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What's Brewing Coffee
What's Brewing Coffee
What's Brewing Coffee
What’s
Brewing?
An Analysis of India’s Coffee Industry
Maitreyi Menon
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TABLE OF CONTENTS
Executive Summary………………………………………………………………5
Introduction…………………………………………………………………………7
Background of the Industry……………………………………………………9
Production……………………………………………………………………10
Process………………………………………………………………………….13
Supply Chain………………………………………………………………14
Market History………………………………………………………………16
Domestic Market……………………………………………………………18.
Specialty Coffee……………………………………………………………..19
Coffee and the Society……………………………………………………19
Employment………………………………………………………………….21
Main Firms…………………………………………………………………….21
Trends…………………………………………………………………………..22
Analysis………………………………………………………………………………24
Porters five forces…………………………………………………………25
Factors which affect rivalry among competitors……25
Factors Affecting threat of entry…………………………….27
Factors Affecting Threat of substitutues…………………30
Factors affecting supplier power……………………………..32
Factors affecting buyer power…………………………………33
PESTEL analysis…………………………………………………………….35
Political/Legal………………………………………………………..37
Economic……………………………………………………………….38
Social…………………………………………………………………….38
Technological…………………………………………………………40
Environmental……………………………………………………….41
SCP Framework…………………………………………………………………43
Structure……………………………………………………………….44
Conduct …………………………………………………………………47
Performance……………………………………………………………47
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SWOT……………………………………………………………………………………49
Strength……………………………………………………………….50
Weakness…………………………………………………………...51
Opportunity………………………………………………………….52
Threat…………………………………………………………………52
Key Success Factor…………………………………………………………….55
Product……………………………………………………………….54
Marketing……………………………………………………………55
Localization…………………………………………………………55
M&A……………………………………………………………………56
Habituation of Coffee Consumption- Cultural factors…………….57
Rural Sector Opportunities…………………………………………61
Recommendations/Future Prospects……………………………………63
List of Figures
FIGURE PG. NO
Fig 1: Relationship between 15
Stakeholders in the Coffee Supply
Chain
LIST OF GRAPHS
LIST OF TABLES
Executive Summary
• India produces two types of coffee beans: Arabica and Robusta. Most
coffee production in India happens in small holdings (area<10 ha). .
The type of fertilizer, the frequency of usage, cropping density,
phytosanitary controls, government subsidies etc. has a significant
impact on coffee production.
• Growers, Intermediaries, processors, exporters, government agencies,
dealers, roasters and retailers are the most important players in the
coffee supply chain.
• India is an export economy when it comes to the coffee industry. The
export earnings has increased 4139.58 metric tons between 2009-
2010 and 2017-18. Italy is the largest export market, followed by
Germany, Russian Federation, Belgium and Turkey.
• Productivity has also improved from 567 Kg/Ha in 1961 to 7765
Kg/Ha in 2017-18
• India’s domestic consumption has increased from 50,000 MT in ‘98
to 115,000 MT in 2011.
• Demand fluctuations in the coffee industry are affected by the
publication of literature on the health effects of coffee and caffeine.
When research predicts that caffeine consumption is good for health,
coffee consumption rises. With the reduction of information
asymmetries by the introduction of internet, these results have a
stronger influence on coffee markets.
• Nestle and Hindustan Unilever limited are the two firms dominating
the packaged coffee industry. In the instant coffee segment, these
two firms almost have a duopoly, with both having 51% and
49% (approx.) market share each (Naik, 2018).
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Introduction
Coffee is a very important plantation crop in India, mainly cultivated in
Karnataka, Kerala and Tamil Nadu. Non-traditional cultivation of coffee is
found in Andhra Pradesh, Orissa, and some North Eastern States. The major
coffee growing destinations are Hassan, Chikmagalur and Coorg in
Karnataka, Wayanad, Idukki and Nelliyampathy in Kerala, And Shevaroys ,
Anamalais and Nilgiri hills in Tamilnadu (Coffee Board, 2017).India is not
only the world’s seventh largest exporter of coffee, but is also the third
largest exporter of coffee in Asia(Coffee Board, 2017). Currently, the Indian
coffee industry accounts for 3.67% of the global production in 2017.There
has been a 12.7% YoY growth in in terms of coffee export from India
between 2016-17 and 2017-18.Out of the total Indian coffee production,
70% is exported while only 30% consumed domestically. The largest
importers of Indian coffee are: Italy, Russia, Germany, Belgium, Turkey, USA,
Poland, Libya, Spain (Coffee Board, 2017).
