Indian Coffee Industry – A Market Analysis
Coffee is among the most popular beverages consumed globally. In India, coffee consumption has seen a robust growth during the past decade. Coffee is being increasingly consumed in cafes and other commercial establishments apart from South India where coffee is readily consumed by households. The per capita consumption of coffee in India is only about 90 grams. This is considerably low when compared to other coffee exporting nations. This shows the immense potential for the domestic coffee industry to grow. Majority of India’s coffee production is exported.
Global coffee production stood at about 7. 98 billion kg in 2011-12 (crop year). India is the 5th largest producer, accounting for only about 3-4 per cent share in total production. On the basis of player presence in the value chain, the industry can be segmented into: (i) planters (ii) planters-cum-traders, and (iii) non-integrated players From the consumption point of view, the industry can be segmented into (i) filter coffee, and (ii) instant coffee Filter coffee accounts for 40-45 per cent of total domestic consumption.
Instant coffee accounts for around 55-60 per cent of the total domestic consumption of coffee. Indian Coffee Industry: an oligopolistic competition The coffee industry in India is oligopolistic with the presence of many players. Major players include Nescafe (Nestle), Bru (HUL), Tata Coffee (Tata Coffee Ltd). An oligopolistic competition is a situation in which a particular market is controlled by a small group of firms. An oligopoly is much like a monopoly, in which only one company exerts control over most of a market.
In an oligopoly, there are at least two firms controlling the market. Following characteristics make the Indian coffee industry oligopolistic: 1. Few Sellers: Nescafe by Nestle clearly dominates the Indian coffee market. Enjoying almost a monopoly status it accounts for almost 50% of market share. Bru accounts for approximately 49% of the market. Tata Coffee is one of the largest integrated coffee producing companies in the world. It owns 19 coffee estates which are located in South India. Fig. Different Products in Market 2. Homogeneous or unique products:
Nescafe and Bru, the major players in the Indian Coffee market have much in common be it their intentions or brand images perceived- young and glamorous like the beverages itself. Both the brands have continued endearment to the youth. There is homogeneity in the kind of products they bring out for example HUL to continue on the growth path reverted to the oldest marketing mantra – straddling the pyramid. In simpler parlance, offering a product at each price point, HUL launched Bru Lite, for those who like their coffee light.
Then came Bru Exotica, a premium range of coffees for the well-heeled, well-travelled Indians who like international flavours. And the latest addition to the portfolio is Bru Gold, a non-chicory coffee, a 100 per cent coffee, for those who like their drink strong. With Bru Lite, Exotica range and Gold, HUL has beefed up its portfolio which previous included ice and hot cappucino and the original, Bru Green Label roast and ground further. Coming to Nestle for combating Bru lite it has Nescafe Sunrise premium, an instant Coffee- Chicory based beverage mix, then it has the Nescafe Classic its flagship product targeting at Bru gold.
Thus both of these have products catering to similar portfolios. Fig. (a) Homogeneity in Different Segments Segment Price (Size. 50 gm) Light Coffee Nescafe Sunrise Premium Rs. 69 Bru Lite Rs. 70 Strong Coffee Nescafe Classic Rs. 106 Bru Gold Rs. 106 Fig. (b) Homogeneity in Different Segments 3. Blockaded entry and exit: A barrier to entry is something that blocks or impedes the ability of a company (competitor) to enter an industry. A barrier to exit is something that blocks or impedes the ability of a company (competitor) to leave an industry.
The Indian Coffee industry has a blockaded entry and exit which can be understood from the facts below High setup costs: The amount of investment involved in setting up a Coffee plant is very high due to various large infrastructural requirements. Tata Coffee recently had commissioned a new instant coffee plant at Theni in Tamil Nadu and the initial investment for the set up was to the tune of Rs 80 crores which is huge. Coffee industry is capital intensive. Economies of size: The need for a large volume of production and sales to reach the cost level per unit of production for profitability is a barrier to entry in the Coffee Industry.
