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What's driving Coca-Cola's recent acquisitions?

September 5, 2018
Consumer Packaged Goods

Last week, Coca-Cola announced a major acquisition and a tiny one. The company has been in a steady, acquiring mode over the last few years. It has acquired rivals specializing in vitamin water, coconut water and tea, but now it’s buying a tiny regional soda company and a major retail coffee chain overseas. What’s driving these purchases?

In August 2018, Coca-Cola acquired Moxie, a regional soda company, from a Kirin-owned bottling company in New England for an undisclosed sum. Since Moxie only produces about 225,000 cases of its soft drink and mammoth Coke generates a whopping 80 million cases of beverages, why acquire it when its production doesn’t even constitute 1% of its output?

Moxie is known primarily in Maine and the Northeast and recognized for its bitter taste and possessing only 25 grams of sugar per can. So Moxie now joins Coca-Cola’s huge stable of brands that many people don’t associate with it, including: Dasani, Smartwater, which it acquired in 2007 for $4 billion, Powerade, Vitaminwater, protein drink Odwalla and Honest Tea.

And for Coca-Cola, Moxie was the appetizer before it nabbed the main dish. On September 1, it announced that it was paying $5.1 billion for Costa, an overseas retail coffee chain with 3,800 outlets.

What’s driving these acquisitions has been America’s gradual decline of drinking sugar-filled beverages. The New York Times reported on October 2, 2015 that “Over the last 20 years, sales of full-calorie soda in the United States have plummeted by more than 25 percent.”

Bill Sipper, managing partner at Ramsey, New Jersey-based Cascadia Managing Brands, a global beverage consultant, noted that Coca-Cola has been on a sweeping downward trajectory. “Almost every brand of Coca-Cola is down. Soft drinks are down. Vitamin water is down. Coconut water is down.”

Hence, Sipper says, “In order to maintain market share, they have to buy the little guy.”

And of course acquire the big guy, too. Sipper says Coca-Cola likely acquired Costa to sell its “ready-to-drink coffee products and bagged coffee products.” Since Coca Cola has done very well in Asia and is a global company, it likely can grow Costa’s business there as well.

But Sipper is critical of Coca-Cola’s handling of acquisitions. “They don’t execute well. They seem to lose the cachet of these brands,” he says.

Jeffrey Klineman, a Watertown, Massachusetts-based editor-in-chief of BevNet, a business-to-business media company specializing in beverages, calls the Costa purchase “a total beverage play. Coffee is extremely hot right now.”

And yet Klineman adds, “I’m not sure if Coke is ready to be a real estate company. But we’ll see.”

Klineman also notes that the business climate pervasive in the U.S. encourages these acquisitions. “There are many businesses with cash on hand as a result of these tax breaks,” he says.

But Sipper praises the legacy of Moxie. “It’s been around forever. It has a cult following and sells extremely well,” Sipper notes.

But aren’t 225,000 cases of soda a drop in the bucket for a behemoth like Coca-Cola? “They can grow it to half a million cases. It’s all about incremental sales,” Sipper states.

Because of its low sugar content, doesn’t Moxie fit in with Coca-Cola’s drive to minimize sugar content and appeal to more nutritious customers? Sipper swats away that idea. “Not at all,” he replies. “I don’t think it played any role whatsoever. They didn’t buy it for its natural content.”

Since they’ve been emphasizing natural soda, and Moxie is a carbonated brand, it doesn’t blend in with a prevailing strategy, Sipper says. He sees Coca-Cola’s acquiring Moxie as a “tactical move, not a strategic one. It’s not going to have much impact on its bottom-line.”

Questioning Coca-Cola’s acquisition, Sipper says, “If you continue to play large multiples for beverage companies and sales continue to decrease, what does that say for your future?”

Furthermore, Moxie has a certain cachet with its cult followers, and the minute those Moxie cases are spotted on a Coca-Cola truck that cachet can fade quickly, like a craft beer being acquired by Budweiser.

What underlies its acquisition of Moxie are the problems that Coca-Cola has had innovating and launching new products on its own. “They’re not good at incubating small beverages. They can’t incubate, so they have to acquire,” Sipper says.

By Gary Stern

Source: Forbes

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