Coffee is the second most traded commodity in the world, after oil. Overall,
it is a $20 Billion dollar industry. While coffee production is largely
dominated by the developing world, consumption is largely done by
industrialized nations, in Europe, North America and Australia. The Indian
Coffee market is largely dominated by two firms- Nestle and Hindustan
Unilever Limited. Their subsequent coffee brands, Nescafe and Bru are
easily the most popular in the domestic market. The entry of a new brand,
Tata Grande has created more competition in the industry. There is a high
level of competition in the industry, especially in the instant coffee segment
since advertisement costs and capital requirements are extremely high.
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Background of the
Industry
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Production
beans. While Arabica production accounts for 80% of the global production,
only 10% of this production meets the global industry standard for specialty
coffee.
southern part of the country. These coffees are well suited for cappuccinos
and espressos alike (Wrest, 2017).
The production of coffee is also affected by pricing policy decisions, which
could be incentivized and disincentive by support prices or taxation policy.
As a result, the producer prices are not just decided on the basis of the cost
of production, but also on the basis of international prices, domestic
inflation and exchange rates (Bibangambah, 2007). However, it would be
unwise to assume that governmental decisions alone provoke changes in
output decisions of a firm. For instance, there are factors other than policy
decision as well as factors of production which causes changes in pricing -
like input cost of R&D, strength of existing credit systems, transportation
costs, infrastructure, agricultural inputs etc.
Coffee production has been growing rapidly from the 1950s, from 18,893
tonnes in 1950-’51 to 68169 tonnes in 1960-61. The 1996 government
decision to remove the central pool and sell coffee privately further made
the industry robust. Today, Coffee production stands at 316,000 metric
tonnes. Of this, Robusta accounts for 70% of the production while Arabic
accounts for the remaining 30%. As a result, India has now become the 7th
largest coffee producer, accounting for 3.3% of the global production and
5.4% of the global exports as compared to 3.15% and 3.57% respectively in
1994-95 (Coffee Board, 2017).
Even though the increase in global production is minimal, the area under
which coffee is cultivated has increased three times between 196-61 and
2017-18 in India. A large part of the area under which coffee is grown is
concentrated in the Southern states of Karnataka (53.8%), Kerala (18.89%)
and Tamilnadu (7.83%). Productivity has also improved from 567 Kg/Ha in
1961 to 7765 Kg/Ha in 2017-18. 99% of the coffee growers are small
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growers, while the 1% are medium and large growers. These plantations
employ around 659,865 workers on a daily basis according to estimates for
2017-18 (Coffee Board, 2017).
Process
Both washed and unwashed coffees are produced in India. These are
processed with two techniques: the wet process and the dry process. While
Arabica coffee is processed by the wet process, Robusta is processed by the
dry process (Coffee Board, 2017).
For instance, due to the pressure and influence wielded by the World Bank
and IMF, Burundi was recently forced to withdraw its investments in
agricultural research and development and had to privatize these sectors.
Since R&D regarding coffee production avails substantial investment, the
Asian green revolution was largely characterized by the same (Zerihun,
1994).Earlier, many production inputs like seedlings, fertilizers and
pesticides were subsidized by governments. However, due to pressures by
international organizations, many inputs are available at market price
(Zerihun, 1994).
The Supply Chain
Most coffee is grown in tropical countries, where the temperature is stable for
most of the year. Most coffee producers are small scale producers.Many
coffee farmers around the world live in extreme poverty. Adding to this,
since most of them own very small plots of land, supplier power is very low
in the industry. Therefore, in some Latin American countries, farmers and
plantation workers have formed their own cooperatives to improve the
prices they receive. An example for this is Mut Viz.
