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What’s
Brewing?
An Analysis of India’s Coffee Industry

Maitreyi Menon
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TABLE OF CONTENTS

Executive Summary……………………………………………………………..5
Introduction…………………………………………………………………………7
Background of the Industry…………………………………………………..9
Production………………………………………………………………….10
Process……………………………………………………………………...13
Supply Chain………………………………………………………………14
Market History……………………………………………………………16
Domestic Market………………………………………………………..18
Specialty Coffee………………………………………………………….19
Coffee and the Society……………………………………………..…19
Employment………………………………………………………….…….21
Main Firms………………………………………………………………….21
Trends………………………………………………………………………..22
Analysis………………………………………………………………………………24
Porters five forces……………………………………….………………25
Factors which affect rivalry among competitors…….25
Factors Affecting threat of entry…………………………...27
Factors Affecting Threat of substitutues……………..…30
Factors affecting supplier power……………………...…..32
Factors affecting buyer power………………………..,……33
PESTEL analysis………………………………………………….……….35
Political/Legal………………………………………….…………..37
Economic……………………………………………….…………….38
Social…………………………………………………..………..…….38
Technological……………………………………..…………………40
Environmental…………………………………...………………….41
SCP Framework……………………………………………………..………………43
Structure……………………………………………………………….44
Conduct …………………………………………………………………47
Performance…………………………………..………………………………47
SWOT………………………………………………..……………………………………49
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Strength……………………………………………………………….50
Weakness……………………….…………………………………...51
Opportunity……………………….………………………………….52
Threat………………………………..…………………………………52
Key Success Factor……………………………………………………………….55
Product…………………………………..…………………………….54
Marketing………………………………..……………………………55
Localization………………………………..…………………………55
M&A……………………………………………..………………………56
Habituation of Coffee Consumption- Cultural factors……………….57
Rural Sector Opportunities……………………………………..………61
Recommendations/Future Prospects………………………………………63

List of Figures
FIGURE PG. NO
Fig 1: Relationship between 15
Stakeholders in the Coffee Supply
Chain

Fig 2. Porters Five Forces Analysis 24

Fig 3. PESTEL Analysis 38
Fig.5 Types of Roasts 42

Fig.6: Types of Brews 43

Fig.7: SCP Framework 48

Fig 8: SWOT Analysis 52

Fig. 9 KSF Framework 58

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Fig 10 Motivation to Buy Coffee 62

Fig. 11 Challenges in Rural Marketing 64
Fig 12: Recommendations and 66
Future Prospects

LIST OF GRAPHS

GRAPH PAGE NUMBER

Graph 1: Worldwide Production of 8
Coffee, 2017, Source: Statista

Graph 2: Production of Coffee, 10

Graph 3:Number of Holdings, 11

Graph 4: India’s Exports 13
Graph 5: Domestic Consumption of 19
Coffee
Graph 6:Employment in Coffee 22
Plantations
Graph 7,Total Production of tea and 33
Coffee in India, 2001 to 2015

LIST OF TABLES

TABLES PAGE NUMBER

Product Price levels 27
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Executive Summary
• India produces two types of coffee beans: Arabica and Robusta. Most
coffee production in India happens in small holdings (area<10 ha). .
The type of fertilizer, the frequency of usage, cropping density,
phytosanitary controls, government subsidies etc. has a significant
impact on coffee production.
• Growers, Intermediaries, processors, exporters, government agencies,
dealers, roasters and retailers are the most important players in the
coffee supply chain.
• India is an export economy when it comes to the coffee industry. The
export earnings has increased 4139.58 metric tons between 2009-
2010 and 2017-18. Italy is the largest export market, followed by
Germany, Russian Federation, Belgium and Turkey.
• Productivity has also improved from 567 Kg/Ha in 1961 to 7765
Kg/Ha in 2017-18
• India’s domestic consumption has increased from 50,000 MT in ‘98
to 115,000 MT in 2011.
• Demand fluctuations in the coffee industry are affected by the
publication of literature on the health effects of coffee and caffeine.
When research predicts that caffeine consumption is good for health,
coffee consumption rises. With the reduction of information
asymmetries by the introduction of internet, these results have a
stronger influence on coffee markets.
• Nestle and Hindustan Unilever limited are the two firms dominating
the packaged coffee industry. In the instant coffee segment, these
two firms almost have a duopoly, with both having 51% and
49% (approx.) market share each (Naik, 2018).
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• It is a highly competitive industry dominated by HUL and Nestle.

