Industry Analysis - Coffee

8/13/2019 Industry Analysis - Coffee

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Industry Analysis:

Steady Volume Growth for Hot Drinks in India

Hot drinks in India recorded a low single-digit growth rate in total volume sales in 2010.

Though growth rates for other hot drinks and coffee were higher, the dominance of tea in

hot drink sales served to restrict growth. Certain categories in hot drinks saw exceptional

growth, either due to a health and wellness positioning or convenience of preparation. Off-

trade value sales of hot drinks saw double-digit growth in 2010, highlighting the significant

increase in average unit prices.

Unit Prices Escalate Significantly

On the back of consistently increasing commodity prices, hot drinks experienced substantial

growth in off-trade unit prices in 2010. The percentage rise in off-trade unit prices for teareached low double digits, as tea manufacturers passed on at least some of the increased

costs deriving from the significant increases in raw material costs. However, major players

such as Hindustan Unilever and Tata Global Beverages chose to absorb much of the

increase in input costs in their quest to maintain volume sales. Several local small players

were forced to shut down due to the continuously increasing input costs over the review

period.

Multinational Players Dominate Hot Drinks

Hindustan Unilever, GlaxoSmithKline Consumer Healthcare and Tata Global Beverages

together accounted for more than half of off-trade value sales of hot drinks in 2010. Horlicks

retained its status as the number one hot drinks brand in terms of off-trade value sales,

followed by Tata Tea and Brooke Bond. Innovative product launches by the leading players

kept them abreast of changing consumer preferences, and in some cases even opened up

new consumer segments. Both Hindustan Unilever and GlaxoSmithKline Consumer

Healthcare attempted to expand their rural presence by launching Brooke Bond Sehatmand

and Horlicks Asha, respectively.

Kirana Stores Continue To Dominate Retail Sales

Independent small grocers, or kirana stores, accounted for two thirds of off-trade volume

sales in 2010. With no significant dip in popularity among consumers, such stores managed

to retain the confidence of all national hot drink manufacturers in selling their respective

products. The traditional appeal of kirana stores reflects that of the most popular hot drink

category: black tea. Though supermarkets/hypermarkets experienced a marginal rise in their

share of off-trade volume sales, they are still far off from competing with kirana stores as the

primary retail channel. Declines in share were experienced by forecourt retailers and

convenience stores.


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Forecast Period to See Higher Volume Growth

Total volume sales of hot drinks are expected to see a marginally higher CAGR in theforecast period than that seen in the review period. Exploration of rural consumers as amajor target segment will contribute to this rise.

The relatively mature tea category will be driven by premium products which offer additional

health benefits, while coffee will increasingly move towards the more expensive but

convenient instant coffee format. On-trade sales through specialist outletscoffee shops for

coffee, and the slowly upcoming tea lounges for tea will popularise these beverages

further. Other hot drinks will see continuous growth as parents, especially in urban

households, look for the best nutritional benefits for their children. The inclusion of adults in

the age group targeted by other hot drinks also provides manufacturers with a tool to bolster

growth in the forecast period.

Competitive Landscape:

The two primary coffee brands on a national scale are Bru by Hindustan Unilever and

Nescafe by Nestl India. Bru Roast & Ground captured 25% of off-trade volume sales of

fresh coffee in 2010. In the absence of any substantial national competition in fresh coffee, it

is likely to hold onto its position as the leader, and possibly increase its share. There are

many regional players in fresh ground coffee, mostly concentrated in South India. Instant

standard coffee, priced at three to four times the unit price of fresh ground coffee, was led byNestl in terms of volume sales in 2010.

Nescafe Classic and Sunrise together accounted for around 53% of instant standard coffeevolumes in 2010, with Bru accounting for another 40%.

Nestl India and Hindustan Unilever both experienced an upward trend in off-trade coffee

value sales in 2010. Rises in unit prices were, however, the major driver of revenue growth,

with Bru instant coffee seeing 17% value growth in 2010. Growth was also assisted by a

strong increase in instant standard coffee volumes in 2010. Mr Bean (under the Tata Coffee

umbrella) on the other hand, recorded a 36% value sales. This was due to a lack ofadvertising by the company, which is looking to focus its attention on the plantation and

coffee growing / supplies business in the near future as opposed to final consumer coffee

product. Conversely, Coffee Day saw a notable rise in retail value sales of 22% in 2010.

