Coca-Cola (KO -0.19%) is best known for its namesake soda. It is a global icon that can be found in stores across the globe. And given Coca-Cola’s size, financial strength, and distribution and advertising prowess, it is a vital partner to retailers.
But there’s one small wrinkle when it comes to Coca-Cola’s coffee business that you’ll want to understand before you buy the stock.
Coca-Cola is way more than Coke
Coke is, clearly, the most important brand at Coca-Cola. The company is usually just called Coke for a reason. But the breadth of its beverage products is much wider than just cola. For example, it also produces different flavors of soda, water, orange juice, tea, and coffee, among other beverages.
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The vast majority of Coca-Cola’s beverage portfolio operates in a fairly similar way. Coca-Cola makes the drink (or a concentrate) and sells it to other companies to resell to consumers. This core business model has worked very well for a very long time. To put a simple number on that, Coca-Cola has increased its dividend annually for 62 consecutive years, making it a Dividend King. You don’t create a dividend streak like that without having a strong business model.
That said, there’s one oddity in the mix and that’s Costa Coffee. According to Coca-Cola’s 2023 annual report, “We generate most of our coffee revenues through Costa.” In fairness, coffee is just one of many things Coca-Cola does, and it isn’t even the most important, but clearly Costa is important with regard to Coca-Cola’s coffee operations.
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What is Coca-Cola doing in coffee?
Here’s the not-so-small fact that gets hidden inside of Coca-Cola’s giant beverage portfolio: “We sell directly to consumers through retail stores operated by Costa Limited.” What that means is that Coca-Cola basically owns and operates a chain of coffee shops, competing directly with companies like fast-growing upstart Dutch Bros, industry giant Starbucks, and all of the mom and pop shops that only have one location.
This is a very different business than selling drinks and drink syrup to other companies that then resell the beverages to the public. Costa was added to Coca-Cola’s portfolio in 2019. The Costa business gets shoved into Coca-Cola’s Global Ventures group, which kind of obscures the very different nature of this operation.
Costa is not a small business, with the Global Ventures division operating 1,575 leased retail locations at the end of 2023. Most, if not all, of those locations are attributable to Costa. While Global Ventures “only” made up around 6.7% of revenue in 2023, investors shouldn’t simply overlook the Costa business.
Costa is so different from Coca-Cola’s other operations that it needs to be monitored for two big reasons. First, it could end up being a distraction that drains management’s time and financial resources. Second, it could end up being the impetus for Coca-Cola taking a more active role in selling directly to customers.
If you aren’t watching Costa you could end up blindsided as an investor if Coca-Cola ended up selling the business and taking a big write off. Or you could suddenly find out that Coca-Cola has decided to open retail outlets tied to other brands it operates. Both are possibilities, but neither will be on your radar if you don’t fully appreciate the little-known Costa business Coca-Cola hides in its Global Ventures division.
Costa isn’t going to make or break most Coca-Cola investment decisions
To add some perspective, Costa isn’t likely to be the reason investors buy or sell Coca-Cola’s stock. And even if the Costa brand ends up being a total disaster it probably won’t derail Coca-Cola’s long-term success. That said, it is still a material business competing in a very competitive industry. It is also an interesting experiment by Coca-Cola, which is effectively reaching outside its comfort zone. If you own Coca-Cola, or are considering owning it, Costa deserves a moment of consideration for what it could mean, both good and bad, for Coca-Cola as a company.
Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Starbucks. The Motley Fool recommends Dutch Bros. The Motley Fool has a disclosure policy.