• Intermediaries
They usually buy coffee cherries from farmers, who are at the bottom of the supply
chain, and sell it to stakeholders who are ahead in the supply chain, like
processors.
• Processors
Coffee Processing is a complex and capital intensive process. The coffee cherries
are the base product which is converted into green coffee beans.
• Government
The involvement of government varies from country to country. In India, the Coffee
Board acts as a checking mechanism.
• Exporters
The Exporters main duty is to transport the coffee which they buy from the
producer to a different location.
• Roasters
This is when green coffee beans are transformed into roasted coffee beans. This
is a highly skilled profession. There are four types of roasts: Light, Medium,
American and dark. This product can be highly differentiated in niche
markets. Some retailers, like Starbucks roast their own coffee.
• Retailers
The job of the retailer is to sell the product to the consumer.
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Market History
When it comes to coffee, India is an export driven economy, where around
70% of the coffee produced is exported. Before 1996, there was a different
bureaucratic arrangement to manage the sales of coffee. The coffee board,
back then held different auctions for the domestic and export market. The
produce was collected through the Coffee Board’s pool depots, after which
it was stored in secondary processing facilities. Strict quality control norms
were imposed on these and payments were made on the basis of quality.
The Fair Average Quality (FAQ) was seen as an industry standard for pricing
coffee. If the quality falls below the FAQ, the produce was penalized and if
the quality was above the FAQ, producers were encouraged by ‘premium
points’ ( Pazhanilath, 2002).
Along with the economic liberalization of ‘91, the coffee industry also went
through structural changes during the period of 1993-06.However, the
share of coffee exports among that of India's agricultural exports have been
discouraging in the post liberalization period.
Today, India exports coffee to around 45 countries. The export earnings
have increased 4139.58 metric tons between 2009-2010 and 2017-18.
Italy is the largest export market, followed by Germany, Russian Federation,
Belgium and Turkey (Pazhanilath, 2002).
Coffee prices have fluctuated throughout the years. For instance, in ‘95,
coffee prices increased by 2%, and then dropped by 25% in the next year.
Export market uncertainties highlight the need to look at the coffee industry
as a domestic market good. According a study conducted in 2005 by Talbot,
the formal sector sale of processed coffee was fourteen thousand tones
valued at 4.3 billion rupees. Instant coffee sales, under the larger umbrella
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of coffee sales accounted for 4.4 thousand tones, at a valuation more than
3 billion rupee (Talbot, 2005)).
In his study, Bain (Bain, 1949) stated that the instant coffee market is a
duopoly, as Nestle and Hindustan Lever have been the 2 most prominent
firms operating in the market. There is a certain degree of brand loyalty and
product differentiation offered by both via branding. As a consequence,
there is high level of market concentration availed by both firms. Some
degree of collusion can be expected from these two firms, to prevent new
firms from entering the market. Tata coffee is another large firm which has
captured a reasonable amount of market share in the market (Talbot,
1997).
If the nature of the domestic industry is collusive, the liberalization of
economic policies would increase competition in the market. However, due
to the presence of tariff and non-tariff quotas, the market is more favorable
for domestic firms (Hwang &Mai, 1988).
According to some studies, coffee is better suited to foreign markets as
opposed to domestic markets. This is mainly because of a decade wide shift
which took place in the late 70’s when the prices of raw materials were low.
However, during the early eighties, the market price for coffee dropped
drastically by around 30% as the International Coffee Agreement (ICA)
collapsed. As a consequence, the earnings of coffee exporting countries
dropped (Beets, 1990).
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Domestic market
Specialty Coffee
Employment
Nestle and Hindustan Unilever limited are the two firms dominating the
packaged coffee industry. In the instant coffee segment, these two firms
almost have a duopoly, with both having 51% and 49% (approx.) market
share each (Naik, 2018).
In the coffee retail industry, Cafe Coffee Day and Starbucks are the biggest
players. Recently, the Barista-Lavazza partnership had recently been broken
apart, resulting in Lavazza exiting the market.
