Coffee in EMs: coming full circle

26/12/2011
 
Coffee in EMs: coming full circle
FINANCIAL TIMES (UK)
 
Italy’s coffee roasters are turning to emerging markets as demand there is set to overtake developed markets in the next few years. This has yielded an interesting and potentially lucrative phenomenon – beans supplied by producers like Brazil are finding their way back home.

“It’s like selling ice to the Eskimos but it’s working,” Andrea Illy (pictured), CEO of illycaffè, the family-owned Italian coffee maker, told beyondbrics.

While major US and European markets are saturated, demand is burgeoning elsewhere in Indonesia, India and even Rwanda. Some describe the change in taste as a “rite of passage” for economies moving up the development ladder as it is closely correlated with rising disposable incomes.

“Exports of coffee to producing countries are rising at a fast rate, but still represent a very small proportion of the overall market,” said Jose Sette, head of operations at the International Coffee Organisation.

The share of exports to exporting countries from importing countries is estimated to be 27.1 per cent in 2011, up from 12.4 per cent just six years ago, according to the ICO.

Illycaffè aims to double the share of its sales to emerging markets from its current 8 per cent in five years, Illy said.

Although Italy was the company’s main market for decades, the percentage of re-exports to countries outside Italy is forecast to grow to 70 per cent in the next seven years from the current 57 per cent, he said. Italy’s coffee consumption has eased in recent years and fewer Italians spend time drinking coffee outside the home, he added.

The company is particularly targeting Brazil and China, having last year formed a distribution company in Brazil, where demand for high-quality coffee is growing. The country is expected to surpass the US as the world’s top coffee consumer by 2015, according to Rabobank, one of the largest lenders to agribusinesses.

Tea-sipping China is another target, as per capita consumption of coffee is still very low – around 1 kilo per year. Brazilians consume nearly as much as Italians, at around 6 kilos.

“China is the main hub of strategic interest. There is great opportunity there,” Illy said, citing coastal cities where cosmopolitan urbanites drink coffee in bars or hotels, while residents in the more westernised economies of Hong Kong and Taiwan lean more towards preparing espresso at home.

The company is also interested in Russia and India, although high import tariffs in India have made market penetration difficult, Illy said.

“In Italy, we have to consolidate the market. Outside Italy, we need to contribute to market expansion.”

Lavazza, another big Italian roaster, is also increasing its foothold in emerging markets. It will announce partnerships in Asia next year, a spokeswoman said this week. The Turin-based business launched its Barista and Espression brands in India last month following its acquisition of two India-based companies, Fresh & Honest Cafe and Barista Coffee Company, in 2007.

Starbucks opened its first coffee shop in India this year through a partnership with Tata. Recently two joint ventures with Whitbread, the owner of Costa Coffee, opened the 100th Costa store in China.

Roberio Oliveira Silva, head of the ICO and former head of the coffee department of Brazil’s agriculture ministry, has supported efforts to push the drink in developing countries that produce coffee themselves. “I am confident that China is going to become a very important market for coffee and I am going to do everything within my reach to transform it into a very important market.”

According to the ICO, coffee consumption per capita in Indonesia, for example, was just 0.87 kilos in 2009, even though the country exports 7 per cent of the world’s coffee production. A Brazilian consumed 5.70 kilos, a Vietnamese 1.08 kilos, an Indian just 80 grams.

While domestic roasters such as India’s Cafe Coffee Day or Colombia’s Colcafe are gaining ground, western companies continue to exert power over budding local businesses because of difficult financing conditions, says Keith Flury, senior commodities analyst at Rabobank. Big brands like illycaffè or Lavazza on the other hand are cash-rich, debt-free and have the added-value of being a historic company.

“It may take decades before the English switch from tea to coffee, but if Chinese decided to (make the switch), China is going to be the main driver for this industry,” Flury said.