Big soda is expanding into less bubbly product lines.
The global beverage industry is diversifying into hot and cold drinks, as health-conscious consumers turn away from sugary drinks to enjoy custom-made flavored waters and barista-quality coffee at home or on the go.
US drinks giant Coca-Cola is buying UK coffee company Costa for $5.1 billion, while rival PepsiCo is taking over Israeli homemade soda company SodaStream International for $3.2 billion. The two deals, which were announced in August, are expected to be completed in the first half of 2019 and will see Coca-Cola expand into hot beverages and PepsiCo dip into flavored carbonated waters.
“The large beverage companies are looking for growth avenues,” says Gary Hemphill, managing director and chief operating officer of research at consulting firm Beverage Marketing Corporation (BMC). “Some of the large traditional beverage categories have experienced soft performance in recent years, so companies are seeking ways to spur growth.”
The consolidation trend is shaking up a market where large manufacturers compete with alternative start-ups offering a variety of hot and cold beverages infused with low-sugar, detoxifying ingredients. Sales of sparkling and still water have grown by the mid-to-high teens this year so far, according to a Cowen research note that cites Nielsen data.
“Entering into an alternative beverage platform makes sense, given all of the fragmentation seen throughout retail, in particular with the emergence of e-commerce,” Cowen managing director and senior research analyst Vivien Azer says in a broker note. Referring to PepsiCo’s acquisition of SodaStream, she adds: “The focus on sparkling water is aligned with health and wellness and fits the company’s performance-with-purpose vision.”
In addition to the “healthy consumer” trend, companies are also looking to strengthen their distribution network.
Costa Coffee will provide Coca-Cola with more than 2,400 coffee shops in the UK, as well as 1,400 stores in 31 international markets and 8,000 self-service coffee units.
Coca-Cola said that its acquisition of Costa from parent company Whitbread will give it “a strong coffee platform across parts of Europe, Asia Pacific, the Middle East and Africa, with the opportunity for additional expansion.”
“Given Costa’s existing international footprint, expansion and integration into other geographies will be a key focus of Coca-Cola to generate revenue synergies,” Cowen’s Azer stated in a note on the deal.
The merger between coffee company Keurig Green Mountain and soda group Dr Pepper Snapple—which was completed in July—created a market leader in flavored carbonated soft drinks and single-serve coffee. The new company is forecast to generate $600 million worth of synergies between 2019 and 2021, helped by Dr Pepper Snapple’s distribution network.
Integrating different brands and product lines isn’t likely to be a challenge for large beverage groups, Hemphill said.
“The giant beverage companies have been broadening beyond their core carbonated soft-drink business since the 1990s as consumer tastes have shifted. I see no risk of confusion,” he says.
Asked about whether the trend is likely to continue, Hemphill says: “There is potential for further acquisitions, but it’s not a certainty.”