Coca-Cola's Strategic Dilemma with Costa Coffee: Is a Divestiture Looming?

Coca-Cola's $5.1 billion acquisition of Costa Coffee in 2018 was a bold bet on the global coffee boom, aiming to transform the British chain into a cross-category powerhouse spanning retail, vending machines, and ready-to-drink (RTD) beverages. Yet, as of Q2 2025, the venture remains a strategic enigma. With Costa's global revenue stagnant at £1.22 billion (down from £1.3 billion in 2018) and its U.S. market strategy yielding minimal traction, Coca-Cola finds itself at a crossroads. The question now is whether to double down on a high-risk, high-cost asset or cut its losses.

The Financials: A Tale of Two Markets

Costa Coffee's performance in India offers a glimmer of hope. In FY25, its Indian operations saw a 30.76% surge in revenue to ₹198.5 crore and a 28.4% rise in profit to ₹149.7 crore, driven by an aggressive expansion to 220 outlets. This growth aligns with India's 10–12% annual coffee market expansion, fueled by a cultural shift toward premium coffee among younger, urban consumers. However, the global picture is starkly different. Costa's U.S. strategy, which relies on 250 Smart Café vending machines and RTD iced coffee lines, has failed to gain scale. Analysts note that Costa's RTD offerings are “so small and sporadic in terms of distribution it doesn't even show up on our data,” as Duane Stanford of Beverage Digest put it.

The volatility of coffee bean prices—spiking to $4.30 per pound in early 2025—has further squeezed margins. Costa's gross margin in India fell to 75.4% in FY25, while its global margins face similar pressures. Meanwhile, the original 16.4x EBITDA valuation of the Costa acquisition, described as “staggeringly high” by analysts, looms large. With no clear path to recouping this investment, Coca-Cola's leadership is reevaluating its coffee strategy.

Strategic Missteps and Integration Challenges

Costa's struggles stem from a misalignment with Coca-Cola's core competencies. The company's expertise lies in mass-market carbonated soft drinks, not the fragmented, premiumized coffee sector. Costa's dual focus on retail stores and RTD products has led to a diluted strategy. In the U.S., the brand's B2B and vending machine approach contrasts sharply with Starbucks' and Dunkin's retail dominance. Even in Europe, where Costa operates 4,000+ stores, growth has been flat.

Coca-Cola's recent decision to integrate Costa into its Europe, Middle East, and Africa (EMEA) division—eliminating its standalone Global Ventures unit—suggests a long-term integration strategy. However, this move contradicts typical divestiture preparation, where assets are kept separate for easier market transition. CEO James Quincey's admission that the company is “reflecting on what we've learned” signals a pivot rather than an exit.

The Road Ahead: Divestiture or Revival?

Divestiture rumors persist, but the lack of concrete plans indicates Coca-Cola is not rushing to sell. A potential buyer would need to absorb Costa's high fixed costs, volatile supply chain, and underperforming RTD brand. Moreover, the brand's strong presence in India and Asia-Pacific—markets expected to become Costa's top five globally within five years—offers a glimmer of long-term upside.

If Coca-Cola chooses to retain Costa, it must prioritize scaling RTD and vending machines in key markets. The company's recent experiments in India, including high-traffic store placements and digital engagement, hint at a path forward. However, without a strategic overhaul akin to Starbucks' RTD partnership with PepsiCo, Costa risks remaining a footnote in Coca-Cola's portfolio.

Investment Implications

For investors, the Costa conundrum presents a dilemma. A potential divestiture could free up capital for Coca-Cola's core brands or high-growth ventures, but it would also signal a retreat from the coffee sector. Conversely, a strategic pivot—prioritizing RTD, leveraging India's growth, and streamlining operations—could unlock value. Analysts like Connor Rattigan of Consumer Edge argue that Costa's future depends on whether Coca-Cola treats it as a core asset or a peripheral experiment.

In the short term, Coca-Cola's stock appears resilient, with Q2 2025 earnings showing a 58% EPS increase. However, the long-term outlook hinges on resolving the Costa question. Investors should monitor two key indicators: the pace of RTD expansion in North America and Asia, and any shifts in Quincey's strategic rhetoric during earnings calls.

Historical data on Coca-Cola's stock performance also provides context. From 2022 to 2025, the company has demonstrated a consistent, if modest, positive trend following earnings call announcements. A 3-day win rate of 46.67%, a 10-day win rate of 53.33%, and a 30-day win rate of 53.33% suggest that short-term market reactions to earnings events have generally favored the stock. While the maximum return during this period was a relatively modest 0.87% on July 12, 2025, the cumulative effect of these positive responses reinforces the importance of tracking earnings-related developments.

For now, the coffee sector remains a high-stakes gamble for Coca-Cola. Whether it doubles down on Costa or pivots to a new model, the beverage giant's next move will shape its relevance in a world where coffee is increasingly displacing soda as the beverage of choice.

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