Trends
Around 2.25 billion units of coffee are consumed everyday ((Dicum and
Luttinger, 1999). However, in emerging markets like India, where coffee
drinkers are mostly affluent, coffee consumption is rarely just about the
caffeine intake, and has much more to do with the attached social
perception of the same.
Profits for many products in this industry have more to do with product
differentiation rather than the actual product itself. In the packaged coffee
industry, for instance, marketing the product as organic, fair trade or
sustainable sets one product apart from another and allow these products
to be priced at a premium as well.
Even among the instant or soluble coffee business, different branches
identify themselves with different demographic groups. For instance,
Nescafe has larger market share in the Northern region as opposed to Bru,
which is popular in South India. Bru has projected itself as more of a ‘family
oriented’ brand as opposed to nestle, which tries to position itself as
something desirable to the increasingly affluent urban youth.
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While filter coffee variants are popular in Southern India, instant coffee is
popular all over the country. Main distributional chain for packaged coffee is
traditional retail stores, mostly large and small convenience store. Currently,
market variants like ready to drink alternatives and decaffeinated coffee
accounts for just over 1% of the total industry. This means that there scope
for growth in this segment.
There has been a bean to cup trend which is present in coffee shops and
this was exploited by firms like Cafe Coffee Day, Barista Coffee etc.
However, these trends are only present in the cafe retail segment, as Indian
homes traditional do not have equipment required for the same. However,
coffee consumption is largely limited to the urban Indian populace. As most
Indians (70%) live in rural areas, there is a growing urgency to ensure that
market penetration to rural areas happen soon.
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Analysis
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Concentration of
economies of buyer power
High Demand
scale
nature of firms
threat of
substitution from
tea Purchase volume
of buyers
Reputation and
Concentration of
established brand
players
loyalties
Supplier Substitutu
concentration products
Access to
Product Price distribution
levels channels and raw
materials Price elasticity of
demand
threat from
foreign coffee ownership,
forward
Switching costs Experiencebased integration and
and product advantages of import Threat of
differentiation incumbants substitution backward
integration
High demand
Demand from domestic market is booming at the moment, with the growing
disposable incomes of India’s urban youth. The number of cafes in the
country, at the moment is 3500, and it is set to expand to around 6200
countries by 2021. The market for chain cafes is currently valued at Rs.
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1820 crore and is 27% of the overall cafe market. Cafe Coffee Day,
Starbucks, McCafe, and Costa Coffee constitute the main firms operating in
the country. Such chains are also focusing on increasing baked goods
available in their stores are expanding into quick service retailing industry
(Fuerstein, 2007).
Nestle and Hindustan Unilever and Market leaders and they together
account for 60-70% of the market, according to Coffee Board of India
(2012). Nescafe on its own enjoys 51% of market share. Not only do they
have several manufacturing units across the country, there are several
coffee vending machines all over the country (Pinto, 2015).
Bru, which is positioned as a family brand, enjoys around 49% of the market
share. Its customer base is stronger in Southern India (Pinto, 2015).Tata
Grande coffee is a major recent entrant in the market. Even Though TGC
has not been able to grab market share in the instant coffee market from
Bru and Nescafe, Tata coffee is India’s second largest exporter of coffee
(Pinto, 2015)
Product Price levels
Switching costs are very low with instant coffee brands. Even though there
is a slight price difference between Nescafe and bru, with bru coming off on
the cheaper end. However, both bru and Nescafe are marketed differently
to the Indian demographic. While Bru has been marketed as a family brand
for the south Indian audience, Nestle has targeted the young, urban class
with high disposable income.
Brand loyalties are strong with Bru and Nescafe in their own right.
A Canstar Blue survey conducted in Australia shows that brand loyalties are
extremely strong in the instant coffee segment, with 68% of people always
purchasing one brand of instant coffee throughout (Halim, 2006).
Pricing strategy
Comparative pricing, General Pricing and Economic Pricing are used by
producers.
Comparative pricing: Not only are the firms incurred costs taken into
consideration, but the pricing decisions of other firms and similar products
are also considered while pricing a product (Harith, 2015).