• Coffee consumption has only penetrated the urban, young
demographic. For companies to be more profitable, they have to focus
on their rural marketing efforts to increase profitability.
• Coffee Consumption is highly price elastic, since it is not the primary
mode of caffeination in India.
• The Threat of backward integration is low since coffee production and
roasting is an incredibly complex process which most retailers would
not be interested in, unless they are specifically a coffee retail store.
An example of this would be Starbucks.
• The threat of forward integration from suppliers is also very less as
production is incredibly fragmented and most producers do not have
the capital requirements to enter the market.
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Introduction
Coffee is a very important plantation crop in India, mainly cultivated in
Karnataka, Kerala and Tamil Nadu. Non-traditional cultivation of coffee is
found in Andhra Pradesh, Orissa, and some North Eastern States. The major
coffee growing destinations are Hassan, Chikmagalur and Coorg in
Karnataka, Wayanad, Idukki and Nelliyampathy in Kerala, And Shevaroys ,
Anamalais and Nilgiri hills in Tamilnadu (Coffee Board, 2017).India is not
only the world’s seventh largest exporter of coffee, but is also the third
largest exporter of coffee in Asia(Coffee Board, 2017). Currently, the Indian
coffee industry accounts for 3.67% of the global production in 2017.There
has been a 12.7% YoY growth in in terms of coffee export from India
between 2016-17 and 2017-18.Out of the total Indian coffee production,
70% is exported while only 30% consumed domestically. The largest
importers of Indian coffee are: Italy, Russia, Germany, Belgium, Turkey, USA,
Poland, Libya, Spain (Coffee Board, 2017).
Coffee is the second most traded commodity in the world, after oil. Overall,
it is a $20 Billion dollar industry. While coffee production is largely
dominated by the developing world, consumption is largely done by
industrialized nations, in Europe, North America and Australia. The Indian
Coffee market is largely dominated by two firms- Nestle and Hindustan
Unilever Limited. Their subsequent coffee brands, Nescafe and Bru are
easily the most popular in the domestic market. The entry of a new brand,
Tata Grande has created more competition in the industry. There is a high
level of competition in the industry, especially in the instant coffee segment
since advertisement costs and capital requirements are extremely high.
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Graph 1: Worldwide Production of Coffee, 2017, Source: Statista

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Background of the
Industry
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Production

Graph 2: Production of Coffee,

Source: Tea and Coffee Board of India

India cultivates two types of coffee, Arabica and Robusta, in an area of 3,

55,102 ha in 2003-04, producing around 2, 75,225 metric tons of coffee
per annum. Most (99%) coffee holdings are small, with less than 10
hectares per household. These small holdings represent around 71% of the
total coffee consumption area and contribute to around 60% of the total
production. The remaining 2% of the total holdings, which account for large
holdings, correspond to 40% of the total coffee production in the country.
The productivity of Arabica is 713 kg/ha while that of Robusta is 1175
kg/ha. (2003-04).
Arabic beans produce superior- quality coffee and are grown best over an
altitude of 3000 feet. They are less caffeinated as compared to Robusta
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beans. While Arabica production accounts for 80% of the global production,
only 10% of this production meets the global industry standard for specialty
coffee.

