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Bean’s A Bean

Or is it? While coffee bean prices hit historic lows, cocoa-bean prices are headed upwards. The implications to companies, and their strategic responses to the same.

By Ankur Sabharwall

Coffee beans: Fall guy

It makes little difference whether you’re a bean spiller or bean counter. You must acknowledge that corporate strategy cannot ignore primary realities for too long. For a good illustration, take the commodity markets for two volatile beans: coffee and cocoa.

Coffee, first. In what’s being described as a ‘global coffee crisis’, commodity prices for coffee are at their lowest in real terms in a hundred years. Blame oversupply. Coffee production has been increasing at 3.6 per cent annually, while global demand has been rising by just 1.5 per cent. The resultant glut has sent prices spiralling down to 44 cents per pound this July (average production costs are estimated at 80 cents), compared to 150 cents per pound. in the 1980s. This is because of “rapid expansion of production in Vietnam and a bumper crop in Brazil, which produces 25-30 per cent of the world’s coffee”, in the words of S. Radhakrishnan, Deputy Director (Market Research), Indian Coffee Board.

Meanwhile, the other bean -- cocoa, usually in the news for exploitation of child labour in West Africa, has seen prices soar to a 15-year high, following speculation that this year’s crop will fall short of demand for the third year running. The demand-supply balance first tipped over in 2000-01, a year that recorded a 247,000-tonne deficit (from a 97,000 tonne surplus in 1999-2000). The following year’s harvest hasn’t really plugged the gap. The deficit estimate for 2001-02: 48,000 tonnes. This is bad news for cocoa-users, for it leaves them with little option but to dip into their reserves. Ivory Coast, which has a 44-per cent share in world cocoa production, is the biggest gainer. It has capitalised on the volatility by increasing the export tax on cocoa by 22 per cent, thereby increasing the price still further.

The strategic implications to business?

India grows just 6,000 tonnes of cocoa, so the high prices for this commodity haven’t spread too much cheer. Coffee is bigger. And it goes without saying that Indian coffee growers, concentrated in Karnataka’s Coorg district, are in deep misery. The country accounts for 4.5 per cent of global coffee production, some 85 per cent of which is exported. Not only is overseas demand low, Indian growers find themselves losing out in the quality stakes. While gourmet varieties are still sought after by specialty coffee marketers, most Indian beans are left without takers. This calls for value-added coffee farming, which requires ascending the sophistication curve. It can’t be done overnight.

Coffee consumption is a different story altogether. Brand marketers, such as Nestle and Hindustan Lever, are currently enjoying high margins on their instant coffee brands, though prices have been reduced (Nestle, for instance, has slashed Nescafe’s price by 16 per cent over the last three years). The margins are the reward for their dedication to the proposition that brands, by occupying independent space in consumer mindspace, offer insulation against ground-condition volatility. People drink Nescafe because it is Nescafe, regardless of the procurement cost of the beans.

That brings us to the streetside café phenomenon, in which several strategic global-minded players are thought to be keen on taking a stake. This is a significant trend. As more and more open up, the notable thing is that cafes are taking the value-migration inherent in branding all the way to its logical end. People pay not so much for that steaming cup of espresso, a two-minute proposition in itself, but for the entire gestalt of the café experience.

Are cafes better insulated? It would seem so. But commodity conditions don’t matter much anyway, say café chain executives. Most high-profile chains claim to use speciality coffee beans, which are relatively insensitive to commodity price fluctuations. For instance, Barista, India’s largest cafe chain, procures “ninety per cent of its coffee from four high-altitude plantations in Coorg” (the rest is imported), according to Sandeep Vyas, Vice President (Marketing), Barista Coffee Company.

As mentioned earlier, the coffee market is not one big brew; it has many little eddies swirling around as well. This is so of cocoa, though to a lesser extent. Chocolate marketers have insulated themselves against volatility by directing consumer attention to products that use very little actual chocolate (and thus cocoa) in their sweet-tooth-fulfilling composition. Nestle, for example, has turned Munch, a chocolate-enrobed wafer snack, into India’s largest selling ‘chocolate’ (it is priced at just Rs 5 for a 19-gm bar).

That’s smart marketing. And that’s also the reason marketers can dedicate themselves to the proposition that a bean’s a bean, when brands do their job right.

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