Economies of scale
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Older and more established companies and brands, like Nestle and Bru,
have an additional advantage of reached economies of scale, and as a
result are able to reduce their marginal cost of their products. This is
especially advantageous as coffee is already a highly priced commodity in
India. Large scale production of coffee and transnational transport of the
same is cost and energy efficient. For instance, a Nestle production facility
in Queensland uses used coffee grounds for energy generation (Naik,
2018).
An important barrier to enter the coffee retail market is the large amount of
capital required to do the same. This barrier to entry acts as an impediment
to those willing to enter the industry. Since the current competitors have
already captured a significantly large portion of the market, any new entrant
will need to spend a large amount of capital of advertising and promotional
content to capture market interest. Many new entrants do not have this kind
of capital- unless they are backed by industrial giants. Tata Grande coffee,
for instance, made an entrance in 2012 and was able to do it because of
the enormous financial backing of the Tata brand. Even then, Tata Coffee is
facing losses of around 244 million in this quarter.
It is far easier to enter QSR marker for cafe retailing, since the entry costs
are relatively low. Again, this market is divided into two segments: the highly
localized independent coffee retail stores, and chain stores. Of the whole,
Chain stores account for 27% of the total revenue. Even Though Cafe coffee
day has a large market share, Independent coffee houses do have their own
claim to profitability, as capital investments required is low. Recently,
Lavazza exited the Indian market by selling Barista Coffee to Carnation
Hospitality. This is because competition is extremely high in the coffee retail
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chain market, with cafe coffee day and Starbucks leading the market (Naik,
2018).
Some customers have long term relationships with brands. As it is with most
food and beverage sector, brand loyalties really play into the decision
making of the consumer. However, since instant coffee product groups are
generally substitutable, price and non-price competition really factor into the
outcomes regarding sales (Malviya, 2017).
However, in the general coffee segment, availability of a diverse range of
product ensures profitability for the brand. For example, in 2008, Bru had a
cold coffee variant and nestle did not. The summer of 2008 was particularly
hot, and as a result, sales for instant coffee in nestle dominated north, west
and east regions fell, while the sales of Bru had boosted up. This is primarily
because of two reasons: Southern India has strong historical ties to coffee
drinking habits, and promoting Bru instant coffee as something compatible
with cold coffee helped with its sales in the hot summers (Malviya, 2007).
Similarly, on the cafe front, the entry of Starbucks is seen as a threat for
CCD. While Starbucks charges a heavy premium on its coffee, it has an
extremely positive brand image amongst upper middle class, urban Indian
populace (Economic Times, 2016).
Larger, and more established firms like Nestle, HUL and Tata Coffee has a
definite advantage with respect to access to raw materials and
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consequently, distribution channels due to the fact that they own large
amounts of coffee plantation holdings as well as distribution channels as
opposed to smaller, ‘indie’ vendors like Blue Tokai Roasters, a Delhi based
coffee start-up (Economic Times, 2016).
If the example of nestle is taken, nestle has 8 factories. After processing,
this coffee goes on to several distribution channels like RDC, OFC,
Wholesalers and retailers. Established brands like Nescafe and Bru have a
distinct advantage here as retailers and wholesalers might be unwilling to
experiment with newer brands, which might potentially reduce their profit
margins (Nestle, 2017).
Due to the presence of some firms over such a long time, they enjoy some
privileges in the market. Some of these privileges include competitive
pricing, in ways that are described above. Some of these privileges include a
loyal customer base and pre-existing distribution networks (Parizat, 2015).
Network externalities
Brands like Nestle have demand side advantages as well as supply side
advantages. Due to the large amount of coffee plant holdings, Nestle has
enough raw materials to not only meet domestic demand as well as export.
Threat of substitution
The threat for substitution is very high as there is very little difference, apart
from brand differentiation which affects the preferences of customers in
this price range. The main competitor is bru, which delivers similar quality
coffee at a similar price point.
