The Acquisition of Costa by Coca-Cola
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Introduction
The Coca cola Company is a leading corporation in the non-alcoholic beverage industry. According to Cision, the world largest and research company, the growth of the carbonated drinks industry is anticipated to be moderate between 2018 and 2023 (Global carbonated beverage, 2019). Coca-Cola acquisition of the Costa Coffee is a strong strategic move by the company to reduce the pressure of relying on soft drinks; which are currently perceived to be unhealthy. Consequently, the main purpose of this study will be to critically evaluate the acquisition of Costa by Coca-Cola by using different theoretical frameworks to understand strategic issues facing the company and approaches adopted by the firm to resolve these issues.
Theoretical Approaches
The study will use three theoretical approaches to analyze the acquisition of Costa by Coca Cola. VRIN framework, Ansoff Matrix and the BCG matric will be employed in analyzing the recent acquisition made by the Coca Cola.
Value-Rarity-Imitability-non-substitutability (VRIN)
Value-Rarity-Imitability-non-substitutability (VRIN) framework was proposed by Barney as an approach of assessing company internal resources. However, Knecht (2013) claims that VRIN can also be employed to evaluate firm’s external environment, resources and capabilities. VRIN main objective is to enable one to know what are the competitive advantages or weaknesses by asking questions such as; are the resources valuable?, are they rare?, is the cost of imitating high?, is the cost of the substitute high? (BARNEY, HESTERLY, 2010). In spite of its applicability in assessing companies’ competitiveness, VRIO has several drawbacks in that it is impossible to use it to analyze smaller companies and those at the starting phase as Knecht (2013) notes.
From the first question, the framework seeks to know whether a particular resource adds value to the business by either availing means of defense against threats or giving a firm means of exploiting business opportunities (Haluob, 2019, A). In this regard, Cardeal and Antonio (2012) suggest that resources are also deemed valuable if they improve efficiency and effectiveness. Secondly, the question of rarity addresses the issue of substitutability. A resource is considered to be rare if only few or one firm can be able to acquire it (Haluob, 2019, A). Consequently, a rare resource is a source of competitive advantage to the beholder. Thirdly, the question relating to imitation seeks to unravel whether other organizations can be able to acquire the resource by either imitating/duplicating or coming up with a substitute product/service (Haluob, 2019, A). Cardeal and Antonio (2012) point out that resources that are costly to duplicate may help an organization to achieve a sustained competitive advantage in the long run. Lastly, the question of whether the threat for substitutes exist. Haluob (2019, A) postulates that a company cannot have a competitive advantage if a threat for substitution exists. For a firm to realize any benefits from its valuable, rare and inimitable resources, it must be able to overcome the threat of substitute both from within and outside the industry.
Ansoff Matrix
Ansoff Matrix was proposed by Igor Ansoff in 1975 and he posited that a business can seek more opportunities of growth by either marketing existing products to new markets or creating new products and market them to both new and existing markets. According to Zekiri, & Nedelea (2012) Ansoff suggested four main strategies that a business can adopt to increase its growth as follows;
Market penetration is a growth strategy aimed at marketing the firm’s existing products through intensive marketing efforts. Taylor (2012) argues that market penetration utilizes employs the existing value chain to increase sales without affecting the expected returns. This strategy is aimed at raising a products’ consumption within the existing market to expand the products market share. Market development is a technique employed by an organization to offer its products to a new market (Haluob, 2019, C). Market development is a corporate level strategy that focuses on developing competencies to create or acquire a market. The approach aims to add the customers it serves to increase its market share. Product development embraces the introduction of an innovation to consumers. According to Hussain, Khattak, Rizwan, and Latif (2013), product development entails designing, conceptualizing, and promoting a new product. The objective of the approach is to create a new product or improving an existing one (Haluob, 2019, C). Diversification is an approach used to colonize a new market or industry that an organization does not currently operate. It involves the access to more attractive investment opportunities (Haluob, 2019, C). Hussain, Khattak, Rizwan, and Latif (2013) postulate that the core objective of diversification is to develop a new customer base product to expand the market potential of the original product. Venturing into a new market can widen the scope of a company by tapping new customers and markets. However, Ansoff matrix is deemed to be too optimistic and it doesn’t consider activities undertaken by competitors in the market.
The BCG Matrix
The BCG Matrix is a technique developed by the Boston Consulting Group to assess a brand’s portfolio’s strategic position (Mohajan, 2017).This planning tool enables a firm to perform an in-depth assessment of its brand to determine if it is worth investing. The BCG matrix categorizes a business portfolio into four groups based on the growth rate of an industry and the relative market share as follows;
Dogs represent a brand with a low market share in comparison with competitors and have a slowly growing market (Mohajan, 2017). As a result, the firm’s brand is not worth investing if its expected cash return is significantly low or negative. Cash cows represent brands that make huge profits and as such a company should take advantage of them to reap as much benefits as possible (Shanbhag, Dutt, & Bagwe, 2016). A firm is not supposed to invest in cash cows to induce growth but is rather only required to support its brand to uphold its competitive position. Stars are brands that operate in industries with a high growth rate and are able to maintain a high market share (Shanbhag, Dutt, & Bagwe, 2016). While stars generate significant profits, they also require huge investments to maintain. If a star brand is expected to generate positive cash flows, then it is worth investing. Question marks are brands that albeit having a fast growing market share hold a low market share and incur losses (Mohajan, 2017). Since they have a potential of gaining a market share and growing into a star and ultimately into a cash cow, they need much more consideration. In spite of this, BCG model only tries to address the current situation but fails to predict with certainty of what will happen in the future. Moreover, this approach does not consider the external environmental factors affecting the business as Shanbhag, Dutt, & Bagwe (2016) indicates.
