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Structure and scope of expanding demand for coffee in China

A report published on the websiteFoodnavigator-asia.comforesees considerable growth in Chinese consumption of ready-to-drink (RTD) coffee. According to analysis from Euromonitor, instant coffee retail sales (a broader category than RTD coffee) in China amounted to over US$1 billion in 2012, despite an average per capita consumption of only two cups per day.

The report notes that China is already the fourth-largest market for RTD coffee in terms of volume, and fifth in terms of value. A distinct preference for three-in-one mixes that include a mix of instant coffee, creamer and sweetener is apparent in China, and accounts for 52% of instant coffee sales in 2012. RTD coffee packaged in either cans or PET (plastic) bottles provides convenience to Chinese consumers with busier and busier lifestyles, particularly students and young professionals who perceive it as more convenient than instant tea.

A preference for flavoured RTD coffee is also emerging: in 2012, flavoured RTD coffee products accounted for 52% of the total market, up from a 32% share of the market in 2007.

The dominant player in both instant and RTD markets is Nestls Nescaf, which has 50% of the entire RTD market and 74% of the instant market, based on strong brand recognition. Nevertheless, the Euromonitor analysis still sees potential for other RTD coffee manufacturers to increase their presence in the Chinese market, noting that the second player in the Chinese coffee market has expanded its line to include flavours that are designed to appeal to specific demographics such as professionals and younger consumers. The report notes that by 2017, the Chinese RTD coffee market is projected to increase by 129% in volume.

In contrast to the size and growth trends in the instant and RTD coffee market components, fresh coffee sales totalled less than US$20 million in 2012. However, analysts at Euromonitor also noted that as disposable incomes [continue] to increase, further success for RTD coffee may be threatened by consumers looking to trade up to specialist coffee shop purchases. RTD coffee manufacturers are mindful of this development and hence are introducing more premium products that use higher-quality beans and reduced-fat whiteners.

The longer-term developments in China need to be seen against the background of the dismal price performance of arabica coffee in 2013 (down some 20%, according to reports published onAgrimoney.com) following a strong crop in Brazil and output recovery in Colombia. Falls in price were halted as blenders changed the mix with robusta beans in response to lower arabica prices.

Commerzbank, Macquarie, Rabobank and Socit Gnrale all broadly agree that there will be further price declines in 2014, projecting a variable rate of price recovery. They anticipate that lower prices will reduce fertiliser and pesticide applications, which will then lead to falls in yields and production, while substitution for robusta beans in blends will continue.

Arabica coffee: Average price November 2013 and average price projections 2014 (US cents/lb)

Nov 13 20141stquarter 20142ndquarter 20143rdquarter 20144thquarter
Commerzbank 105 100 105 110
Rabobank 105 100 90 95
Indexmundi.com 122.75