaSo far, Starbucks and other coffee store chains have expanded into the easy target, the highly globalized segment, where these foreign store chains do not have to lure locals away from He Cha (drink tea) to espresso drinks.

But Chinas is seeing market saturation in its “highly globalized” market segment, which could stall market momentum for all coffee chain players there -- becauseit will be extremely difficult to reach the other two segments, without substantial changes to its business model that will hurt the company’s scalability and profitability.

James Quincey is president and CEO of The Coca Cola CompanyJames Quincey is president and CEO of The Coca-Cola Company.

Still some analysts are optimistic about the long-term prospects of Starbucks. “Longer-term, SBUX is becoming a mature cash-generating company in the U.S. market with a high-margin licensing revenue stream from licensing partnerships all around the world and a huge high-return growth opportunity in China,” says equity analyst John Zolidis. “There's a lot left from this story if you're willing to look past near-term comp headwinds, in our opinion.”

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