Nestle’s first Nescafe plant was set up in Moga (Punjab) in 1961 and the first BRU plant was set up by Hindustan Unilever in 1968 and both are economies of size. Now for any new entrant to come in and establish itself at this juncture is a humungous task, even the Tata with huge backup and established way earlier than Nestle and HUL has a market share of approximately 1 %. Established brand identity: Industries dominated by branded products are difficult to enter due to the large amount of time and money required to create a competing branded product.
Nestle, HUL and Tata Coffee have created an aura around them and it is highly impossible for a new entrant to make leeway and capture market share. Investment in specialist equipment – Investments in specialized equipment that cannot readily be used in other industries tends to be an impediment to leaving the industry. As we have seen that to have an integrated Coffee manufacturing unit the investments to the tune of crores need to be made and that is definitely an impediment for an entrant who hasn’t made it big in the industry. 4. Imperfect dissemination of information :
A lot of R&D in terms of technological up gradation takes place in Coffee industry in the way how the beans are extracted and processed and the companies have patented their work, this hardly provides any information for other players. Also the cost and product composition information is withheld from buyers. Producers, policy makers, roasters and even consumers are constantly faced with asymmetric information on the actions of other players within the coffee market, consumers under normal circumstances have very little access to information on market practices beyond the store shelf. 5.
Opportunity for above normal (economic) profits in long run equilibrium : Profits in the long run are determined by the barriers to entry. If there is high barriers to entry, new firms cannot enter the industry easily and hence cannot competed with existing firms for profits. Being an oligopoly, Indian Coffee industry is characterized by high barriers to entry and hence can look for above-normal profit in the long run. According to ‘India Coffee Shops / Cafe Market Forecast & Opportunities, 2017’, the cafe market in India is expected to grow threefold in the next five years to become a whopping Rs.5,600 crores ($ 1 billion) market by 2017. In India the Coffee industry is not as big as the Tea industry and for players like Nestle and HUL to achieve super normal profits and to increase consumption non-price factors like improving quality standards and communicating the same to the consumers via generic promotion campaigns and/or brand advertising needs to be done. Coffee Board and CARE Research estimate domestic coffee consumption to grow at a CAGR of 6% in the period CY12-15. Fig. Estimate of Domestic Coffee Consumption Profits in an oligopolistic competition Short Run
In an oligopolistic market it is possible to make supernormal profit by the firms i. e. profit over and above normal rate of return. As coffee industry is oligopolistic in nature there is supernormal profits available for the players as shown in the figure below. Long Run An Oligopolistic competition can turn into perfect competition in long run if large number of new players enter into the market. In this situation there will be change in equilibrium till the point where marginal cost will be equal to the average cost such that there will be only normal profit available for the firms.
However, looking at the high levels of entry barriers in the coffee industry, there is a good possibility that only few major players will be there in the market. Hence they will continue to enjoy price making power and have supernormal profit. Fig. Short Run and Long Run Equilibrium Demand analysis of Coffee in India Over forecast period, retail sales of coffee are expected to witness a constant CAGR of 9% in constant value terms, to reach Rs38 billion in 2017.
The growth of modern retail outlets and coffee chains is expected to drive coffee growth over the forecast period. Exotic flavours and premium variants of existing offerings will continue to be launched by the top players, leading to premiumisation of the coffee category over the forecast period. The price elasticity of demand for coffee is low, it is much lower in the short-run than in the long-run. This suggests that temporary price incentives will not achieve any significant demand increase.
Moreover, coffee demand is characterised by habit formation. Therefore, demand for coffee can be increased by non-price factors like improving quality standards and communicating the same to the consumers via generic promotion campaigns and/or brand advertising. Though 90% Indians drink Tea, we are taking to drinking Coffee in a big way, the arrival of retail Coffee outlets has changed everything and India’s large population means that even a small increase in coffee consumption by individuals can affect global supply and demand for the commodity.
Multinational Coffee retail outlets are thronging to India to set up their base, Lavazza, Barista, Starbucks are few of them. Conclusion We analysed data for the coffee industry from various databases (CRISIL, Capital Line), looked at market share of major players, their cost and pricing, entry-exit barriers from which identified coffee industry as an oligopolistic form of competition. We looked into the various factors as to why coffee industry is an oligopoly and analysed the profit making capability of the industry in short and long run.