The Application of the Selected Theories
VRIN Framework
The VRIN framework reveals that Coca-Cola’s internal resources and external resources, environment, and capabilities can benefit the company with regard to Costa’s acquisition. The acquisition of COSTA undoubtedly allows Coca-Cola to exploit a new opportunity and neutralize its competitors’ threats. According to Luty (2020), COSTA is the leading coffee brand in the UK and its revenues have been on an upward growth since 2010. The acquisition of COSTA has enabled Coca-Cola to tap an additional global market-base with an additional healthy drink to enhance its global presence.
Regarding rarity, Costa coffee faces stiff competition from other players in the industry including Starbucks and Dunkin brands. According to Hanbury (2018), Costa has heavily invested in the global market with 3,882 established stores in 32 nations and is the leading coffee chain in the UK. Coca-Cola’s extensive global network coupled with that of Costa gives it a competitive advantage above other players in both the nonalcoholic and coffee industry.
Concerning imitability, Costa has a unique brand image and a highly skilled human resource that rivals will find hard to imitate. Furthermore, the resources employed in the acquisition of Costa are too high for a majority of the players in the nonalcoholic beverage industry to afford. According to Hanbury (2018), Coca Cola invested $ 5.1 billion in the successful acquisition of Costa. Ultimately, the resources required to replicate Coca Cola’s investment are too high for a majority of the rival firms to pursue.
The non-substitutability aspect assesses whether a threat to substitutes exists (Haluob, 2019, A). Regarding Coca Cola, an analysis is fundamental to determine if any substitute threat in its Costa’s takeover. From within the nonalcoholic beverages industry, no other player has ventured into the coffee industry. However, direct competition may prompt its rivals to enter the coffee business in future. Nevertheless, Coca Cola faces stiff competition from other coffee firms whose products can be deemed as substitutes including Starbucks and Dunkin.
Ansoff Matrix
On the other hand, the Ansoff matrix shows that Costa’s acquisition is a perfect prospect for the Coca Cola Company to prosper and flourish. Concerning market penetration, Costa’s purchase represents perfect opportunity for Coca Cola to increase its range of products consequently enhances its market share. Furthermore, the move can enable the firm to increase its usage of the existing customers and restructure its market share and use its nonalcoholic drinks’ profits and resources to rival competitors in the coffee industry. Moreover, the acquisition can enable Coca Cola to employ Costa’s distribution network to colonize its nonalcoholic beverages’ customers.
Costa’s purchase is also critical to Coca Cola’s market development. Coca Cola and Costa deal with different products and geographical markets. According to Agarwal (2017), the US, Mexico, China, Brazil and Japan are the top 5 largest Coca Cola’s markets. On the other hand, the UK is the single largest market for Costa coffee (Hanbury, 2018). Thus, the acquisition of Costa is a perfect opportunity for Coca Cola to upscale Costa’s market share in its top 5 largest markets. Moreover, the move can enable Coca Cola to develop new distribution channels and product dimensions and packaging to suit both its coffee and nonalcoholic drinks products.
Coca Cola’s Costa takeover promotes product development. The purchase presents Coca Cola with a viable opportunity to add coffee drinks into its traditional nonalcoholic beverages. Traditionally, Coca Cola has mainly specialized in non-alcoholic drinks such as Coca Cola, Fanta, Sprite, Krest, and Dasani (Our Company, n.d.). Thus, the acquisition of Costa can enable Coca Cola to tap into the coffee industry and add multiple coffee drinks into its range of products. Through its competencies, the company can execute research and development to innovate new range of products and possibly become the first in the market to introduce drinks linking the traditional nonalcoholic beverages and the coffee flavor.
Moreover, the Costa’s takeover is important for the Coca Cola Company to enhance diversification. Ribeiro, Ribeiro, Bertolini, and Rogis (2016) point out that the incorporation of additional sectors or processes to an organization is key the realization of significant expansion of market share and efficiency. The introduction of coffee products indeed enables Coca Cola to venture into a new line of business that it was previously not involved. However, the process is not always straightforward as diversification may present management challenges as the process may impact on its structure.