Graph 3:Number of Holdings,

Source: Tea and Coffee Board of India
Robusta beans, on the other hand are grown at lower altitudes, easier to
grow and are more disease resistant than Arabica beans. They are
sometimes used as mixers for bringing coffee prices down. Robusta beans
are also sometimes added to Italian espresso mixes due to their woody
flavor for added complexity.
The Indian coffee industry is unique since it is the only country where all the
crops are grown under a shade of a well-defined two tiered canopy trees.
There 16 different varieties of coffee in India, and they are sourced from 13
distinct regions. A large part of these regions are concentrated in the
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southern part of the country. These coffees are well suited for cappuccinos
and espressos alike (Wrest, 2017).
The production of coffee is also affected by pricing policy decisions, which
could be incentivized and disincentive by support prices or taxation policy.
As a result, the producer prices are not just decided on the basis of the cost
of production, but also on the basis of international prices, domestic
inflation and exchange rates (Bibangambah, 2007). However, it would be
unwise to assume that governmental decisions alone provoke changes in
output decisions of a firm. For instance, there are factors other than policy
decision as well as factors of production which causes changes in pricing -
like input cost of R&D, strength of existing credit systems, transportation
costs, infrastructure, agricultural inputs etc.
Coffee production has been growing rapidly from the 1950s, from 18,893
tonnes in 1950-’51 to 68169 tonnes in 1960-61. The 1996 government
decision to remove the central pool and sell coffee privately further made
the industry robust. Today, Coffee production stands at 316,000 metric
tonnes. Of this, Robusta accounts for 70% of the production while Arabic
accounts for the remaining 30%. As a result, India has now become the 7th
largest coffee producer, accounting for 3.3% of the global production and
5.4% of the global exports as compared to 3.15% and 3.57% respectively in
1994-95 (Coffee Board, 2017).
Even though the increase in global production is minimal, the area under
which coffee is cultivated has increased three times between 196-61 and
2017-18 in India. A large part of the area under which coffee is grown is
concentrated in the Southern states of Karnataka (53.8%), Kerala (18.89%)
and Tamilnadu (7.83%). Productivity has also improved from 567 Kg/Ha in
1961 to 7765 Kg/Ha in 2017-18. 99% of the coffee growers are small
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growers, while the 1% are medium and large growers. These plantations
employ around 659,865 workers on a daily basis according to estimates for
2017-18 (Coffee Board, 2017).

Process
Both washed and unwashed coffees are produced in India. These are
processed with two techniques: the wet process and the dry process. While
Arabica coffee is processed by the wet process, Robusta is processed by the
dry process (Coffee Board, 2017).

Graph 4, Source: Tea and Coffee Board of India

There are several technological factors which need to be taken into
consideration when coffee production is accounted for. The type of fertilizer,
the frequency of usage, cropping density, phytosanitary controls,
government subsidies etc. has a significant impact on coffee production.
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For instance, due to the pressure and influence wielded by the World Bank
and IMF, Burundi was recently forced to withdraw its investments in
agricultural research and development and had to privatize these sectors.
Since R&D regarding coffee production avails substantial investment, the
Asian green revolution was largely characterized by the same (Zerihun,
1994).Earlier, many production inputs like seedlings, fertilizers and
pesticides were subsidized by governments. However, due to pressures by
international organizations, many inputs are available at market price
(Zerihun, 1994).
The Supply Chain

