India, with its culinary richness, is emerging as a dynamic player in the global coffee scene. With a history steeped in the cultivation of this beverage, the Indian coffee industry is now captivating the attention of investors worldwide. With a unique mixture of traditional coffee-growing practices intertwined with modern innovations, India's coffee sector presents a blend of opportunities for investors.
Basics of the Brew
Coffee comes in two main varieties: Arabica, which traces its origins back to Ethiopia, and Robusta, initially rooted in countries within central and western sub-Saharan Africa. Arabica coffee, being the first coffee species cultivated, holds a dominant position in the market, overshadowing Robusta coffee.
Presently, there exists a gap between global coffee production and consumption. Among the fastest-growing markets are the developing economies, with the Asia-Pacific region taking the lead due to the surge in coffee demand among the working population, the proliferation of numerous coffee chains, and the growing e-commerce retail sector.
Industry Overview
The global instant coffee market hit a record high of $11.4 billion in 2020, and it's not showing any signs of slowing down. Projections indicate a steady growth rate of 4.9% from 2022 to 2027, potentially pushing the market value to a whopping $15.2 billion by 2026.
When it comes to instant coffee, spray-dried beans reigned supreme in 2020 and are expected to maintain their dominance for the foreseeable future. Similarly, the pouch packaging is gearing up for a strong performance, thanks to its cost-effectiveness, flexibility, and eco-friendly appeal, making it a promising contender for a significant market share in the years ahead.
When it comes to where people get their caffeine fix, supermarkets and hypermarkets were the go-to spots in 2020, offering convenience and variety that attracted swarms of coffee enthusiasts. Meanwhile, Europe claimed the throne as the ultimate hub for instant coffee lovers, fuelled by a growing middle class, increased disposable income, and rapid urbanisation.
But it's not just about the caffeine hit. Instant coffee also brings some health benefits to the table, boasting a healthy dose of antioxidants while being lighter on caffeine compared to its brewed counterpart. This is also a reason for driving new affection towards the beverage in the health-conscious young population.
Challenges
The growth trajectory of the coffee industry could encounter hurdles posed by unpredictable weather patterns, the consolidation of retail establishments and the imposition of stringent regulations.
To take up the recent case, India’s coffee production dipped by 20% this year, primarily due to deficient rainfall in Karnataka, a key coffee-producing region. According to the CEO of the Coffee Board, delayed blossom showers and inadequate rains resulted in a 20-25% drop in yield.
However, current prices are compensating for production costs, as Indian coffee prices surged due to supply disruptions from Brazil, the world's largest coffee producer. The specialty coffee sector in India is growing at an impressive rate of almost 10% annually, prompting encouragement for farmers to focus on its cultivation.
Indian Coffee Industry in Growth Phase
Given the escalating global coffee consumption, particularly the surge in instant coffee consumption in India, companies are preparing to leverage the emerging opportunities. In the coffee industry business expansion is expected to revolve around targeting new market segments, forging alliances, and exploring innovative packaging options. As the post-Covid scenario gradually returns to normal, the companies are observing a substantial surge in demand in the non-retail segment in India.
Noteworthy trends in the industry include the rising footprints of premium coffee outlets, the heightened preference for cold brew compared to iced coffee, the increasing appetite for functional coffee varieties, and the flourishing sales of gourmet brews in some specific segments.
This year in a notable development in the Indian coffee industry, the 5th World Coffee Conference (WCC) 2023 drew coffee enthusiasts and industry leaders to Bengaluru, marking its first appearance in India. With a focus on sustainability and innovation, the event brought together over 24,000 delegates from 80 countries to delve into circular economy practices and regenerative agriculture in the coffee industry. The event underscored the proliferating coffee industry in India and also shed light on how consumers are increasingly being drawn towards specialty coffee and the companies laying more emphasis on sustainable growing practices to develop resilience. Some of the key players in the event included companies such as Nestlé India, Tata Coffee, Bru, and artisanal brands like Blue Tokai and Narasu's Coffee
David Rennie, deputy executive vice-president and head of Nestlé Coffee Brands remarked that the company boasts of every one cup of coffee in four through its brand Nescafe in India. Recently the company has decided to invest in the Nanjangud factory. It is slated to receive 110 million Swiss Francs in investment to boost capacity by 2025. Despite India's average coffee consumption of 30 cups per annum, significantly lower than the global average of 200 cups, Nestlé remains optimistic about the country's coffee market potential, driven by a young, coffee-loving population, highlighted a Mint report. Rennie also remarked that the trend of premiumisation is also likely to catch up to the coffee industry. It’s worth noting that owing to the demographic dividend and increased socialisation, premiumisation is also working its charm in the alcoholic beverages industry in India.
Trends in Indian Retail
Since Starbucks' 2012 debut in India, the coffee market has burgeoned, with the chain now boasting 360 stores across 44 cities. This growth has paved the way for other international players like Tim Hortons and Pret a Manger to make their mark. Domestic chains, including Cafe Coffee Day, Barista, Costa Coffee, Third Wave Coffee Roasters, and Blue Tokai, are also expanding rapidly.
Start-ups such as Blue Tokai and Third Wave Coffee are introducing specialty coffee roasts, while initiatives like Roastea are redefining the retail experience. Established players like Starbucks are embracing digital innovation, evident in their significant growth in mobile and advance ordering.
Despite past challenges, the Indian cafe market has transformed, driven by a shift in work culture post-pandemic. Experts predict a promising future for the industry, with Statista forecasting the Indian coffee industry to reach $1.3 billion by 2025, accompanied by a robust CAGR of 8.9% from 2020 to 2025. E-commerce is also playing a significant role, with expectations of a 20% CAGR in the online coffee market over the next five years.
The Gist
To conclude, Indian coffee industry is gaining global attention with its rich history and innovative practices. Despite challenges like erratic weather and stringent regulations, the sector is booming. Companies are emphasising sustainability and speciality coffee and brands like Nestlé India and Starbucks are expanding their footprint, reflecting the industry's promising future. With a significant push towards premiumisation and growing e-commerce, India's coffee industry is set for remarkable growth, presenting investors with an opportunity to reap returns from this bright-looking sector.
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