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COMMENTARY

The acquisition of Costa Coffee brings Coke back to its main street origins

"TO our considerable misfortune, the pleasures of the city have been largely reduced to consumerism. We don't much enjoy our cities because they're not very enjoyable," wrote Ray Oldenburg in The Great Good Place, his lament for the lack of US watering holes akin to French cafés and 18th-century English coffee houses.

Mr Oldenburg's paean to these "third places" between home and work for citizens to drink and socialise with each other popped up in a strange context last week. Three decades after his influential book was published, the phrase was cited by Coca-Cola in the investor presentation for its £3.9 billion (S$6.9 billion) purchase of Costa Coffee from Whitbread.

When Coke admits to a problem with consumerism, there is something wrong. That might account for the defensive tone of James Quincey, chief executive, about acquiring a chain of stores rather than another variety of flavoured liquid. "This is a coffee strategy, not a retail strategy," Mr Quincey kept insisting to analysts.

He would be better off owning the shift proudly. Coke started out being served as a flavour of syrup in the soda fountains that Mr Oldenburg approvingly mentions as the third places of US main streets in the 19th and early-20th centuries. Soda was mixed by black-tied "soda jerks" behind marble counters - the baristas of their day.

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From soda fountains Coke came, and to coffee houses it has returned. They are the real thing, more tangible than a secret recipe for sweet syrup, marketed on television and billboards, distributed by bottling companies and sold by supermarkets. Coke flourished without direct contact with customers for decades but has lost its fizz.

Coffee is the new craze among food and drink companies. Nestlé paid US$7.2 billion in May for the rights to sell Starbucks coffee outside the latter's cafés. The Swiss group has also bought Blue Bottle, the high-end US coffee chain. JAB Holdings, the European group, owns brands such as Keurig and Stumptown, as well as the Peet's chain.

But coffee is not just another stimulating soft drink. It is mostly served hot and fresh, which means finding a barista to brew it or doing so yourself, perhaps in a Nespresso or Keurig machine. Some coffee is dispensed by vending machines or bottled for sale in shops but a human is usually involved.

Coffee is also grounded in community, like draught beer in pubs and Coke from soda fountains before bottles started to dominate in the 1920s. Joseph Addison, the 18th-century English writer, praised coffee houses and clubs for encouraging people to meet "for their own improvement, or for the good of others, or at least to relax themselves from the business of the day".

That is an unfamiliar experience for the modern Coca-Cola, which has kept a wide berth from its consumers, communicating with them mainly by being one of the world's biggest advertisers. It is a revolution for Coke employees, as Costa's baristas are becoming, to take orders directly from customers and to mix their favourite drinks according to their individual whims.

Coke has become remote even from retailers by disposing of its bottling operations to independents. It has changed its mind several times over the decades about how tightly to control distribution of Coke, but Mr Quincey made a point of retreating to an "asset light" core. He has sold its US bottlers and reduced its staff from 123,000 three years ago to 39,000 this year.

It is thus a reverse for Coke to plunge into owning cafés, acquiring 3,800 Costa stores and 20,000 more employees. Mr Quincey made it sound as if having physical assets is the necessary price it had to pay for holding the Costa brand and spreading the coffee drinking habit to Asian countries. He showed more enthusiasm for Costa's 8,000 vending machines and the prospect of growing sales of branded coffee.

He need not be defensive. Coke's lack of retailing experience means there is a risk of the acquisition going wrong. But in one respect, it is returning to its roots - the company did not own soda fountains but Coke was founded on the experiences of people drinking it socially. Nor will sticking to the 20th-century formula work: like other consumer giants, it has been losing sales.

Other companies that once shied from owning physical outlets and mingling with customers have changed course. Apple's retail stores have turned into one of its most influential channels for brand building and humanising its image. Amazon has not only opened book shops but also bought the Whole Foods supermarket chain and experimented with Amazon Go grocery shops.

Many consumers like to experience brands themselves, not just to be told that they are human in ads. Coke can acquire as many healthy, organic, artisanal and authentic new drinks as it wants and sell them in its traditional manner, but the coffee business is indivisible from human contact. That is how brands such as Starbucks rose, and how they learn what customers want next.

Coca-Cola outgrew soda fountains in the 20th century and found a convenient and winning formula for selling fizzy drinks to the world. But everything has its era. Mr Quincey should not be bashful about his "third place". FT