The great Indian coffee story and what's in it for Starbucks?

Coffee in India is a relatively recent but distinctly visible phenomenon. The same has got a major boost with the entry of the biggest global coffee chain in India in 2012. After years of deliberation & policy related road-blocks, world’s biggest coffee retailer, the Starbucks has finally arrived.

To call it the big fish of this business will be an understatement of sorts, to truly understand its size, we need to see that their turnover of US ~$ 13bn turnover is more than 50 times of the turnover of all the current Indian coffee chains combined.

Starbucks vs Indian coffee chainsStarbucks vs Indian coffee chains

 

 

 

 

 

 

 

 

 

 

 

 

Still, if the entry is being called significant even for Starbucks, than we must wonder about the future of Indian coffee market. What will be the scenario after say 10 years? 20 years? Will the Indian business contribute >10% of Starbucks annual revenue? We’ll try to answer the same in this post. More broadly we’ll cover the macro-economic scenario of Indian Coffee market & the role that modern coffee chains are likely to play in the same.

But first let’s cover the current situation.

Coffee Production & Exports:

Karnataka alone produces ~70% of the 330000 MT coffee produced in India. Kerala produces another 20% and the remaining production happen in Tamil Nadu, AP & North-east region. Indian export stands at ~220000 MT (~67% of production is exported), while a variety of coffees are imported as well in relatively smaller quantities of ~50000 MT. It is to be noted that even if India exports nearly two thirds of its production, this hardly contributes ~5% of global coffee export market (which is incidentally the most traded agro commodity in the world by value).

Coffee consumption:

Coffee is the beverage of choice in many south Indian states and these states consume the bulk of the coffee in India. While this southern market consumes most of the coffee as filter coffee (usually with Chikori added), rest of the India is mainly an instant coffee market.

Volume-wise south India consumes ~75% of the total coffee that is consumed in India. (Well, the same was >90% just a decade back). The Value-wise break-up is a less skewed, given that most of the consumption in the rest of the India is out of home (restaurants, cafes etc & hence of high value).

Coffee consumption (volume) in India is growing at a CAGR of ~6% per year during the last decade, which clearly indicates at a strong trend of newer people & regions being exposed to coffee. To put this growth in perspective, tea has grown at ~3% during this period and even this has to be considered a healthy growth.

Coffee vs Tea consumption in IndiaCoffee vs Tea consumption in India

 

 

 

 

 

 

 

 

 

 

One more thing to note is that currently in India, per capita consumption per person stands at a meager 100 gm per person per year. Just to compare, traditional coffee drinking markets have this indices at as high as 8 Kgs per capita per year, and even for newer markets like Japan, this stands at ~3Kgs (which had a per capita consumption equal to current day India in early 60s)

Japan, in fact presents an interesting case study for the explosive growth of coffee consumption that the country witnessed in the decades 1960 & 70s. Massive industrialization, fast life, westernization played a major role in making Japan a major coffee drinking market.

 

Following figure shows the dramatic growth of coffee imports (~consumption) for Japan.

Coffee consumption revolution in JapanCoffee consumption revolution in Japan

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

*Credits: tofugu.com & ico.org

This is not to say that India can replicate the sudden spurt that we saw in Japan, which unlike India was already a highly industrialized economy in those decades. But still it establishes that coffee consumption can have viral effect & can actually penetrate a nontraditional market in a short span of time.

Factors Influencing the Coffee market in India:

In India, the signs of things to come are already there, with the coffee outlets dotting the urban cityscapes. Coffee drinking is a behavioral shift, like all such changes, reaching a tipping point (attaining a critical mass) can be crucial, post which it spreads at a very fast & noticeable pace.

There are many factors that are working & are required to work further in future for coffee culture to firmly establish itself in India. We can broadly classify the same under Cultural, Economic & Demographic factors. Few of the critical factors are:

Growth drivers for coffee chains in IndiaGrowth drivers for coffee chains in India

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  • Increasing disposable incomes of Indian consumers which is changing the conservative approach to spending on consumables & leisure. These days, a 200 Rs restaurant bill is not that big a deal for many Indians.
  • Fast paced living in cities. People want to meet others & finish meetings while being on the move (& this is where these cafes come handy).
  • Increasing westernization (OK..globalization if the word offend you) of Indian society
  • Large shift from rural to urban population (due to which our urban population is increasing at more than 3% per year). This is creating high density population clusters, which are favorable for such businesses.
  • Increasing expat & tourist arrivals (~6.5 million per year), who look out for such places.
  • More globetrotting Indians

 

For India, at times its highly conservative society also helps the coffee chain business due to:

  • College going & unmarried couples are still apprehensive about being seen going together. They want a place which is decent, not exorbitantly costly & still isolate them from the conservative sections of the society. Coffee cafes are the perfect places for this.
  • Alcohol is still a stigma, particularly for girls. This means that in India, coffee cafes do get an upper hand over the pubs or bars for many people.

 

Given these factors, it is clear that the coffee retailing finds itself in a sweet spot in India, which explains the heightened interest in the field. The current consumption levels are so low, & the economic scope of India so huge, that the two put together make a heady combination.

If the organized retail chains continue to grow at the current pace(~25% annually), & if Starbucks can take even 25% of its share at that time, India can very well contribute more than 10% Starbucks global revenue within next 15 years. And even at that time India will be looking at sustaining the momentum for few more decades. In this era of global doom & flat sales, this potential is what is attracting majors like Starbucks & CostaCoffee to India.

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