Fig 1: Relationship between Stakeholders in the Coffee Supply Chain

• Growers
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Most coffee is grown in tropical countries, where the temperature is stable for
most of the year. Most coffee producers are small scale producers.Many
coffee farmers around the world live in extreme poverty. Adding to this,
since most of them own very small plots of land, supplier power is very low
in the industry. Therefore, in some Latin American countries, farmers and
plantation workers have formed their own cooperatives to improve the
prices they receive. An example for this is Mut Viz.
• Intermediaries
They usually buy coffee cherries from farmers, who are at the bottom of the supply
chain, and sell it to stakeholders who are ahead in the supply chain, like
processors.
• Processors
Coffee Processing is a complex and capital intensive process. The coffee cherries
are the base product which is converted into green coffee beans.
• Government
The involvement of government varies from country to country. In India, the Coffee
Board acts as a checking mechanism.
• Exporters
The Exporters main duty is to transport the coffee which they buy from the
producer to a different location.
• Roasters
This is when green coffee beans are transformed into roasted coffee beans. This
is a highly skilled profession. There are four types of roasts: Light, Medium,
American and dark. This product can be highly differentiated in niche
markets. Some retailers, like Starbucks roast their own coffee.
• Retailers
The job of the retailer is to sell the product to the consumer.
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Market History
When it comes to coffee, India is an export driven economy, where around
70% of the coffee produced is exported. Before 1996, there was a different
bureaucratic arrangement to manage the sales of coffee. The coffee board,
back then held different auctions for the domestic and export market. The
produce was collected through the Coffee Board’s pool depots, after which
it was stored in secondary processing facilities. Strict quality control norms
were imposed on these and payments were made on the basis of quality.
The Fair Average Quality (FAQ) was seen as an industry standard for pricing
coffee. If the quality falls below the FAQ, the produce was penalized and if
the quality was above the FAQ, producers were encouraged by ‘premium
points’ ( Pazhanilath, 2002).
Along with the economic liberalization of ‘91, the coffee industry also went
through structural changes during the period of 1993-06.However, the
share of coffee exports among that of India's agricultural exports have been
discouraging in the post liberalization period.
Today, India exports coffee to around 45 countries. The export earnings
have increased 4139.58 metric tons between 2009-2010 and 2017-18.
Italy is the largest export market, followed by Germany, Russian Federation,
Belgium and Turkey (Pazhanilath, 2002).
Coffee prices have fluctuated throughout the years. For instance, in ‘95,
coffee prices increased by 2%, and then dropped by 25% in the next year.
Export market uncertainties highlight the need to look at the coffee industry
as a domestic market good. According a study conducted in 2005 by Talbot,
the formal sector sale of processed coffee was fourteen thousand tones
valued at 4.3 billion rupees. Instant coffee sales, under the larger umbrella
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of coffee sales accounted for 4.4 thousand tones, at a valuation more than
3 billion rupee (Talbot, 2005)).
In his study, Bain (Bain, 1949) stated that the instant coffee market is a
duopoly, as Nestle and Hindustan Lever have been the 2 most prominent
firms operating in the market. There is a certain degree of brand loyalty and
product differentiation offered by both via branding. As a consequence,
there is high level of market concentration availed by both firms. Some
degree of collusion can be expected from these two firms, to prevent new
firms from entering the market. Tata coffee is another large firm which has
captured a reasonable amount of market share in the market (Talbot,
1997).
If the nature of the domestic industry is collusive, the liberalization of
economic policies would increase competition in the market. However, due
to the presence of tariff and non-tariff quotas, the market is more favorable
for domestic firms (Hwang &Mai, 1988).
According to some studies, coffee is better suited to foreign markets as
opposed to domestic markets. This is mainly because of a decade wide shift
which took place in the late 70’s when the prices of raw materials were low.
However, during the early eighties, the market price for coffee dropped
drastically by around 30% as the International Coffee Agreement (ICA)
collapsed. As a consequence, the earnings of coffee exporting countries
dropped (Beets, 1990).
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Domestic market

Graph 5 : Source: Coffee Board of India

Even though coffee is an export oriented commodity in India, India’s
domestic consumption has increased from 50,000 MT in ‘98 to 115,000
MT in 2011. India’s growing middle class, and their penchant for coffee as a
social phenomenon has led to the rise of several retail stores like Cafe
Coffee Day, Lavazza, Barista, Starbucks, Coffee Beans and Tea Leaf and
Costa Coffee (Cafe Coffee…...Barista, 2016).
There has been an increase in independent ventures in the past as well.
The farm to cup coffee culture is sustainable and is marketed as a high end
gourmet product. Using distinguished brewing equipment’s and specialty
coffee also helps with product differentiation.
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Demand fluctuations in the coffee industry are also affected by the

publication of literature on the health effects of coffee and caffeine. Earlier,
a very small amount of such research reached the public eye. However, with
the rise of digital media and the democratization of information via the
internet, it has become easier for such fads and trends to affect the market
demand for coffee (Varnam, 1994).

Specialty Coffee

Green Coffee is a type of specialty coffee which has received substantial

commercial interests in recent times. It is prepared via a complex process
with an entirely native supply chain. The beans are preserved by removing
various layers and keeping the moisture below 12%, followed by dry or wets
processing depending on the type of end product, and then further followed
by grading, cleaning and polishing. While the dry process leads to a
cheaper, end product with a relatively simple production process, the wet
process leads to a more refined, expensive final product (Varnam, 1994).

