Is there a magic bullet to success in business? Most entrepreneurs sweat blood for decades to build their empire one customer at a time. In the back of their minds is the hope that, one fine day, someone will come along and offer them a very large cheque to take it over. If you want to learn a more productive strategy, you need to be at our Boardroom Breakfast later this month.
Alison Brittain just had one of those fine days. Not that Whitbread’s CEO can take all the credit. The founders were Bruno and Sergio Costa, who set up in Lambeth as coffee wholesalers back in 1971 when T Rex topped the charts and hemlines went from mini to maxi. They opened their first café in 1978 and expanded to 39 outlets when Whitbread came along in 1995 and waved the cheque book. The brothers must have felt they’d won the recently introduced National Lottery when the brewer handed over £19 million for the fruits of their 24 year labours.
Business graveyards are full of the remains of great enterprises acquired and ruined by big, dumb companies who didn’t know what they were getting into. No such charge can be laid at Whitbread’s door. They’ve owned the chain for one year less than the Costa brothers, and in that time they’ve taken it from 39 outlets to 2,400 in Britain and another 1,400 overseas. Only Starbucks is bigger, their scale put into perspective when you learn that Costa has 460 coffee shops across the whole of China while their US rivals have 600 in Shanghai alone…
Whitbread’s original £19 million investment has been turned into an enterprise recently valued at £2.3 billion. That would represent growth of 121 times, in itself a remarkable achievement. Except Coca Cola is not paying £2.3 billion, they are stumping up £3.9 billion, a 70% premium on enterprise value. That’s what happens when a big company wants to jump straight into a market without putting in 47 years of hard labour.
It may have something to do with Coke’s Aston Villa supporting CEO James Quincey, who is determined to reduce the mega brand’s reliance on sugary drinks. He’s the first UK born CEO of Coca Cola and remembers Costa from when he was growing up in the West Midlands. He was also instrumental in Coke’s acquisition of Innocent, causing a few headaches for the health conscious founders who were accused of selling out their core values when the deal was announced.
Look behind the headlines and the gargantuan price doesn’t seem so over the top. Coca Cola’s market capitalisation is over $190 billion, while the global coffee market is worth $80 billion with plenty of room for further growth. If your core product was suffering steadily declining sales you’d want to diversify into other markets to offset that trend. Add in the obvious synergies from their established distribution networks and you could see how the bean counters could justify the big premium. They instantly become the second largest global player, with the means and the scale to take on Starbucks.
Meanwhile, Whitbread appeases its activist shareholders by selling what could be seen as a non-core asset and filling the coffers to expand other parts of the business like Premier Inn hotels. No matter what size your business, there are lessons to learn here. Typically, founders can only grow a business to a certain size before they run out of steam. However, if you build enough scale to appeal to a bigger player the multiples of profit that they will pay to acquire you rise significantly.
And, straight out of the Coca-Cola playbook, the easiest way to grow your own business may be to acquire someone else’s. That’s very much been Jonathan Jay’s approach, and that’s what he’ll be sharing with us at the Boardroom Breakfast at Home House private members’ club on Tuesday 25th September. And it’s worth noting that some of Jonathan’s best acquisitions have cost £3,899,999,999 less than Coke just paid for Costa…
Until next time.