Market Reports

Ground coffee set to dominate

Nestlé withdraws from Russia

The popularity of ground coffee in Russia is steadily growing and is set to overtake the popularity of instant by the end of 2015, according to the latest data from  Russia’s Ministry of Agriculture, the agency responsible for the development of  the coffee industry. According to Ramaz Chanturia, President of Russia’s public association Rusteacofee, which unites the country’s leading producers of tea and coffee, Russia is gradually becoming a country of ground coffee. “Being a traditional tea-drinking country, Russia is gradually turning into a country where coffee is on the list of the most popular drinks for local consumers,” Chanturia says. “While in the past the majority of Russians preferred instant coffee, in recent years its popularity has significantly declined, in favour of its ground counterpart.” Despite the current economic crisis in Russia, caused by sanctions imposed by Western countries on the Putin regime, coffee consumption in the country is steadily growing, with the growth being mainly due to the rise in popularity of ground coffee. At present, the Russian coffee market is estimated at about US$2.4 billion, or about 120,000 tonnes in volume terms. According to recent predictions from Euromonitor, the Russian market for ground coffee will grow by almost 36 per cent, to US$720 million by 2018. The average per capita coffee consumption in the country is 0.8 kilograms per year. In recent years, the consumption structure in the Russian coffee market has significantly changed and currently the share of ground coffee is estimated at 48 per cent of the market, compared to 35 per cent in 2013. Currently, 70 per cent of all the ground coffee consumed in Russia is produced within the country. In the case of instant coffee, this figure is around 85 per cent. According to analysts from the Russian Ministry of Agriculture, this high share of domestic production protects the Russian coffee market from currency fluctuations. At the same time, according to data from Rusteacofee, Vietnam remains the main international supplier of ground coffee to Russia. The country currently accounts for 31.9 per cent of the overall coffee imports to the country. The second place is occupied by Indonesia, with 19.2 per cent share of the market, while Brazil is third with 17.3 per cent. In the case of instant coffee, the majority of it is supplied from India, 19.4 per cent, as well as Brazil, 19 per cent and Germany, 18.2 per cent. Currently the Russian coffee market remains highly concentrated, with 62 per cent of market share being controlled by  the five largest companies: Nestlé, Kraft Foods, Strauss, Orimi Trade, and Tchibo. Nestlé currently remains a leader of the market with a share of 23 per cent. The share of Kraft Foods is estimated at 19 per cent of the market, while Strauss and Orimi Trade have about 7 per cent each. According to Luis Cantarell, head of Nestlé Europe, this year the company’s coffee sales in Russia grew by 15 per cent in value terms. “Although Russia historically is a tea-drinking country, currently it is the world’s eighth-largest coffee market and continues to grow,” Cantarell says. Cantarell adds that the fastest growing segment is coffee for coffee machines. Since 2009, the annual growth rates of the segment have amounted to 20 per cent per year, while the share of the segment has already reached 10 per cent of the overall market. “High volatility currently remains one of the major features of the Russian market,” Cantarell says. “However there is also an uncertainty in Europe, the Middle East, and North Africa. These markets no longer demonstrate sustainable growth.” An official spokesperson of Russia’s Minister of Industry and Trade, Denis Manturov, has recently expressed his doubts about the optimism of the majors in Russia and the predicted further growth of the segment of coffee capsules and coffee machines, due to their high cost for the average Russian citizen. “I have doubt that there are enough Russians who can afford premium products such as Nespresso,” Manturov’s spokesperson says. “The situation is aggravated by the current economic crisis in the country, which is caused by Western sanctions.” However, most of local experts agree that the Russian coffee market has good prospects for further growth. One of the distinctive features of the Russian coffee market is the ever-growing share of private label brands, which, according to predictions of some local analysts, will be able to compete with flagship Kraft and Nestlé instant coffee brands in the local market in the middle or long-term. Currently McDonald’s McCafe brand is one of the most prominent players in the Russian market. In recent years, the role of the world’s leading coffee chains in the local market has also increased. But there is still room for their further growth. In contrast to the central part of the country (and in particular Moscow and St. Petersburg), the number of coffee chains in the eastern part of the country remains insignificant. According to forecasts from Euromonitor, during the next several years the Russian market will continue to grow at an average rate of 5-6 per cent per year. The rate of growth in value terms is expected to be higher, as a result of growth in commodity prices. At the same time, retail prices will also continue to grow. Since 2004 the average rate of inflation in the Russian coffee market reached 64 per cent. Analysts also believe that the instant coffee segment is close to saturation, due to the reduction of population in Russia and a steady growth of imports. According to forecasts from AS Marketing, one of Russia’s leading analyst agencies in the field of coffee, the main battle among producers in the Russian coffee market will be focused on the attraction of new customers from other segments of the market. According to Alexander Kolkov, one of Russia’s leading coffee experts and a former CEO of Paulig Russia, there is a clear trend of the ever-growing demand for natural coffee of local consumers with the simultaneous decline of instant coffee consumption. “More and more customers taste organic coffee, understanding the difference in taste,” Kolkov says. Interestingly, the growth of the segment of natural coffee in Russia has benefited from the use of some technological innovations by producers, who sometimes produce very finely ground organic coffee, which is then brewed in the same way as instant – directly in the cup. Still, according to Kolkov, despite the growing consumption of natural coffee, the Russian coffee market is going through difficult times. “This is mainly due to the increase of global coffee prices in recent years, which resulted in an increase of consumer prices,” Kolkov says. “In the case of Russian customers, currently they are not ready for such a significant rise in coffee prices, which exceeded 50 per cent for the last two years and which, in addition to the rise of prices for raw materials became mainly due to the current economic crisis in Russia, caused by Western sanctions.” In the meantime, according to Fyodor Borisov, Executive Director of the Russian Association of Coffee Producers, prices for raw materials will remain high during at least the next four or five years, which will put additional pressure on producers. In contrast to the US and some EU states, where the majority of local coffee shops focus on the take-away business model, in the case of Russia, the share of such stores does not exceed 10 per cent, as Russian customers prefer coffee shops where they can sit and talk for a long time. According to Ramaz Chanturia, in addition to producers, further development of the Russian coffee market will mostly depend on state policy in this field. Russia’s accession into the World Trade Organization has resulted in a significant tightening of the level of competition in the market and the influx of new players.  According to Chanturia, the current financial crisis in Russia has already resulted in the majority of local producers experiencing a shortage of funds, which are needed for the modernisation of their factories and further development. To date, the Russian Association of Tea and Coffee Producers together with some of Russia’s leading coffee producers, has already called on the Russian government to provide financial support, with the aim of ensuring their further development and the implementation of investment plans. In the meantime, the Russian Government is aware of the current situation in the industry, and considering ways of its improvement. As part of these state plans is the provision of subsidies to producers, as well as ensuring access to cheap lending. In addition, the government has announced it plans to consider a petition from producers and abolish duties on some raw materials and components that are not produced in Russia, such as filter paper, coffee oil and some other items that are known to contribute with huge costs for local coffee producers. At the same time producers have also called on the Russian Government to speed the process of harmonisation of Russian safety requirements for coffee with the existing international standards. GCR

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