Coffee competition heats up in Brazil as demand for premium options grow

By Elizabeth Crawford contact

- Last updated on GMT

Coffee competition heats up in Brazil as demand for premium grows
With growth of coffee consumption in the US and Europe stagnating, manufacturers are pursuing increase opportunity in emerging markets, such as Brazil, “despite several macro-economic road bumps,” according to new research from Rabobank.

Even though Americans and Europeans continue to drink coffee heavily, the compound annual growth rate of the beverage in both regions is slowing, reaching just 0.4% in Europe and 1.7% in the US from 1995 to 2015, Stephen Rannekleiv, a global strategist for beverages at Rabobank, writes in a research note published last month.

“Coffee consumption in exporting countries, on the other hand, grew at a CAGR of 4.2% during this period, and the rate has remained consistently robust,”​ which suggests “exporting and emerging markets are expected to remain the main drivers of global coffee consumption growth through 2025,”​ he added.

Within emerging markets, some are more promising than others – such as Brazil, which Rannekleiv predicts will see consumption of premium coffee increase by 6% to 7% in 2017 to reach 800,000 bags.

Premium coffee drives growth in Brazil

He attributes this spike in part to the maturation of the “so-called third wave in coffee consumption,”​ which focuses not on the caffeine of the first wave or the introduction of new concepts, such as espresso, as seen in the second wave, but rather on perception of value.

“The third wave revolves around value concepts, so that coffee’s origin and preparation methods become essential in providing the consumer with a special experience,”​ that will justify a price point that is nearly double that of traditional supermarket coffee at R$43.50/kg, Rannekleiv writes.

Competition is heating up

Manufacturers are scrambling to meet this new demand by launching new premium brands, the number of which grew 19% to 336 in the year ending in July 2017, Rannekleiv noted.

Among those who have entered the fray are Jacobs Douwe Egberts, Coca-Cola and Nestle.

In August, JDE announced it would launch its super premium coffee brand L’OR in Brazil, where a spokeswoman said coffee sales have not been impacted by the ongoing recession. Rather, she said in a press conference in August, the company expects the market for super premium coffee in Brazil to double in the next three years.

To support the launch, LDE outfitted its Sao Paulo facility with new equipment to produce capsules for its coffee that will fit Nespresso machines.

This announcement followed JDE’s January proclamation that it would acquire a portfolio of local brands from Cacique Company, including including Pelé, Graníssimo and Tropical, in order to “strengthen its leadership in core regions across the country,”​ according to a company statement.

JDE’s move also followed Coca-Cola’s introduction of its Cafe Leão in the second half of 2016 – a move designed to combat declining beverage volumes as consumers worldwide continue to turn away from sugary beverages, such as soda.

“Meanwhile, Nestle has launched a premium-branded Arabica coffee line for food service,”​ Rannekleiv noted.

He added for all of these brands to succeed, continued economic recovery will be important as well as companies’ flexibility to adjust their portfolios “to profit from premium coffee consumption in the near future.”

Four take-aways

The race to invest in coffee in Brazil and other emerging markets, reveals four lessons that manufacturers can apply across channels when entering developing regions, Rannekleiv writes.

The first, he said, is to “take the long-term view”​ because there will continue to be short-term volatility in emerging markets, but the growing demand for premiumization in many categories should help offset this by driving sales growth over the long-term.

Hand in hand with this is Rannekleiv’s advice to “keep it balanced”​ by maintaining a “healthy mix of geographic exposure”​ in order to ride out problems in any one particular area.

Third, Rannekleiv advises that brands with a clear purpose and execution will see stronger results given consumers desire for individual brands even in categories that are not as strong overall.

Finally, he said, innovation is a two-way street where “ideas and innovation can flow as easily from emerging to developed markets as vice-versa.”

Related topics: Tea and Coffee, Markets

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