There is also a threat of indirect substitution from the tea industry. Coffee is
often considered to be a secondary beverage to tea, which over 80% of
Indian Households consume. As a result, the demand for coffee is highly
elastic as opposed to the demand for tea. Therefore, even a small increase
in prices of coffee would drop its demand
Coffee
Tea
Tea
Graph 7,Total Production of tea and Coffee in India, 2001 to 2015, Source:
Statista
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The threat from foreign competitors is low as the import duties imposed are
extremely high. For instance, the Price of Davidoff Fine Aroma is Rs. 495 for
100g while the pricing of similar quality Nestle gold is 395 per 100g.
Therefore, even though both belong to the premium coffee category, Nestle
is able to price their product at a lower amount (Perez &Perez, 2018).
Nature of firms
For brands like Nestle and Bru, the firm acts as its own supplier because
they own the plantations from which they get coffee .
Supplier concentration
Suppliers of coffee are largely fragmented in India. For instance, 98% of all
land holdings which cultivate coffee are small holdings (less than 10 ha)
while only 2% are large holdings. A large percentage of this crop is meant for
exporting, since India is the world’s sixth largest exporter of coffee (Coffee
Cooperation and Competition, 2017).
The threat of forward integration from supply side is very low. As most land
holdings are largely fragmented, it would be very difficult for them to reach
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Substitute products
Coffee can be very easily substituted for tea. Tea holds a very large market
share of the hot beverage market. The threat of substitution is even larger
as tea is cheaper than and coffee and more culturally relevant (Thornton,
2015).
PESTEL ANALYSIS
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Political/Legal
• Tariffs
• State oppositionto
Gadgil report
• Political isntability and
Productivity
Technological Environmental
• types of roasts and • Deforestation
pricing • adverse ecological
• brewing and price effects
• Infrared technology in • Kerala floods and
Coffee Production effect on coffee
production
Social
• research onhealth
effects
• cultural consumption of
tea
Economic
• Import tariff and pricing
• Global south vs Global
north
Political/Legal
The global economy is barely recovering from these price drops, which
happened even 10 years ago now (Pohl, 2017).
Economic
Social
Consumer attitudes about coffee changes frequently, mostly in tandem with
developments on research on the health effects of caffeine. In more
industrialized markets, there has been a shift from coffee to herbal teas as
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the health effects of the later are an improvement upon that of coffee. The
coffee industry has responded to this by introducing decaffeinated coffee in
India (The Future of Coffee, 2017). The market for certified, sustainable
coffee is growing. Young consumers are more ethically conscious and would
prefer specialty coffee which is organic, fair trade or has other certifications
(Specialty Coffee Facts and Figures, 2018).
In many Asian societies, Indian society included, tea consumption is the
norm, while coffee is considered to be a ‘special’ drink which is only to be
consumed during specific occasions. The drive by Coffee board of India is
geared towards changing these consumption patterns to increase
consumption of coffee (Deodhar &Pandey,2008).
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Technological
The choice of roasting and brewing determines the nature and quality of
coffee. Generally, there are four types of roasts:
Light roasted
Medium • mild coffee, non-
oily surface
•stronger
flavorless oil,
referred to as the
American
Roast,Bittersweet
Dark
• 'European' Roast
Roasts
Fig.5 Types of Roasts
French Press
Cold Brew
Instant Mix
Standard Drips
5. Environmental
There are some impediments to good yield in the coffee production industry,
and they are excessive rains, earthquakes, floods, irrational weather cycles,
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SCP Framework
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Structure
• Competitive
Market
• Barriers to entry
and exit
• vertical integration
• Types of firms
SCP
Conduct
• Pricing strategy Performace
• Capacity • Expanding market
investments
Competitive Market
localized brands like Narasu (Karnataka) which has a market share in some
parts of the economy.
However, the coffee shop industry in India is monopolistic in nature. This is
because the low amount of capital required to enter the industry. While it
might be difficult to compete with chains like Cafe Coffee Day or Starbucks,
many independent coffee shops are successful due to their personalized
approach.
Vertical integration
There is possibility for vertical integration, as the supply chain is elaborate
and long. This is particularly an opportunity for companies like Nestle and
HUL, which is currently involved mostly in roasting and is involved in coffee
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production as well. Both the companies have also tried forward integration-
when they launched Nescafe coffee stations and Bru world cafe. While
Nescafe coffee stations were mostly a success, many Bru World Cafe
outlets had to be shut down.
