Market Reports

State of the South African coffee market

One of the more bizarre and cheerful sights along an otherwise dreary section of the commuter line between South Africa’s main commercial capital, Johannesburg and Durban, the east coast city, are two giant coffee cans the size of tower blocks. They loom colourfully over the railway line as it cuts through Wembezi township on the outskirts of Estcourt and announce the presence of Nestlé. The two silos, wrapped in the familiar branding of the company’s two most popular instant coffee brands, Nescafe and Ricoffy, are one of the ways that have been used to get South Africans to think of coffee as part of their daily routine. The Estcourt plant, one of Nestlé’s oldest facilities in the country, was added to in April this year by the US$150 million expansion of its instant coffee factory, the largest investment the Swiss transnational food and drink company has made in Africa. Intercity commuters, industrial investments, global brands, and a growing number of South African consumers: this is the vision of South Africa that prompted its inclusion in 2010 among the BRICS, the club of five major emerging economies (Brazil, Russia, India, China and South Africa) and made it the place where all major industries and multinationals look for signs of life in the broader African economy. Predictably South Africa’s Minister for Trade and Industry, Rob Davies, was among the cheerleaders when the plant expansion was inaugurated. “This investment by Nestlé over the past five years confirms that multinationals view South Africa as a preferred investment destination and [is] a vote of confidence in South Africa,” he said. Later that month and a little further along the same train line in Rosebank, a trendy and affluent Johannesburg neighbourhood, long queues formed outside the first Starbucks outlet in Africa. The store opening was such a draw that it handed out branded blankets and umbrellas to curious would-be customers huddled against the unseasonal cold and rain, and facing long waits outside. Those who made it to the front of the queue found global media outlets waiting for them and were only too happy to share the same national optimism the minister had at the Nestlé plant opening. “It kinda shows the world that South Africa is taken seriously to have a brand like this,” university student Olivia Cloud told Quartz news. “I had my first Starbucks on holiday in England and I’m so happy that they’ve come here. It’s about time,” Keabetswe Kgantisoe, who travelled 30 kilometres to be there on opening day, told the BBC. The two coffee-related investments took some observers by surprise as South Africa’s economic prospects have been anything but frothy. The rainbow nation never matched the feverish growth rates of its fellow BRICS and over the past three years has gone into a marked slow down.
South Africa’s economy is expected to grow just 0.6 per cent this year, down from 1.3 per cent in 2015 and 1.7 per cent the year before. A quarter of South Africans remain unemployed. Together with a depreciating currency there is high inflation and weak growth. Labour productivity has trended down since 2011, according the Organisation for Economic Co-operation and Development (OECD), as have real wages. Consumer and business confidence measures have both been negative since 2012, with consumer glumness at a 15-year low. All of this has led investors to question whether coffee can beat the prevailing conditions. These doubts have been visible on the country’s stock exchange where shares in Taste Holdings Ltd, the South African franchise partner of Starbucks, are worth roughly half what they were when news of the partnership was announced in July 2015. The pessimists fail to understand what is happening in South Africa beyond the headline figures, argues Carlo Ganzaga, CEO of Taste Holdings. “There is more to this than GDP figures. There a couple of main threads to the Starbucks story here. South Africa is a restaurant culture and Starbucks is unique in its offering in creating a place where you can hang out,” he says. He points to South Africa’s mall culture, which is growing in spite of stagnant wages and a small visible middle class.
The country has one of the highest concentrations of malls per capita, he explains, at more than 200, which places it in the top five globally. Many put the proliferation of malls down to security issues as well as an aspirational spending culture. When the sparkling new Mall of Africa launched in Johannesburg later in the same month as Nestlé’s factory and the arrival of Starbucks, it drew more than 120,000 people and led to miles of traffic jams. Among its 300 stores was Taste Holdings and Starbucks’ second outlet. Ganzaga says the existing “addressable market” might warrant as many as another 148 stores in the coming years. For now there are plans for another 15 stores in the first year. “[Among South Africans] there’s a strong need to get out of your house and there isn’t really a place where you can go and hang out and choose what you do.” When the CEO describes the Rosebank Starbucks, it is clear that he envisions a kind of aspirational lounge space for its local customers. The debut store is 485 square metres and offers what he claims is the fastest free Wi-Fi in the country by a factor of up to 20. “And we won’t kick you off after half an hour.” To underline the sense of excitement at Rosebank he relates an anecdote about seeing kids taking as many as seven photos with their drink and themselves. Sceptics who believe the initial hype will subside have pointed to impressive launches that fell flat among other international brands. High street clothing chain H&M and Burger King both had high profile launches, followed by bullish talk of rapid expansion but have subsequently reined in these plans as results diminished after the