1. What was the Change Event?

Coca-Cola is a global beverage company that offers over 500 brands in more than 200
countries and territories (Company T. C.-C., 2020). On 31st August 2018, The Coca-Cola
Company first announced its planned acquisition of Costa Limited from Whitbread PLC
(Green, 2018). After gaining necessary antitrust approvals from regulatory authorities in the
EU and China, the deal completed on 3rd January 2019 (Arthur, 2019). The 5.1bn USD
transaction makes the acquisition of the British coffee platform one of Coca-Cola’s largest to
date (Company, 2020). As well as gaining rights to the Costa brand, 3,800 retail outlets,
8,500 Costa Express machines, Costa's roastery and for-home product offerings, The Coca-
Cola Company acquired all issued and outstanding shares of Costa Limited upon shareholder
approval (Leith, 2018).

Acquiring Costa Coffee has provided Coca-Cola with a significant step into hot drink
offerings and direct retail outlets, neither of which the company had direct access to before
the acquisition (Green, 2018). As separate companies, Coca-Cola and Costa were competitors
in the beverage market. The strategic move from Coca-Cola is, therefore, an example of a
horizontal acquisition with the overall goal of increasing market share and competitive
position within the beverage industry.

Acquisitions are an example of episodic change, which Weick and Quinn (1999) define as
'infrequent, discontinuous and intentional'. A growing misalignment between an inertial
organisational structure and perceived environmental demands will lead to an episodic
change event (Weick & Quinn, 1999) as demonstrated by Coca-Cola’s acquisition of Costa.
2. Why Did the Change Event Happen?

The Coca-Cola Company heavily relies on its line of carbonated beverages to make revenue
and profits. However, developing concerns relating to health issues such as obesity and
diabetes have seen consumer preferences shift away from sugary carbonated drinks towards
perceivably healthier alternatives (Warner, 2018). In April 2018, this shift in demand was
exacerbated by the introduction of the sugar tax in the United Kingdom. The levy on soft
drinks charges the company 24 pence per litre of drinks sold containing eight grams or more
of sugar per 100 millilitres, or 18 pence per litre for drinks containing between five and eight
grams (Treasury, 2018), which negatively effects revenue and profits. Not only does this
legislation impact about 40 percent of Coca-Cola’s portfolio, but it also entails increased
prices to consumers. Thus, demand shifts further away from drinks high in sugar and the
impact on The Coca-Cola Company’s revenue intensifies.

At the same time, the coffee segment within the beverage industry is growing 6 percent
annually (Team, 2018), presenting a significant opportunity for Coca-Cola to expand their
portfolio and create value within the company. These evolving consumer preferences in the
market exemplify a change in Coca-Cola’s external environment. According to the
evolutionary metaphor for organisational change, an organisation must recognise how their
industry is changing and adapt in order to align with it. Weick and Quinn (1999) suggest that
an organisation becomes less aligned with its environment as inertia builds, ultimately
leading to a trigger that precipitates an episode of replacement. Organisational inertia is
defined as the tendency of a mature organisation to continue on its current trajectory (Gilbert,
2005), despite evidence that it may be more efficient to deviate from existing structures and
routines. Coca-Cola’s changing environment illustrates the trigger that determined the
decision to enter the coffee segment. However, many coffee chains are coming increasingly
under fire for the high sugar content in their drinks (itv, 2019), which suggests that the coffee
segment may also experience a decline in demand in the coming years. Although Costa’s
own drinks are not subject to the sugar tax (Alliance, 2017), it remains uncertain whether
Coca-Cola’s strategy will achieve long-term benefits.

Acquisitions provide the opportunity of fast growth, which avoids the uncertainties
associated with internally generated growth (Cameron & Green, 2015). If Coca-Cola had left
growth to manifest slowly through internal expansion and allowed inertia to persist,
competitors could have responded quicker to the environment and taken potential market
share. Prospective growth is a significant motivating factor for takeovers and the synergy
achieved through acquiring a company can accelerate growth for both companies involved.
Synergy refers to the potential ability of the two to be more successful when merged than
when apart (Cameron & Green, 2015). Since its establishment, Costa Coffee has
demonstrated significant success and strong competitive capabilities, with its number of
stores expanding by 197 percent between 2008 and 2018 (Lock, 2020), and offers a unique
product that can further facilitate rapid growth (Gaughan P. , 2007), which could explain why
Coca-Cola expects high returns from the deal.