Coffee and the Society

The coffee culture in India has surprising Brahmanical origins. It was initially
bought by South Indian Brahmin families from the British in the early
1930’s. It was served among wealthy Brahmin families as ‘filter coffee’ in a
davra tumbler. As time progressed, coffee moved away from its
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Brahmanical origins to the more educated upper classes who convened in

‘coffee houses’ to shape public discourse on several issues.
Coffee, as a social phenomenon has not penetrated the low income groups
in comparison to tea. As a result, coffee consumption is largely restricted to
the middle class and above wealthier, literate segments. Due to its bitter
and acquired taste, coffee preparations are considered more expensive
than tea due to its larger milk and sugar requirements. As a result, there
has been a very slow increase in the demand for coffee. While the
relationship between habit formation and aggregate demand has been
documented in the study done by Nagarajan, no detailed work has been
done on the complementary/substitute relationship between tea, milk
sugar, price and income.
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Employment

Graph 6, Source: Tea and Coffee Board of India

As of 2017, around 653,647 people are employed in the coffee Industry
(Coffee Board, 2017).
Main Firms

There are different perspectives to approach to the coffee industry, mainly

from the production and consumption side. In the consumption side, it is
further divided into many industries, including but not limited to packaged
coffee industry and coffee retail industry. These are the two segments
examined in this report.
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Nestle and Hindustan Unilever limited are the two firms dominating the
packaged coffee industry. In the instant coffee segment, these two firms
almost have a duopoly, with both having 51% and 49% (approx.) market
share each (Naik, 2018).
In the coffee retail industry, Cafe Coffee Day and Starbucks are the biggest
players. Recently, the Barista-Lavazza partnership had recently been broken
apart, resulting in Lavazza exiting the market.

Trends

Around 2.25 billion units of coffee are consumed everyday ((Dicum and
Luttinger, 1999). However, in emerging markets like India, where coffee
drinkers are mostly affluent, coffee consumption is rarely just about the
caffeine intake, and has much more to do with the attached social
perception of the same.
Profits for many products in this industry have more to do with product
differentiation rather than the actual product itself. In the packaged coffee
industry, for instance, marketing the product as organic, fair trade or
sustainable sets one product apart from another and allow these products
to be priced at a premium as well.
Even among the instant or soluble coffee business, different branches
identify themselves with different demographic groups. For instance,
Nescafe has larger market share in the Northern region as opposed to Bru,
which is popular in South India. Bru has projected itself as more of a ‘family
oriented’ brand as opposed to nestle, which tries to position itself as
something desirable to the increasingly affluent urban youth.
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While filter coffee variants are popular in Southern India, instant coffee is
popular all over the country. Main distributional chain for packaged coffee is
traditional retail stores, mostly large and small convenience store. Currently,
market variants like ready to drink alternatives and decaffeinated coffee
accounts for just over 1% of the total industry. This means that there scope
for growth in this segment.
There has been a bean to cup trend which is present in coffee shops and
this was exploited by firms like Cafe Coffee Day, Barista Coffee etc.
However, these trends are only present in the cafe retail segment, as Indian
homes traditional do not have equipment required for the same. However,
coffee consumption is largely limited to the urban Indian populace. As most
Indians (70%) live in rural areas, there is a growing urgency to ensure that
market penetration to rural areas happen soon.
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Analysis
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Porter’s Five Forces Approach

Factors Factors Factors Factors

Factors affecting affecting Affecting affecting
Affecting threat of threat of supplier Buyer
Rivalry substitute
entry power Power

Concentration of
economies of buyer power
High Demand
scale
nature of firms
threat of
substitution from
tea Purchase volume
of buyers
Reputation and
Concentration of
established brand
players
loyalties

Supplier Substitutu
concentration products
Access to
Product Price distribution
levels channels and raw
materials Price elasticity of
demand
threat from
foreign coffee ownership,
forward
Switching costs Experiencebased integration and
and product advantages of import Threat of
differentiation incumbants substitution backward
integration

Fig 2. Porters Five Forces Analysis

Factors which affect rivalry among existing competitors

High demand
Demand from domestic market is booming at the moment, with the growing
disposable incomes of India’s urban youth. The number of cafes in the
country, at the moment is 3500, and it is set to expand to around 6200
countries by 2021. The market for chain cafes is currently valued at Rs.
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1820 crore and is 27% of the overall cafe market. Cafe Coffee Day,
Starbucks, McCafe, and Costa Coffee constitute the main firms operating in
the country. Such chains are also focusing on increasing baked goods
available in their stores are expanding into quick service retailing industry
(Fuerstein, 2007).