first six months. Ganzaga is confident that Starbucks can ride rising interest in coffee to outperform previous new entrant brands in South Africa. “What you can’t see from that data is that espresso-based coffees are popping up everywhere – there are least 1000 more outlets than there were a few years ago,” he says. “In Durban you couldn’t find a coffee roaster five years ago. Now you see 50 of these. In actual hard numbers coffee consumption is growing through whole bean and ground.” The South African Coffee Club, an amateur enthusiasts group, says real coffee consumption has grown dramatically from fewer than than 20 roasters a decade ago more than 100 today. The country’s coffee shops have also seen a 7.1 per cent increase in earnings since 2014, according to Insight Survey, a local market research company. “The demand for coffee that is freshly brewed is on the rise,” said Judith Walter, co-founder of Coffee Capsules Direct, a mail order firm offering single serving espresso capsules. “Customers want quality and are happy to pay a bit more for a good cup.” The entrance of Starbucks into a marketplace already containing local chains such as Vida e Caffé, Mugg and Bean, as well as McCafé, the coffee wing of multinational fast food giants McDonalds. Ganzaga says he’s aware of the competition but says that Starbucks’ offering is different to the kiosk format, pioneered by Vida e Caffé and the restaurant option of Mugg and Bean. “People are more aware about coffee quality, origins of coffee,” says the Taste Holdings CEO. “People will appreciate the effort that goes into the last ten yards. Starbucks is part of that educational process and we will grow the coffee market.” Not everyone is convinced that the American-owned chain’s arrival is a good thing. Truth Coffee, a thriving independent roaster once rated by Britain’s Daily Telegraph as the best coffee shop in the world, published this colourful response on their blog: “At first the logo with the green sea-nymph is going to sing it’s siren song the hordes may even queue. They almost certainly will. Then will come the expansion. This sirens are going to adorn paper cups on many a corner. And lo, the country will be drinking overpriced coffee.” Jake Eaton, co-founder of Tribe Coffee, another local brand, put it in less florid terms, suggesting that Starbucks was after the same relatively small upper middle class that other big brands were chasing: “The reality is there’s only about 250,000 people in South Africa who can afford to buy Starbucks on a regular basis.” Initial speculation about prices settled down when the Rosebank launch store revealed R30 cappuccinos, a 30 per cent markdown on US prices. “We want to make the brand accessible,” Ganzaga insists. “We’re creating stores that allow people to be in the store. It’s clear from our pricing and venues. Our store locations will probably surprise people.” The fact that trendy Rosebank was chosen over wealthy Sandton for the debut store did raise some eyebrows. “We’d like to see consumers with lower income.” These lower income consumers are still more likely to drink instant coffee than wait in line at Starbucks or pop into the steam punk decor of the Truth coffee shop in Cape Town. This is the market where there is real scope for expansion, says Ravi Pillay, from Nestlé South Africa. “South Africans drink between 250 and 300 cups per capita and it’s classified as a medium coffee consumption market. In Europe the trend per capita is between 700 and 800 cups. Thus we can see the potential opportunity from a growth perspective.” Nestlé’s new plant, boasting one of the world’s largest dry spraying machines, can produce up to 3.2 tonnes of coffee powder an hour. Pillay says the firm is “extremely bullish” about the South African market and says Nestlé is positioned to capitalise on the “demographic dividend” of youthful populations in South Africa and the surrounding region. Interestingly, the profile of Nescafé and Ricoffy customers echoes those that Ganzaga’s description. “We operate in an environment where our consumers are young, aspirational, and looking at trying new things and in this case coffee,” says Pillay. The decision to invest in additional capacity came “in anticipation of increasing coffee consumption in South Africa and in the Africa continent in general”, he adds. “The coffee category is certainly growing and is supported by new coffee outlets and brands entering the market.” One again, beyond the bullish talk, signs of this growth are harder to detect in the numbers. A survey of instant coffee drinkers between 2013 and 2015 found consumption had remained stable but not grown among people who reported having drunk at least one cup in the preceding day. Consumption among those drinking up to three cups daily crept up from 5.5 million people to 5.6 million. Outside South Africa’s middle class malls, much of the rest of the country still prefers tea, which is grown locally and is far cheaper. Even those who have switched to coffee, whether it’s low-end Ricoffy with its mix or robusta beans and chicory additives or frappucinos in Starbucks, may be doing so with money they cannot afford. Recent government figures showed nearly half of South Africans with access to credit are struggling to meet their monthly payments. A credit crunch could follow. For now there is little sign of the caffeine bubble bursting, especially not at the Rosebank store, where three months after launch queues are still collecting outside at the weekends. “I have been to many, many Starbucks openings around the world,” the American coffee chain’s boss, Howard Schultz, told reporters during a recent visit to Johannesburg. “I have never seen a line like this after a week of our opening. “I think this market is going to be larger than we probably thought.” GCR

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