Making strategic choices: where we choose to play in soluble coffee
Arun Sharma, Senior Vice President, Soluble Coffee
The global soluble coffee market has grown from approximately 530,000 metric tonnes (MT) in 2005 to 760,000 MT in 2014, an increase in total of 43% or 4% each year during this period. In absolute terms, the strongest growth came from emerging markets in Central and Eastern Europe, Middle East, South America and Asia (Source: LMC International, UK).
Above: Soluble coffee consumption by region in 2014 (MT)
Above: Growth in soluble coffee consumption by region between 2005 and 2014 (MT)
The consumption growth drivers over the past decade have been a combination of convenience, premium positioning, brand experience and the ability of manufacturers to innovate and provide new flavours. These factors are expected to continue to drive growth.
While 70% of the soluble coffee market’s needs are met by the major brand owners, the remaining 30% or 228,000 MT estimated at US$2 billion is supplied by the independent segment, which largely supplies bulk, non-branded soluble coffee. This independent segment has grown 43% or 4% per annum in volume terms from 160,000 MT in 2005 to 228,000 MT in 2014 and this is where Olam is positioning itself to become a leading independent supplier of soluble coffee.
Making strategic choices
Olam’s instant coffee business, which started in 2008 on a greenfield basis, has grown its capacity fivefold from 4,000 MT to 22,000 MT per annum by 2013. We built our competencies around strategic locations – Vietnam, which has a comparative advantage in producing cheaper and better soluble coffee, and Spain for value-added processing where we can access the private label market in Europe.
On the supply side, Vietnam is the world’s largest producer of Robusta coffee and is also the most cost-competitive producer of soluble coffee compared to other origin soluble coffee producing countries such as Brazil and India. Additionally, Vietnam allows imports of both Robusta and Arabica beans from other origins for processing, which supports product development activities.
Vietnam also enjoys proximity to the fast growing markets in Southeast Asia and benefits from being part of ASEAN as made-in-ASEAN products get a preferential rate of import duty into the ASEAN bloc and other countries in the far-east like Japan and Korea.
Vietnam is where Olam has been sourcing coffee beans in various upcountry locations so it was a logical move to integrate into secondary processing, harnessing the strengths and assets we have built over the years. Today, we operate the largest independent soluble coffee facility in Southeast Asia.
Within 2 years of commissioning our plant in Vietnam, we invested further by trebling our capacity from 4,000 to 12,000 MT by 2013. By 2014, we were fully utilising all our capacity.
As our organic expansion in Vietnam was underway, in late 2012 through a court-sanctioned auction, we acquired Seda Solubles (now known as Seda Outspan), a leading producer of soluble coffee with a production capacity of 10,000 MT based in Spain. Despite its financial difficulties which led to its receivership, its customer and operating franchise remained intact. It also boasted a 10,000 MT packaging facility for private label coffee, an attractive segment within Europe given high barriers to entry for suppliers. Today, it is operating at full capacity.
The output from both our factories caters to the large markets in Asia, Middle East, East and Central Europe – markets where the strongest growth in consumption has been driving demand.
The supply-demand economics of soluble coffee underpins our growth strategy. This is so even if we assume a market growth rate of below 4%, or 2.7% (as forecast by LMC International) to 867,000 MT by 2019. Consumption of soluble coffee supplied by the independent segment would rise to almost 268,000 MT. Continuing growth in consumption, particularly for freeze-dried coffee which grows at twice the rate of spray-dried coffee, will likely put pressure on the existing production capacity.
As we aim to become a leading independent player globally, we continue to look to Asia and Europe for growth by increasing our capacity to address a growing Asia as well as deepening our presence in the private label industry in Europe. Our next move is to step-up our Vietnam capacity from the current 12,000 to 17,250 MT per annum, which should come onstream by 2018. In the meantime, our plans to improve operational efficiencies and product development will also enable us to achieve cost leadership and address new market segments that are focused on cost and quality.