Attractive Opportunities In Coffee Market
BMI View: While the Indian coffee sector has been stagnating over the past 10 years, held back by the pre-eminence of tea in the country and by volatile production, we believe it is set to showcase much stronger growth in the coming decade. Promising consumption trends and sufficient domestic production have fostered an investment spree in the country from both local and global coffee players, which underlines the strong growth potential for the India coffee market in terms of production, exports and retail potential for specialised coffee chains.
We see significant upside potential for the Indian coffee industry, based on production expansion and promising consumption trends. The Indian coffee sector has been stagnating over the past decade, held back by volatile prices and yields, the lack of coffee culture (except in the south) and the pre-eminence of tea in the country. But this trend is slowly reversing, with production growing for the fifth consecutive year in 2012/13. Output is expected to reach 5.5mn bags this season, up 4.7% year-on-year, due to favourable weather conditions and stable prices, which have encouraged better husbandry practices. Out to our forecast period in 2016/17, we forecast production to expand by 29.1% to 6.8mn bags on the back of major export potential, government support and the expansion of cultivated area. Cultivation in non-traditional states such as Andhra Pradesh and Orissa will intensify, and maturating trees will boost yields.
|Compelling Retail Potential|
|India - Coffee Production & Consumption ('000 60 kg bags) & Sales (US$mn)|
Moreover, the government's support to the sector, in the form of production subsidies (coffee replanting, water conservation and quality upgrading mostly to small and marginal coffee producers) and export incentives will ensure continued profitability to farmers. The export subsidy, equivalent to INR1-2/kg (USc2-4/kg), is specifically aimed at enhancing the export of Indian branded and high value coffees to international markets such as the US, Canada and Japan. This feeds into our view that India's coffee production growth will mainly rely on export potential in the medium term, as consumption only absorbs around 35% of production.
|India - Coffee Production ('000 60 kg bags) & Area Planted ('000 hectares)|
Finally, production will be boosted by India's robust coffee consumption growth. Coffee consumption in India has seen a dramatic change in the past decade. After broadly stagnating between 1980 and 1999, it has expanded by 5.6% on average annually since 2000, and is projected to reach 1.8mn 60kg bags in 2012. To 2017, we expect impressive 47.4% growth in coffee consumption to 2.7mn bags. Consumption will be boosted by favourable demographics and the rise of mid-sized cities in India. Meanwhile, India is set to witness rapid growth of its middle class, as households with disposable incomes from INR0.2-1.0mn per year could grow from 50mn people to about 583mn people in 2025, around 41% of the population. Another factor in the consumption increases will be continued aggressive producer marketing campaigns, which have been supported by the Indian government.
|India - Coffee Production By Region & Holding Size (% of total)|
We believe the outlook for the Indian retail coffee sector is more attractive than tea as a result of lower levels of market saturation and continued industry dynamism. We are forecasting a compound average growth rate of 9.1% to 2017 in sales volume terms, at which point sales will reach 180,620 tonnes. A large contribution to this growth should come from specialist coffee chains and instant coffee sales. Consumption through the traditional channels (fresh and ground coffee shops in south India) should showcase more subdued growth.
|Still Small Exporter|
|Select Countries - Coffee Exports (% of total)|
The ongoing investment spree in the Indian coffee retail business is a sign of the attractive long-term outlook for the sector. Fresh & Honest's recent espresso partnership with Illy and the entrance of Costa Coffee show a clear trend towards premiumisation of the industry. Given the strong expansionary capacities of newcomers, such as Starbucks and Dunkin' Donuts, and their Indian ambitions, there will undoubtedly be considerable dynamism in the domestic coffee sector over the coming years. These two companies are likely to be very aggressive in their expansionary efforts once they enter India, which will only make it more challenging for existing players to strengthen their domestic foothold.
We believe that brands already present in India will benefit from accelerating their organic expansion and entrenching their brands deeper among Indian consumers. Café Coffee Day took a period of 14 years to set up 1,000 stores in India but is now planning to double its outlet count within the next four years. These investments will see consumers converting to higher-value, better-quality products and demanding increased range - something that ongoing economic development has enabled them to pursue.
|Company||Country of origin||Number of coffee shops, 2012||Plan|
|Source: BMI, Bloomberg, Rabobank, India Economic Times|
|Café Coffee Day||India||1,350||targeting 2,000 coffee shops by 2014|
|Barista Lavazza||Italy||215||15-20 franchised cafes every year|
|Starbucks||US||1||initial plan to open 50 stores in Mumbai and New Delhi in 2012|
|Dunkin' Donuts||US||3||100 coffee shops by 2015|
|Costa Coffee||UK||100||300 coffee shops in next five years|
|Gloria Coffee||Australia||25||100 coffee shops in the next three years|
|Di Bella Coffee||Australia||6||50 coffee shops in the next three years|
|Krispy Kreme||US||-||80 coffee shops in next five years|
|Coffee Republic||UK||-||in talks with potential partners, no plans revealed yet|
Risks To Outlook
We see downside risks to our coffee production forecast in the form of the vulnerability to weather, with considerable variation in yield from year to year, and tree diseases due to ageing stock and poor knowledge of prevention and treatment.
From a retail point of view, the main risks to the expansion of the coffee market are the stiff competition of space in city centres, high real estate costs, difficulties in managing the supply chain (especially regarding the provision of other perishable materials) and the difficulties to maintain a standard quality for products.
|Notes: f BMI forecasts. Sources: 1 India Coffee Board.|
|Coffee Production, '000 60kg bags 1||5,250.0||f||5,500.0||f||5,903.4||f||6,220.0||f||6,500.0||f||6,780.0||f|
|Coffee Consumption, '000 60kg bags 1||1,807.8||f||1,944.9||f||2,106.0||f||2,279.0||f||2,464.6||f||2,663.7||f|