Coca-Cola files Costa Coffee buyout for Chinese merger review

8 November 2018 10:10am

27 September 2018. By Xu Yuan.

US soft-drink maker Coca-Cola recently notified China’s antitrust regulator of its proposed acquisition of British coffee-shop chain Costa Coffee, MLex has learned.

The Antimonopoly Bureau of China’s State Administration for Market Regulation has yet to begin formally assessing the competitive impacts of the deal, but it is understood that it is set for a normal review procedure of up to 180 days, divided into three phases.

The lack of overlap in the two companies’ businesses makes the tieup unlikely to raise concerns among antitrust regulators around the world.

The Chinese antitrust agency, however, could argue that a merger of two companies in different markets might create a so-called conglomerate effect, with Coca-Cola leveraging its power in the market for soft drinks to affect competition in the coffee market, as it was feared to have been planning in its scuttled acquisition of Chinese juice brand Huiyuan in 2009.

In the very first merger blocked by Chinese authorities after the Antimonopoly Law took effect in 2008, the Ministry of Commerce's Antimonopoly Bureau, the merger-review regulator at that time, blocked the deal by saying it would enable Coca-Cola to leverage its dominant position in carbonated soft drinks to dominate the adjacent juice market.

Mixed history

Almost 10 years has passed since the Huiyuan deal, and it is arguable that the competitive landscape in the Chinese beverages market has changed radically. Although it took some time for Coca-Cola to emerge from the shadow of the failed Huiyuan deal, it managed to continue merger activities in China.

In 2015, the company succeeded in expanding into the healthy-drinks market by buying Culiangwang, a Chinese multi-grain beverage brand, for $400.5 million. That deal was approved unconditionally by Mofcom after a review lasting more than a year. Its review of the Huiyuan deal took 182 days.

Coffee in China

In China, coffee is not a household drink like cola or juice, but its popularity has increased rapidly in recent years. The market for coffee shops has become increasingly competitive.

Costa’s limited footprint in China and the presence of aggressive competitors may ease any concerns the regulator may express in its competition analysis.

China's coffee-shop market was worth an estimated 30 billion yuan ($4.7 billion) in 2017, a sharp rise from 26 billion yuan the previous year. Starbucks has dominated, with a 58.6 percent share of sales. It is followed by McCafé at 6.1 percent and Costa at 3.8 percent, according to Euromonitor data cited by state newspaper China Daily in May.

Despite that dominance, Starbucks is aiming to double its number of outlets in China to 6,000 by 2022. Luckin Coffee, a domestic brand that launched in January, has accused Starbucks of abusing its market dominance in China and announced plans to have 2,000 shops open by the year's end.

Apart from chain coffee shops, independent cafes are sprouting across the country to take on the big brands, often quickly winning loyalty among younger consumers thanks to their characterful designs and distinctive concepts.

Coca-Cola expects to complete the Costa deal in the first half of next year.

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