By Mayank Tripathi, Strategic Services
China and India, the two most populous countries in the world, have traditionally been tea drinkers. In 2011, their per capita annual coffee consumption was a mere 25 and 80 grams, compared to 12.3 kg in the largest European nation and the United States (4.2 kg). However, of late, both China and India have witnessed a slow, albeit steady growth, in coffee consumption. Based on current market trends, if all goes well with current players in the market, these two countries will likely become among the top five markets for coffee consumption.
This trend has not gone unnoticed by investors and global coffee houses that are looking to grow beyond their traditional markets in the western hemisphere. Increase in coffee consumption in these countries has attracted major global brands. Stores ranging from Starbucks to Nestle to local players have all been busy trying to tap into the potential of these markets. Three key questions companies and investors need to ask are:
- What are the demand drivers?
- How are current coffee franchises responding and is there room for further growth and expansion?
- Is the demand widespread among other fast-moving consumer products as well?
What is Driving Demand?
Over the past decade, the appeal of coffee has grown across India, particularly in urban areas. Factors such as globalization, an expanding middle class, rising disposable incomes, and changing lifestyle have all contributed to the increase in coffee consumption in the country. A rising café culture also favors coffee’s uptake. Industry participants estimate the Indian coffee market to be worth $200 million as of 2012, with café and coffee sales expected to grow 25% annually. As per market estimates, the coffee-drinking population is likely to increase by at least 100 million in the near future.
Traditionally, a tea drinking nation, China is enjoying coffee as well! Retail market for packaged coffee grew by an 18% CAGR during 2007–2012. By 2017, the Chinese market for packaged coffee is estimated to reach $2.5 billion. However, the growth in China is driven by the adoption of coffee culture, rather than its taste. Companies such as Nestle and Starbucks are preparing to tap the growth potential in the world’s most populous country. Per capita coffee consumption in China is only 3–4 cups a year, as opposed to almost 600 cups in France, and 400 cups in Japan. These companies see potential in cities such as Shanghai, where rising income levels are laying the foundation for adoption of western culture, including drinking coffee.
Increasing Presence of Global Coffee Giants in China and India
In China, Starbucks started operations in 1999, and currently has about 767 outlets across the country. By 2015, it plans to nearly double the existing number of stores in the country. This would make China its second-largest market after the United States—superseding Canada. The Seattle-based coffee retailer opened its first outlet in India in 2012. Since then, the company has opened eight other outlets (as of March 2013) across Mumbai and New Delhi. In 2013, the company also opened a coffee roasting unit in India.
Nestle, a Switzerland-based company, is the dominant player in the Chinese coffee market. Its instant coffee brand, Nescafe, accounts for two-thirds of total sales. The country is expected to become its second largest market after the United States. The company is heavily promoting Nespresso, its single-serve coffee machines, in the country. It plans to spend about $16 million to develop a coffee center in China as part of its efforts to boost coffee consumption in the country in the near future.
Italy-based Barista Lavazza started its Indian operations in 2007. It currently operates about 318 stores across India, making it the second-largest coffee retail chain. Once considered to be a serious threat to Café Coffee Day (CCD), the company has, of late, decided to shut down some of its outlets amid restructuring moves—it plans to reduce the number of stores to 110 in 2013.
Café Coffee Day
Bangalore-based Café Coffee Day, or CCD as it is popularly known, is the leader in the Indian coffee retail market and the company accounts for 66% of the cafes within the country. Launched in the mid-90s, the company operates about 2,000 retail stores currently, with plans to increase the number to 5,000 by 2018.
Costa Coffee (UK), Mocha (India), Gloria Jean’s (Australia), Coffee Bean & Tea Leaf (US), and Dunkin Donuts (US) are the other prominent players in the Indian coffee retail market. They operate about 100, 18, 17, 17, and 5 outlets, respectively, in the country. Costa Coffee and Gloria Jean’s plan to increase their stores to 300 and 100, respectively, by 2017.
The key takeaway here is that while the “David’s” of the international coffee market step up efforts to gain a foothold in China and India, they will have to face tough competition from local “Goliath’s” who have no intention to forego their home-turf advantage.
Impact on the Global Coffee Market
The increased consumption of coffee in China and India is likely to be a boon for coffee production as well. As a result, more area will likely be brought under coffee cultivation. Indian coffee exports are likely to witness a dramatic fall between 2013 and 2022, on account of rising domestic consumption. Further, demand for coffee dispensing machines is expected to rise in these countries, which would be a boon for global coffee machine and pod manufacturers.
What do you think?
- Will India and China overtake the United States and other European nations in becoming two of the largest coffee consumers?
- Have you assessed the Indian and Chinese markets’ attractiveness for your respective categories?
 International Coffee Organization, 2011