Shift and growth in coffee consumption

When the US economic crisis hit in late 2008, many were quick to predict that coffee consumption would suffer. Four years later, those predictions have mostly proven untrue. While economies have struggled, coffee consumption has hit record levels, expecting to close in at 140 million 60-kilogram bags at the end of the year. While the way coffee is consumed and distributed has seen a shift, coffee demand is as resilient as ever, with some expecting that the next decade will bring about a similar level of growth. “If you look at coffee consumption over the longer term, it is very easy to come to the conclusion that it reflects world population growth – because in part it does,” Mick Wheeler, former Executive Director for the Specialty Coffee Association of Europe (SCAE), tells GCR. “But the story is far more complex than that because consumption growth is not exactly linear. It follows various cycles, which reflect world income growth, technical innovation and that nebulous concept: fashion. Consumption will continue to grow for the foreseeable future providing supply continues to expand at roughly the same rate. Everything goes in cycles. The more interesting question is: is there a chance that consumption will grow at a rate of more than 2.5 per cent in future? To that my answer would definite be yes.” A common mantra heard among coffee officials, including producing and importing countries alike, is that the two key ingredients driving coffee popularity are better quality and rising incomes. This has encouraged many emerging coffee nations to start drinking coffee, and existing consumers to drink more. At a time of economic woes, coffee is considered an affordable luxury. “Usually people cut back on big ticket items in slower growth times. Coffee is not one of those [items],” says Jack Scoville, Vice President of The Price Group in Chicago. “I don’t see [continued] 2.5 per cent growth as unrealistic. Maybe as hard, but certainly very possible. “As for the world, I don’t see consumption dropping off at all right now. Coffee shops look to be doing good business here and coffee is still not so expensive that people will stop drinking it. Plus, sugar-based soft drinks won’t be getting any cheaper. Growth might slow – just because it has been so strong – but I do not view that as negative, just cyclical.” Emerging markets remain the strongest drivers in increasing consumption figures. This includes the more hotly discussed markets of Russia, China and South Korea, where an eye to Western habits seen in movies and magazines has helped the boom of coffee chain brands like Starbucks and Coffee Bean & Tea Leaf. Increasingly, however, the strongest force driving the world’s thirst for coffee has come from producing countries themselves. For instance, Mexico, Ethiopia and Indonesia have seen annual growth of between 3 and 7 per cent in the last 10 years. These countries have watched the world’s largest producer, Brazil, move closer to becoming the largest consumer as well. “Global consumption was growing while all this was happening in Brazil. Other economies in Central and South America – not to mention Asia – were prospering as well, while the US system was undergoing a dramatic change because of the financial situation,” says Marco Ruttimann, Partner at Miami-based brokerage Coffee-Link International. “The US economy was in a downward spiral and the crisis impacted coffee consumption outside of the home. The Starbucks’s of the world saw a significant contraction in their numbers, while home consumption was on the rise again.” The trend of consumption by producing countries is particularly interesting in looking at the cash-crop nature of coffee. Historically, only one producing country in the world also had a culture of coffee drinking: Ethiopia. Known as the ‘birthplace’ of Arabica, it is generally believed coffee trees were first found growing in the wild somewhere between the 10th and 12th century. Coffee was slowly turned into a commodity by Dutch colonial powers in Indonesia, the French in the Caribbean and the English in India. With crops reserved for export, people in the countries never acquired coffee drinking habits. When the 2000 to 2004 coffee price crisis hit due to an oversupply, increasing consumption was seen as necessary to boost prices. In addition to increasing quality to promote more consumption, producing countries looked inward for a new market. Brazil, who invested heavily in marketing campaigns to increase domestic consumption, is perhaps the most successful example. As income levels continue to rise along with consumption, many expect Brazil will soon surpass the US as the largest consumers in the world. “With the increase in purchasing power, people have choice and the product has gone from a necessity to something enjoyable,” says Bernardo Wolfson, Vice President of Brazil’s Coffee Industry Association (ABIC) and also a top executive at Melitta, a large manufacturer of coffee makers. “Brazil continues to consume more and more of its own coffee, and this is not expected to change. I don’t know if the market should be shocked at this – it has always been a thing for Brazil and there was a lot of promotion involved. They keep more of the good stuff too, and this just adds to demand as people will drink more, and we are starting to see the same things in Central America,” says The Price Group’s Scoville. Recent economic troubles, however, have made a slight dent. Traditional consumer markets in North America and Europe have seen demand slowing down in the last few years. A close look of some markets show clear signs of a negative impact from the Euro crisis. Coffee consumption in Spain, one of the countries most severely hit by the debt crisis, has clearly suffered. According to the International Coffee Organisation (ICO), consumption in Spain fell 9.6 per cent in the last four years to around 3.1 million bags in 2011, dropping from around 3.5 million bags in 2008. This translated into per capita consumption by around 0.5 kilograms over three years to around 4.2 kilograms in 2011. This is still considerably above the 3.8 kilogram per capita figure seen in 2004. This drop in Spain, however, won’t have too big of an effect on overall figures in Europe. Key traditional European markets, such as Germany and France, have been stable and seen continuing solid growth in line with what can be expected for mature markets. “Consumption is growing in Europe and yes, some markets seem to be doing better than others. But virtually every Western European market is saturated and variations from year to year do not only reflect changes in consumption habits but also, in fact, reflect many other things such as, believe it or not, weather patterns and the calendar,” says the SCAE’s Wheeler. “In some years the calendar provides longer holiday periods than others and consumption is affected by whether a person is at work or at home, as well as overall economic activity.” He notes that many industry officials “assume that the markets in Europe are very similar and they are not”. Wheeler says they are often going through highly different stages of rapid transformations. “The UK is a prime example. Consumption is rising overall, and in particular out of home where espresso-based drinks dominate. But overall, you should never forget that instant coffee is still king there,” says Wheeler. Consumption in the UK fell 4.6 per cent in the 2008 – 2011 period to around 2.9 million bags by 2011, according to the ICO. Although Britons represent a good portion of the European population, their tea-drinking inclination means that the drop represents a relatively small 141,000 bags in volume. The drop was more than made up for in neighbouring France, which grew by 811,000 bags – almost 16 per cent increase – to around 6 million bags in 2011. German consumption has
remained largely flat at 9.5 million bags. Most importantly, the world’s largest coffee drinker, the US, has risen by 391,000 bags in the last four years, accounting for around 22 million bags. This equates to around 16 per cent of world production. The ICO said in its June monthly market report that despite rising retail prices, there was no denying that consumption is still growing. The report highlights that from 1990 to 2011, world consumption jumped an impressive 53.5 per cent. The most significant changes were in emerging markets and exporting countries, which grouped together rose by around 118 per cent in the same period. “However, as is to be expected from markets that are already mature, consumption in traditional markets increased by only 17.7 per cent,” the ICO’s Executive Director Robério Oliveira Silva commented. He added that this rise nevertheless resulted in new demand of close to 12 million bags of coffee. While retail prices have risen along with consumption, roasters have most likely noticed the largest change in the distribution of consumption, especially in rich industrialised countries like the Euro region, the US, Australia and Japan. In the US, the onset of the world financial crisis and economic recession in late 2008 fell just in time for the 14-year-high prices in the New York Arabica futures market. These prices remained above US$2 per pound for most of 2010 and 2011. The resulting record high retail prices led to the increasing desirability of drinking coffee at home – especially as consumers discovered the wonders of single-serve. And such, short-on-cash consumers were actually able to increase their coffee consumption. When the financial crisis first hit in 2009, consumption was mostly flat. At the height of the crisis in 2010, consumption rose by 2.6 per cent, up by a whopping 3.4 million bags in a single year. This suggests that coffee may have benefited from drawbacks in other more expensive beverage products. This rise coincided with reports of dwindling sales at retailers such as Starbucks and Seattle’s Best, which struggled with a drastic cutback in expensive per-cup servings in coffee shops. “If we look back at consumption patterns in the US shortly after the 2008 economic downturn we seen a shift in consumption from ‘out-of-home’ to ‘in-home’, but overall there was no real drop in consumption,” says Carl Leonard, Vice President of Green Coffee at American-roasters Community Coffee. “This meant consumers may have not gone out to drink coffee at restaurants to lower their spending, but they continued to brew at home and enjoy coffee at a more affordable cost.” Much of the debate now centres on how much longer emerging markets can continue to provide such strong levels of growth to compensate for lower growth in traditional markets. Starting from such a small per capita level should translate into sustained growth for years to come. Some question to what extent the impact of emerging markets can continue to add to global figures. Lower incomes in producing countries such as Mexico, India and Brazil will continue to see coffee compete with basic food requirements, until incomes start to rise. “When you consider these countries, you must acknowledge that a larger percentage of the average person’s income is spent just for food,” says Leonard. “As the world continues to feel the global economic slowdown, it seems that coffee – which is more likely to be looked at as a luxury item – may very well suffer a slowdown in consumption.” It remains to be seen whether the bulls or the bears in the consumption debate will prove right. However, even if consumption grows at just 1 per cent a year, this translates into 2 million bags a year. With the world currently operating in a coffee deficit, those extra few million bags will quickly add up. GCR