Fresh & Honest Cafe has launched some 100% fresh ground coffee brands from the

portfolio of the international coffee player Lavazza, but has yet to establish a significant

brand presence in India.

The international players Nestl India and Hindustan Unilever maintained their strong

presence in Indian branded coffee in 2010. Some domestic coffee players, like NarasusCoffee, Amalgamated Bean Coffee Trading Co Ltd (ABCTCL) and Tata Coffee, are present


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in the fresh ground coffee category, but are still far from threatening the share of Bru Roast

& Ground. A notable feature of the Indian coffee category is the continued popularity of

coffee-chicory mix formats in both instant and fresh ground coffee, due to the lower prices of

these products. The largest brand in off-trade value sales terms in 2010, Nescafe Sunrise, is

in this format.

There were few new product launches in 2010, with Nestl India and Hindustan Unilever Ltdconcentrating on building their existing brands. Both Nescafe and Bru have recentlylaunched new advertising campaigns focusing on the Indian youth and the possible use ofcoffee in the context of socialising. Both of these companies have used film and televisionstars to establish brand equity. The eagerness of these leading brands to connect withyoung people is indicative of the importance of the young working population as a targetmarket in India.

Instant coffee packaging is changing in India. Previously, the main packaging types usedwere pouches and PET bottles. However, Aveon Premium and Royale Coffee are packed inglass jars to give a premium and classy look. Illy Coffee Ground Roasted Powder is,meanwhile, packed in an expensive looking metal tin.

India has a few premium coffee brands, such as Illy and Lavazza. However, coffee is

highly dominated by standard priced brands, such as Bru and Nescafe, along with some low-

priced fresh coffee brands, concentrated in South India. Aditya Birla Retail and Reliance

Home have ventured into private label coffee, but such products are a rarity in coffee in

India. Most plantations sell their produce to major coffee producers, such as Hindustan

Unilever and Nestl, which process, pack and market the products. The high investment andcontinuous innovation required in coffee discourage new entrants from entering the

category.

Background

The history of coffee in India dates back to the 17th century, when a pilgrim to Meccasmuggled coffee beans to India which later went on to become the first coffee plantation inIndia. But it was only during the British rule of 1840s that coffee became an important exportitem. Today, coffee industry of India is the 6 th largest coffee producer of the world,

accounting over 4% of the total world coffee production. There are over 170,000 coffeefarms in India, cultivating nearly 900,000 acres of coffee trees. Most coffee production isconcentrated in the states of Karnataka, Tamil Nadu & Kerala.

Consumption of coffee in India as a hot beverage is not a new trend. According to an

estimate, only 35% of the total coffee produced in India is exported to other markets and the

rest is consumed by the local market. Traditionally, Southern India (Tamil Nadu, Karnataka,

Andhra Pradesh, & Kerala) has been the dominant consumer of coffee, about 78% of the

total coffee consumption in India.

Although a big chunk, South India prefers filter coffee over instant coffee, while the other

three zones prefer the later over the filter coffee.


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The background provided a great platform for NESCAF, a brand of Nestl, which entered

the Indian market in 1963. As of today, NESCAF enjoys a market share of 55% in the

Indian coffee industry.

Consumer Analysis

According to the Indian Coffee board, the domestic consumption of coffee is rising at a rateof 5-6% annually, partly due to the introduction of coffee caf culture and the widespreadacceptance of coffee as a hot beverage options in the non-traditional markets of the North,East & West. According to a report published by the board, over 73% of consumption comesfrom the Urban areas & 27% from Rural areas in the South.

The coffee consumers are segmented based on the consumption rate: non-drinkers,occasional drinkers, and regular drinkers. While the cluster of regular drinkers is mostlyconcentrated in the Urban cities, mostly in South India, the consumption level has increased

significantly, at a rate of around 13% across other regions.

The primary target segment of Nescaf is the Young urban working population, in the age

group of 18-39 years, which is 59% of the total urban population and cumulatively

contributes around 51% of national income. Among the target segment, the penetration of

tea is about 90% and that of coffee is only about 46% according to the Euromonitor report.

According to a study conducted by MTV India Insights Studio, the wallet share of coffee is

only about 7% in males and 5% in females. Though the most common sales channel is the

hypermarket & modern retail channels.

Latest report on market share - http://www.hul.co.in/Images/11Jan19-FE-

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Industry Analysis - Coffee