In addition, Coca-Cola possesses the powerful human and financial capitals to better manage
Costa’s resources, thus supporting a rise in the value of Costa under its control. The synergy
achieved through the combination of Coca-Cola’s marketing proficiency and global reach
with Costa’s expanding platform and expertise provides great potential to increase revenues
through new and strengthened products. Although this can be hard to achieve (Cameron &
Green, 2015), Coca-Cola has identified a gap in Costa’s portfolio and plans to expand
offerings into ready-to-drink Costa products (Ireland, 2018). Exploiting synergy can increase
efficiency and reduce costs. Furthermore, by strategically taking advantage of each firm’s
respective strengths, Coca-Cola will increase its market share and gain a competitive
advantage against other companies. Nevertheless, increased profits achieved through
horizontal integration signal to competitors to enter such a contestable market quickly
(Gaughan P. , 2007). Raising the degree of competition within the market will drive prices
down, which suggests that gaining entry into more profitable areas of business will not
necessarily be successful in the long run (Gaughan, 2010).
3. Was the Change Successful or Not?

After Whitbread PLC announced plans to demerge from Costa LTD in April 2018, The Coca-
Cola Company made an offer of 5.1bn USD to acquire Costa from the company. Following
the offer, which was significantly higher than the expected value of the demerger, Whitbread
agreed the sale of Costa to Coca-Cola on 31st August 2018 (PLC, 2019). Completion of the
sale was expected during the first half of 2019 (Warner, 2018). On 29th November 2018, the
acquisition gained approval from authorities in China under China’s state Administration for
Market Regulation and, less than a month later, the European Union approved the deal under
European Commission Merger Regulation (Portal, NEWS, 2018).
Whitbread intended to return up to 2bn GBP of the sale proceeds to shareholders through a
tender offer in the summer of 2019. The completion of returns took place considerably sooner
than expected; by July 2019, 2.5bn GBP of the proceeds had been returned to shareholders
(PLC, 2019). Subsequently, the Trustee of the Whitbread Group Pension Fund made an
agreement with Whitbread which released Costa from its obligations, involving a one-off
contribution to the Pension Fund of 380 million GBP (PLC, 2019). Overall, all companies
involved processed the deal efficiently, encountering no significant problems that would have
prevented completion.

After Coca-Cola gained the necessary regulatory authorisations and received transitional
services relating to IT and human resources from Whitbread, the transaction completed on 3rd
January 2019. Whitbread reached agreements with lenders and finance providers ahead of
schedule, enabling early completion (PLC, 2019). This enabled Coca-Cola to focus resources
on creating value from the deal – the company’s 2019 half-year results saw net revenues
increase by 6 percent, with the Costa acquisition cited as a central contributor (Young, 2019).
Moreover, in the fourth quarter of 2019, Coca-Cola’s net revenues increased by 16 percent
and its operating income increased by 19 percent (reporter, 2020), which suggests that the
acquisition successfully increased Coca-Cola’s position in the market and awarded
competitive advantage. However, over the first half of 2020, The Coca-Cola Company’s
revenue fell to levels below those achieved before the acquisition of Costa (Lucas, 2020),
indicating that the competitive advantage achieved is not necessarily sustainable. The overall
costs of executing change can often outweigh the short-term benefits; if a change initiative is
not motivated by long-term visions, implementation can be damaging to the company in the
long run. Thus, despite apparent success immediately after the acquisition, if it does not
sustain, the change may become a failure.
4. Why was the Change a Success (or Not)?

Cultural incompatibility is a common issue when implementing an acquisition; particularly

between US and European companies, contrasting management styles may lead to
complications. Evidence indicates that US companies are likely to be more aggressive with
cost-cutting, whereas European companies often work with more long-term visions
(Cameron & Green, 2015). The acquisition added around 20,000 Costa employees to Coca-
Cola’s headcount, translating to an increase of almost a third (Gray & Fontanella-Khan,
2018). This stood as a potential threat to each company’s respective cultures due to the risk of
cultural clashes among employees. In order to successfully integrate cultures, stakeholders
should work together to achieve results that are exclusive to the companies once joined
(Cameron & Green, 2015). Coca-Cola’s bottling infrastructure and marketing capabilities
combined with Costa’s almost 50 years’ worth of intellectual and material assets enabled the
development of ready-to-drink Costa products. This development demonstrates a strong
blend of each firm’s expertise, implying that cultural issues were tackled successfully to
achieve synergy.

Thereby, the success of Coca-Cola’s acquisition of Costa is largely attributable to the

preservation of each company’s respective organisational cultures. From the beginning,
Coca-Cola’s CEO James Quincey emphasised that the focus of the acquisition would be to
craft a ‘connected-but-not-integrated’ model, assuring Costa employees that Coca-Cola
respects and values their expertise (Ireland, 2018). This relationship was cultivated through
the company’s concrete efforts to harness Costa’s skills and infrastructure rather than
attempting to simply merge the coffee chain into its already-extensive brand portfolio
(Young, 2019). Dominic Paul, the CEO of Costa Coffee, confirmed that Coca-Cola has
respected the brand and its heritage, saying that they have benefitted from Coca-Cola’s
support whilst maintaining their brand as customers ‘know and love’ it. This evidence
suggests that Coca-Cola’s connected model successfully preserved Costa’s cultural values,
which can enhance motivation by keeping employees on board with the change, thus
obtaining positive results through maximised efficiency.

