Unleashing the bear: an overview of the Russian coffee market

The Russian coffee landscape is set to become a battlefield of coffee majors, with experts predicting the continued consolidation of a growing market.','none',' In the shadows of its closest BRIC cousins, China and India, Russia’s population of 141 million may pale in comparison, but not enough to escape the eye of major coffee companies as a target for growth. The Russian coffee market may soon become a battlefield of the world’s largest producers, particularly Kraft Foods and Nestlé, that have recently announced plans for massive expansion in Russia. This recent interest is understandable – in contrast to Soviet times, when coffee was hard to find, in recent years Russia has become the world’s leading country in terms of instant coffee consumption. “Today, Russia is ranked the seventh country in the world in terms of overall coffee consumption, at the same time as being an absolute leader in terms of instant coffee consumption,” says Fyodor Borisov,  Executive Director of the Russian Organisation of Coffee Producers. Currently, around 75 per cent of Russians regularly drink coffee. In 2011, the Russian coffee market reached 114,000 tonnes in volume, with more than half of the coffee consumed processed within the country. Borisov says that total amount of foreign investments in domestic coffee production over the past 10 years has reached US$600 million. Such trends have not gone unnoticed by Kraft Foods and Nestlé, that are considering a significant expansion of their Russian business. For Nestlé, the Swiss company has already started implementing a plans to invest over US$260 million in the expansion of its already existing Russian coffee factory in the Krasnodar region of Russia. The majority of funds are expected to be used to introduce new technology and launch the second stage of the factory, known as ‘Nestlé Kuban’.
According to the company, this will significantly help raise Nestlé’s production capacity and increase output, both for the domestic market and for former Soviet states.  The factory’s product range is also expected to expand. The launch of the second stage will make the Krasnodar Nestlé plant the largest coffee factory in Europe, with total production capacity of 36,000 tonnes per year (compared with the current 31,000). Nestlé’s Russian expansion plans seem to have evoked a prompt response from Kraft Foods. A week after Nestlé’s announcement, Kraft Foods declared its plan to spend more than US$100 million in doubling the capacity for production of freeze-dried coffee at its Russian plant in the Gorelovo village (St. Petersburg region). The American company said that by 2013, production will grow from the current 10,500 tonnes to 16,900 tonnes of coffee per year. By 2015, the company plans to increase capacity to 23,000 tonnes. The company will also install equipment for the processing of solid waste. The present production capacity of Kraft’s Russian factory is estimated at 10,500 tonnes. The majority of coffee is produced under well-known brands such as Jacobs, Carte Noire, Maxwell House and others. Since 2000, the company has invested more than US$150 million in the expansion of the plant. According to Kraft Foods Russia, the expansion of production follows growing demand for freeze-dried coffee in the country. In addition to supplying to local market, the American company plans to increase exports. At present, around 10 per cent of total production from Kraft’s Russian plant supplies most former Soviet states, as well as Tunisia, Morocco, Iran and Bulgaria. Raw materials for the factory are imported from South America, Africa, China, and Oceania states. According to Borisov, the largest importers of raw materials to Russia include the major coffee powerhouses of Brazil, India, Vietnam, Ecuador, and Colombia. Russian analysts believe that both Kraft Foods and Nestlé have chosen the right time to expand their Russian coffee businesses. Commentators say that the market has already recovered from the consequences of the recession, and that consumer demand for instant coffee is steadily growing. According to The Russian Association of Tea and Coffee Producers (Roschaykofe), the Russian coffee market is currently estimated at 112,000 – 114,000 tonnes, equivalent to US$4 – $4.5 billion. Around 70 per cent of the market is instant coffee. Before the recession, the annual growth of coffee sales in Russia was around US$100 million, however since the second half of 2008 market growth has slowed down. Although the economic crisis resulted in a shift of consumer demand towards more economical alternatives, the downturn did not have a significant negative impact on the overall demand for coffee in Russia. At present, the largest players in the Russian coffee market are Nestlé and Kraft Foods, as well as Tchibo, Russian Product, Grand, Orimi, and Moscow Coffee House, among others. Kraft Foods has an estimated 20 per cent market share of the overall