Apollo Looks At Costa Coffee

Coca-Cola is exploring strategic options for Costa Coffee, the British café chain it acquired in 2018, amid underwhelming performance. Among the private equity firms in early-stage discussions is Apollo Global Management, owner of Wagamama’s parent company. The move underscores mounting pressure within Coca-Cola’s coffee business and may herald one of the largest food and beverage sales in recent memory.

Strategic reassessment under way
Coca-Cola purchased Costa for around £3.9bn (about $5bn) with the aim of expanding into the coffee market. However, six years on, Costa has yet to deliver the returns expected. Chief executive James Quincey acknowledged that Costa “is not where we wanted it to be from an investment hypothesis point of view,” prompting a strategic review.

To conduct the review, Coca-Cola has engaged Lazard. Initial discussions have been held with a “small number” of potential bidders, most notably private equity firms. Apollo Global Management, which owns The Restaurant Group and Wagamama, is among those in preliminary talks. Another firm, KKR, has also held discussions, but is believed unlikely to submit a formal bid.

Financial backdrop and valuation questions
Costa’s latest financial results reinforce the challenge. Revenues were around £1.2bn in 2023, compared to £1.3bn in 2018. More strikingly, the chain recorded a pre-tax loss of £9.6m in 2023, a sharp reversal from the £245.9m profit recorded in 2022. The losses have been attributed to surging coffee bean costs, inflationary pressures, and what Coca-Cola described as “inflation and asset write-downs.”

Market analysts suggest that, if sold, Costa may fetch as little as £2bn, nearly half of its original acquisition price. That would crystallise a multibillion-pound loss for Coca-Cola and mark a significant write-down of the brand’s value.

Market positioning and store strategy
Costa remains a dominant presence on UK high streets, with more than 2,000 stores in the country and operations in over 50 markets worldwide. Its main competitors include Starbucks, Caffè Nero and Pret a Manger, while competition has intensified from upmarket entrants such as Gail’s and other boutique coffee chains.

In response, Costa has stepped up its store refresh programme. It has introduced a new London concept store designed to speed up service for “grab and go” customers, while still catering to sit in patrons. Despite these efforts, the changes have yet to deliver the financial rebound that Coca-Cola had hoped for.

Apollo’s interest and what it signals
Apollo’s involvement introduces a unique dimension. The firm already owns The Restaurant Group, which includes Wagamama, and has experience managing UK hospitality and food service brands. Its interest suggests it may see untapped potential in Costa’s brand and footprint, possibly through operational restructuring, integration with other holdings, or pricing realignment.

Although Apollo’s discussions are still at a very early stage and it may decide against a formal offer, its presence among potential bidders underlines the seriousness of Coca-Cola’s intent to explore strategic alternatives.

Timeline and outlook
Indicative bids are expected in early autumn, though Coca-Cola may ultimately decide not to proceed with a sale. As yet, no official decisions have been made. None of the parties involved, including Coca Cola, Costa, Lazard, Apollo or KKR, have commented publicly.

In the meantime, Costa continues to trade, with efforts underway to adapt to changing consumer demand and reinvigorate its store experience.

Broader implications
A sale of Costa would mark a strategic retreat by Coca-Cola from its once-aspirational expansion into coffee. The challenges reflect wider business realities such as inflation, supply chain pressures, shifting consumer habits and the difficulty of reviving heritage retail brands on a large scale.

For private equity buyers, the situation offers opportunity. A well-managed turnaround under new ownership could unlock long-term value, particularly if combined with operational efficiencies, brand reinvestment, or synergies with other hospitality assets.

Politically and economically, a sale at a significantly reduced price could raise questions among investors and shareholders about the rationale behind the original acquisition. It would stand as a case study in the risks of rapid diversification without clear execution advantages.

Conclusion
Coca-Cola is actively exploring the sale of Costa Coffee, driven by disappointing performance and a need for strategic recalibration. Apollo Global Management is among the early suitors, reflecting growing private equity interest. As the autumn deadline for indicative bids approaches, the beverage group and its advisers face a critical decision with consequences for Coca-Cola’s direction, Costa’s future and the wider coffee sector.