Starbucks, a retailer also roasts and grinds its own coffee, so does cafe
coffee day. This is a successful example of vertical integration.
Type of Firms
The market is dominated by private players.
Economies of scale
As production grows up, the marginal cost per another unit of production goes
down. Therefore, larger firms have a significant advantage when it comes to
offering competitive pricing to consumers.
Costs
Fixed costs for packaged coffee business would involve rent/real estate
prices, electricity prices, salaries, Advertisements and Marketing. Variable
costs for packaged coffee business would involve coffee beans,
depreciation of capital, packaging costs (straws, cups etc.), etc.
Demand Structure
Due to the increasing disposable income with young Indians, the market for
coffee is set to soar in the coming years. An increase in consumption as well
as increased westernization has made the industry very attractive in terms
of profitability.
The recent expansion drive by CCD and Starbucks is indicative of the same.
Differentiated products, meant for different socioeconomic classes have
made the industry more profitable. For instance, Starbucks is being more
and more used by the executive class for having meetings and so. On the
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other hand, CCD has diversified internally and have started two different
strains of establishment, Lounge (which is the premiere strain) and Square (
A specialty coffee destination).
Power of customers
Customers tend to buy individual units; therefore their power to influence
the market is relatively low. A large chunk of customers belong to urban
upper middle class. Only 27% of coffee consumers are from rural India. Of
this, a significantly large portion of consumers are from Southern India,
where coffee consumption is habituated.
Conduct
Pricing strategy
The firms follow comparative pricing. Other than the costs of the inputs,
firms also take into account the pricing strategies of other firms.
Capacity investments
There has been an increase in capital investments which go into the coffee
industry, especially in the instant coffee segment in the past few years. For
instance, Tata coffee, in 2013 invested heavily in Premium instant coffee
business. Tata coffee invested around 300 cores in three years. Capacity
can also be built via Mergers and Acquisitions. Investing in research and
development can also be considered as capital investment (Naik, 2018).
Performance
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The Hot beverages industry has grown from Rs 25,166 crore in 2013 to Rs
41,800 crore in 2017. Therefore, it is to be understood that market is
expanding. Another positive factor which indicate growth in the industry is
the success of Starbucks in India’s urban markets. Adding to this, the
recent fall in real estate prices have made renting property easier for many
coffee shop businesses (India’s Coffee Market is Brewing, 2016).
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SWOT
- 50 -
Strength Weakness
•Brand value •Questionable ethical practices
•Excellent Promotional Campaign •Quality Control issues in the past
•Large capacity for R&D •Competition with tea
•Growing demand for India's Exports in
western Europe
SWOT
Opportunity Threat
•Unexplored Rural Market •Climate change
•Demographic Shift •Increasing competition from health
beverages
Brand Value: The Nescafe Brand is well known around the world. It is not
only one of the largest Swiss brands, but it is also a resource rich, financially
sound firm with a value of $17.4 Billion (Nescafe, 2017).
Because it is a large firm, due to economies of scale, Nestle has large
research and development capabilities which cannot be achieved new
entrants, unless they have extraordinary capital behind them. Since Nestle
is the largest coffee brand in the world, their costs of producing each
additional unit of Nescafe is very less, hence their profit margins are large,
since it has attained economies of scale.
Nestle has had an excellent promotional campaign in India, and a degree of
cosmopolitanism is associated with the brand, which is aspirational. Using
celebrities and sportspeople to endorse the brand has increased the
popularity of the brand.
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Nestle sustainability initiative has made the brand popular among younger
consumers. For many young consumers, being ethically conscious and
indulging in sustainable good faith practices is as important as the price
point itself (Nestle, 2017).
Due to the demographic shift in the country, there is also a consequent shift
in the taste and preferences. Currently, over 80% of Indian households
drink tea. Since tea and coffee and direct substitutes, it is imperative to
understand that an increase in market share of tea would directly impact
coffee sales. Due to urbanization and westernization (two factors which has
earlier increased market permeation of coffee), a booming potentially
booming coffee industry would be beneficial for Nestle.