Russian market, compared with Nestlé’s 28 per cent. Both companies are focusing operations in the instant coffee segment. Nestlé’s share in the granulated coffee segment in Russia is currently close to 100 per cent, with no other brand able to compete with its flagship Nestlé Classic coffee, which remains an absolute leader in terms of value for money. This is a stark contrast to the freeze-dried coffee market, which is virtually divided in two between Nestlé and Kraft (which each account for around 40 per cent market share). One company that is nipping at the heels of Kraft Foods and Nestlé is the Israeli Strauss Group, which can be also considered a significant player in the Russian coffee market. The company is actively expanding its Russian operations, through an increase of production and the acquisition of local producers. In 2008, Strauss acquired Cupola, a well-known Russian coffee producer. Cupola has well-established brands in Russia, in particular Chernaya Karta and Kaffa. The deal was reportedly worth US$90 million. Two years later, in late 2010, Strauss acquired another Russian coffee producer Le Café for US$40 million. In August 2011, Strauss acquired the rights for popular coffee brand Ambassador, previously owned by Sucafina SA, a Swiss Coffee trading company based in Geneva. The deal was reportedly worth US$10.4 million. At present, Strauss Group operates two production facilities in Russia, one of which is located in the Odintsovo, while the second one in the Strunino (Vladimir region). Some analysts have noticed the absence of US food giant, Sara Lee. With an annual global turnover of  US$10 billion, the company has yet to gain a foothold in Russia.
While the instant-market may be in the hands of foreign entities, fresh roasted coffee has remained in domestic territory. The good news for local companies is that the growth rate for ground coffee currently exceeds those of instant. Alexander Kolkov, CEO of Paulig Russia, the Russian branch of one of the world’s largest producers of fresh-roasted coffee, says that fresh-roasted coffee’s share of the entire Russian coffee market is estimated at 30 per cent and is continuing to grow. “More and more local consumers see the difference in taste between instant and fresh coffee,” says Kolkov. “The segment of fresh coffee has better prospects for future growth than  instant coffee, which is more common for Russian consumers.” Paulig, a Finnish company, is putting high hopes on this growing Russian market. This hope was reflected in last year’s decision to launch a coffee roasting plant in Russia’s Tver region. The project is worth an estimated US$29 million, with a capacity that could reach 10,000 tonnes of coffee per year. Deals like these will likely keep popping up as Russian consumption figures continue to rise. The past decade has seen the most sig
nificant increase in consumption, which can be largely attributed to the entry of coffee chain superpowers, Starbucks and Costa Coffee. The entry of these chains helps explain the increase in demand for fresh ground coffee over instant, as well as an increase in orders for espresso-based coffee. Rising incomes and local purchasing power are also helpful factors, although it should be noted that these figures are still significantly lower than in the European Union and North America. Average per capita consumption of coffee in Russia sits at around 1 kilogram per year, compared to 12 kilograms in neighbouring coffee-loving Finland. Average per capita coffee consumption in the European Union ranges from 4 – 8 kilograms. Further increase and changes in consumption trends may likely depend on the activities of these international coffee chains and the number of new stores, which currently sits at around 600. According to Euromonitor, over 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, however, is expected to be higher, as a result of growth in commodity prices. Retail prices are expected to grow with inflation rates – since 2004 the average rate of inflation in the Russian coffee market reached 64 per cent. With market growth, comes predictions for further consolidation of the Russian coffee market. An increase of market shares of large foreign companies is expected, alongside the withdrawal of small local producers from the market. According to Russian news source Kompania, Kraft Foods is eyeing acquisition of a local company Orimi Trade, the only coffee producer in Russia that holds a relatively strong market positions in instant coffee (5 – 6 per cent of the market). The company is also a leader in fresh ground coffee and tea. Ramaz Chanturia, the head of the Roschaykofe, says that the next several years will see fierce competition in the Russian coffee market. Chanturia predicts the market could tighten up to only include five or six companies, with the process of consolidation the inevitable path. If Chanturia’s predictions are accurate, Kraft Foods and Nestlé are on the right track to stay in the select group.