Early completion of the deal allowed Coca-Cola to focus resources on strategies to create
value through Costa’s platform quicker than anticipated. The mutual respect fostered between
each company could have aided top management in agreeing on strategies to realise the
maximum potential benefits of the deal. Along with maximising synergies through the
development of new products, exploiting logistical advantages, such as improved distribution
of Coca-Cola products through direct-to-consumer channels, can contribute to higher profits
and is essential to longer term success (Gaughan P. , 2007). As a result of such strategies,
Coca-Cola’s revenues increased over the months following the completion of the deal
(Young, 2019).

However, according to economic theory, only industries that are difficult to enter will have
above-average returns in the long run (Gilbert, 2005). Increased returns promote competition
which will eventually drive prices and returns back down to equilibrium level (McNulty,
1968). Hence, a diversification strategy to enter more profitable industries will not be
successful in the long run (Gaughan P. , 2007) and competitive advantage achieved in this
way is not sustainable. This is evidenced by Coca-Cola’s 2020 sales results; the year entailed
a 9 percent decline in revenue for the company (Lucas, 2020), suggesting that the initial
benefits realised from the acquisition will not sustain long term. Nevertheless, the outcomes
in 2020 may have been a result of alternative factors that are out of the company’s control.
For example, Coca-Cola name the Coronavirus pandemic as a significant factor impacting its
2020 sales and earnings (Lucas, 2020). Ultimately, it is difficult to determine whether the
acquisition of Costa will continue to have a considerably positive impact on the company in
the longer term because both the change outcomes and the market are volatile and depend on
a variety of factors; economic theory cannot conclusively predict the change outcome.
5. What Lesson have you Learned about Change Management?

In line with Weick and Quinn’s (1999) proposal that episodic change is characterised by
inertia, a trigger and replacement, an organisation must align with environmental changes by
reacting appropriately in order to survive. Successfully resisting organisational inertia
requires energy created by a perceived threat to the company (Gilbert, 2005). The
organisation should respond to this trigger strategically to reach an optimal change outcome
by considering the wider implications of the change, both to organisational performance and
to stakeholders and their psychological wellbeing. Structural and cultural inertia is often the
culprit of resistance to necessary change; if an organisation’s top team create a sense of
urgency and excitement preceding the change, the process is likely to run more efficiently
(Gilbert, 2005). Therefore, appropriate and effective reactivity to environmental changes
involves expressing care for all those involved, recognising all areas of business that will be
affected and upholding transparency during decision-making to limit unnecessary resistance
and negative change outcomes.

Synergy is an important element during the transitional phase of an acquisition. Maximising

synergy entails cost reductions due to increased efficiency and productivity, simultaneously
producing beneficial outcomes that neither company could have realised alone (Cameron &
Green, 2015). Cultural issues can often interfere with efforts from management to create
synergy, making the company unable to realise potential benefits of collaborating, such as
cost reductions, value creation and growth. For this reason, integrating cultures in the early
stages of the change process by communicating effectively and building mutual values and
goals is essential (Cameron & Green, 2015). Playing on each company’s strengths to both
create and achieve outcomes that neither firm could have achieved separately is the best way
to integrate cultures such that optimal levels of synergy are reached (Cameron & Green,
2015). This enables the company to benefit from increased efficiency and reduced labour
costs as well as higher profits, which all positively contribute to competitive advantage.
Therefore, achieving synergy is essential to achieving a positive change outcome.

Nevertheless, competitive advantage attained through maximising synergy is not always

sustainable. Short-sightedness can have costly long-term implications for an organisation
when considering whether to pursue a change initiative. Therefore, it is important to consider
whether the company will maintain the potential short-run benefits of an acquisition, such as
growth and reduced competition, in the long run. An acquisition that is motivated by a
diversification strategy to increase market share will only achieve higher returns and growth
in the short run unless the market has high barriers to entry and low levels of competition
(Gaughan P. , 2007). This is because, in a competitive market, high returns act as a signal to
new entrants. More competitors will enter the market, resulting in a higher degree of price
competition which will eventually lead profits to return to equilibrium levels. Therefore,
considering the motivation for a change and whether the change strategy will pay off in the
long run depending on the nature of both the change and the industry is crucial. If a change
does not entail long-run benefits, implementation can be damaging to the company and not
worth the financial and psychological costs.
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