The BCG matric
The BCG model portrays a potential for annual growth and sales for Coca Cola after its acquisition of Costa. Based on the BCG matrix, a dog has a low market share and a slowly growing market while a cash cow is brands with a large market share (Mohajan, 2017). On the other hand, star brands have a high growth rate as well as a high market share (Shanbhag, Dutt, & Bagwe, 2016). The question mark brands are the ones with a low market share despite being in a fast growing market share and are thus likely to generate losses.
The Costa coffee is leading coffee company with a significant market share both in the UK and other parts of the globe. As mentioned by Hanbury (2018), Costa is the leading coffeehouse in the UK with several stores in almost every street in the country. Over the years, the company has continuously experienced an upward profit trajectory. For example, Costa’s global revenues rose from £ 425 million in 2010/2011 to £ 951.9 million, £ 1.2 billion and £ 1.3 billion in 2014/2015, 2016/2017, and 2018/2019 respectively (Revenue of Costa Coffee, 2019). Since Costa generates huge profits annually, it is an obvious cash cow for the Coca Cola Company. Furthermore, since the dominant coffeehouse is already highly profitable and has a huge market share, Coca Cola does not need to massively invest. Instead, it only requires to support the brand to ensure that it maintains its competitive advantage in the market.
Future Directions
According the three theoretical approaches discussed, Costa’s adoption into the larger Coca Cola Company is a pivotal decision to enhance the company’s growth. Based on the VRIN framework, Coca Cola should take advantage of the Costa’s extensive global distribution network, human resource (HR), and marketing capabilities to enhance its global presence and market value. While Coca Cola’s distribution network, HR, and marketing capabilities are equally efficient, maintaining and enhancing Costa’s frameworks is fundamental to ensure that the competitive advantage including brand image and market research and development that the coffeehouse had over rivals is maintained to fend off imitation to further its position as a cash cow. However, Coca Cola needs to properly organize and restructure its policies and procedures to bolster its value and exploit Costa’s profitability to the optimal. This will ensure that Coca Cola gains the maximum benefits out Costa’s acquisition.
Costa’s acquisition’s assessment from the ansoff matrix postulates that Costa’s acquisition decision is in line with Coca Cola’s desire to expand its market share. While the uptake promotes market penetration and diversification, Coca Cola should be aware that the Costa Coffee has attained a saturation point in the UK, which is its primary market. As mentioned by Hanbury (2018), Costa’s stores are visible at almost every street in the UK. However, Olah (2018) points out that while Costa has annually been ranked as the most favorable coffee shop in the UK for a record 8 time, its sales dropped by 1.5 percent during the third quarter of 2017 for the first time. This clearly reveals that the future profitability of Costa lies outside the UK. The company should adopt the global strategies to coordinate extensive sales in other nations (International strategy, 2019). Coca Cola needs to focus more on expanding, developing, and penetrating the global markets outside the UK and adding a new range of coffee products to maintain Costa’s previous upward profit trajectory.
On the other hand, the MCG matrix reveals that while Costa has generated huge profits for a while, its UK coffee market has attained the saturation stage. This suggests that Costa has operated as a cash cow in the UK market for the past decade. The sale of coffee in almost every corner of the UK’s streets indicates that Costa has earned a lot of revenues over the past few years. However, the company experience of a dwindling sale and profit levels in the last quarter of 2017 postulates the likelihood of tough period ahead (Olah, 2018). Thus, the readjustment of Costa’s business strategy represents the most appropriate pathway for Coca Cola to improve its coffee’s sales and profits in the future. Singh, Kumar, and Puri (2017) believe that a focus on sales management leadership can help a firm enhance its salespersons’ behaviors to bolster their influence on the company’s overall sales. Indeed, the coffee business environment is rapidly changing and a company’s ability to comprehend, take advantage, and realign its customer-facing roles is critical to meeting their current and future needs. Thus, the two companies need to merger to integrate their resources to develop a stronger competitive advantage (Haloub, 2019, “B”). The amalgamation will enable the corporations to come up with the best marketing approach to maintain old customers while attracting new ones.
Conclusion
Coca Cola’s decision to purchase Costa is a good verdict for the company to enhance its market presence to increase its sales and profits. For the numerous decades that Coca Cola has existed, it has experienced significant growth until it has finally attained maturity. Despite its attempt to introduce other range of nonalcoholic beverages, a majority of the new drinks like Coke Diet have underperformed albeit the immense marketing effort. Moreover, a majority of the beverages that Coke traditionally relied on like Fanta and Sprite have continued to dwindle the firm’s sales and profitability as emphasis moves towards healthy lifestyles. The VRIN framework, Ansoff Matrix and the BCG matrix indicates that the acquisition of Costa is a perfect move for Coca Cola to diversify its range of products and move away from its contemporary reliance on soft drinks. With trends indicating a shift to healthy drinks, venturing into Coffee can enable Coca Cola venture into new products and embrace research and development to come up with much more healthy commodities to maintain and further its market presence. While Costa is a clear cash cow, its long-term profitability is at stake. As the leader in the nonalcoholic beverages industry, Coca Cola needs to employ its massive resources to research and marketing the Costa coffee to ensure that it maintains gains optimal value from the purchase.
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