Exports: A growing demand for India’s exports in Western Europe is
beneficial for Nestle.
2. Weakness
There has been severe criticism against Nestlé’s ethical practices. Nestle
has not had particularly good track record in the past with sustainable and
ethical practices; it’s list bad faith practices include contamination of
natural resources, high usage of water in water scarce regions, forced child
labour and many more. A controversial statement by the then Nestle CEO
suggested that water is not a human right, when they were questioned
about their high value consumption of water in Africa.
3. Opportunity
Due to the demographic shift in the country, there is also a consequent shift
in the taste and preferences. Currently, over 80% of Indian households
drink tea. Since tea and coffee and direct substitutes, it is imperative to
understand that an increase in market share of tea would directly impact
coffee sales. Due to urbanization and westernization (two factors which has
earlier increased market permeation of coffee), a booming potentially
booming coffee industry would be beneficial for Nestle.
Unexplored rural market: Coffee does not enjoy market penetration in rural
India. Introducing low price alternatives can be used to increase market
share in these parts. Large numbers of young people are interested in
specialty coffee- if Nescafe can branch out into flavoured coffee as well as
certified coffee types like Gourmet coffee. Since this is a very young and
niche market, Nestle can capture the market attention at this moment to
sell these products at a premium.
4. Threat
Due to Climate change, the price and quality of coffee beans could be
volatile in the coming years. Both positive and negative price shocks for
coffee beans can unfavourably disrupt the supply chain. This would affect
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Nescafe especially badly since instant is at the top of a very high value
supply chain.
Increasing competition from health beverages and other beverages is a
threat for the coffee industry as these goods can be easily substituted.,
Water is extremely necessary for roasting of coffee beans. Water scarcity in
many parts of the country where the roasting plants are located raises
several questions about the profitability and sustainability of the business.
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•Quality •Advertising
•Uniqueness and
Promotional
Campaigns
Product Marketing
Mergers
Localization and
Acquisition
•Globalised •Profit
Product for Maximisation
Local
Audience
Habituation of Coffee
Consumption India- Cultural
factors
According to ICO, around 150M cups of coffee was consumed worldwide in
2014/2015. However, the west accounts for a large part of this
consumption. This is why India, despite having a very large population and
staggering consumer demand has very little domestic consumption
relatively. Cultural consumer behavioural differences can be attributed to
these differences (ICO, 2014).
Products cannot be viewed completely on their material characteristics
alone. There are certain implicit associations which the consumer makes
with these products which strongly influence their purchasing decisions. For
instance, in reference to a study conducted regarding consumer behavior
with respect to coffee consumption in China and Sweden, Collectivists
cultures like that of India tend to have more inertia when it comes to
switching over from tea, which is a traditionally consumed beverage, to
coffee, which has attached has connotations regarding westernization and
urbanization. Tea in India is much more than a source of caffeination, but
rather is very rooted in what is associated with traditional Indian culture.
The famous tagline adopted by Chai Point, “India runs on Chai” illustrated
India’s relationship with the much beloved drink.
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There is also the challenge of adapting the product to the market, which is
highly elastic and price sensitive in the case of coffee. Large number of rural
Indians lives below the poverty line. To include a non-elastic product like
coffee in their consumption basket would be very difficult.
Distribution problems are many when it comes to making the product
available in Rural India. For instance, only 50% of rural India is connected by
roads. Getting the product across into the small convenience stores in these
parts can be costly and time consuming. The availability of ‘knock offs’
continue to be a main problem for established brands as spurious versions
of such brands, which have a competitive advantage with respect to pricing
due to reduced quality standards.
Transferring responsibility of logistics to Clearing and Forwarding agents
who specialize in the Indian rural market as a solution to inefficient
distribution channel. Point of purchase marketing, along with TV, radio and
cinema promotions can be used to further the case for the product. The
case for radio arises from the poor electricity supply in rural areas, due to
which tab broadcasting is often interrupted (Indian Coffee….potential,
2016)
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Ecological Problems
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