Concentration of players and impact of economic growth

Nestle and Hindustan Unilever and Market leaders and they together
account for 60-70% of the market, according to Coffee Board of India
(2012). Nescafe on its own enjoys 51% of market share. Not only do they
have several manufacturing units across the country, there are several
coffee vending machines all over the country (Pinto, 2015).
Bru, which is positioned as a family brand, enjoys around 49% of the market
share. Its customer base is stronger in Southern India (Pinto, 2015).Tata
Grande coffee is a major recent entrant in the market. Even Though TGC
has not been able to grab market share in the instant coffee market from
Bru and Nescafe, Tata coffee is India’s second largest exporter of coffee
(Pinto, 2015)
Product Price levels

Nescafe Price Bru Price

Classic 235 g per 100g Instant Coffee 160 for 100g

Gold 265 for 50g Gold 245 for 100g

Gold Decaf 540 for 100g

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Sunrise 80 for 50g Green Label 75 for 200g

Table 1: Product Price Levels

Switching costs price elasticity and product differentiation

Switching costs are very low with instant coffee brands. Even though there
is a slight price difference between Nescafe and bru, with bru coming off on
the cheaper end. However, both bru and Nescafe are marketed differently
to the Indian demographic. While Bru has been marketed as a family brand
for the south Indian audience, Nestle has targeted the young, urban class
with high disposable income.
Brand loyalties are strong with Bru and Nescafe in their own right.
A Canstar Blue survey conducted in Australia shows that brand loyalties are
extremely strong in the instant coffee segment, with 68% of people always
purchasing one brand of instant coffee throughout (Halim, 2006).
Pricing strategy
Comparative pricing, General Pricing and Economic Pricing are used by
producers.
Comparative pricing: Not only are the firms incurred costs taken into
consideration, but the pricing decisions of other firms and similar products
are also considered while pricing a product (Harith, 2015).

Factors affecting threat of entry

Economies of scale
 - 28 -

Older and more established companies and brands, like Nestle and Bru,
have an additional advantage of reached economies of scale, and as a
result are able to reduce their marginal cost of their products. This is
especially advantageous as coffee is already a highly priced commodity in
India. Large scale production of coffee and transnational transport of the
same is cost and energy efficient. For instance, a Nestle production facility
in Queensland uses used coffee grounds for energy generation (Naik,
2018).
An important barrier to enter the coffee retail market is the large amount of
capital required to do the same. This barrier to entry acts as an impediment
to those willing to enter the industry. Since the current competitors have
already captured a significantly large portion of the market, any new entrant
will need to spend a large amount of capital of advertising and promotional
content to capture market interest. Many new entrants do not have this kind
of capital- unless they are backed by industrial giants. Tata Grande coffee,
for instance, made an entrance in 2012 and was able to do it because of
the enormous financial backing of the Tata brand. Even then, Tata Coffee is
facing losses of around 244 million in this quarter.
It is far easier to enter QSR marker for cafe retailing, since the entry costs
are relatively low. Again, this market is divided into two segments: the highly
localized independent coffee retail stores, and chain stores. Of the whole,
Chain stores account for 27% of the total revenue. Even Though Cafe coffee
day has a large market share, Independent coffee houses do have their own
claim to profitability, as capital investments required is low. Recently,
Lavazza exited the Indian market by selling Barista Coffee to Carnation
Hospitality. This is because competition is extremely high in the coffee retail
 - 29 -

chain market, with cafe coffee day and Starbucks leading the market (Naik,
2018).

Reputation and established brand loyalties

Some customers have long term relationships with brands. As it is with most
food and beverage sector, brand loyalties really play into the decision
making of the consumer. However, since instant coffee product groups are
generally substitutable, price and non-price competition really factor into the
outcomes regarding sales (Malviya, 2017).
However, in the general coffee segment, availability of a diverse range of
product ensures profitability for the brand. For example, in 2008, Bru had a
cold coffee variant and nestle did not. The summer of 2008 was particularly
hot, and as a result, sales for instant coffee in nestle dominated north, west
and east regions fell, while the sales of Bru had boosted up. This is primarily
because of two reasons: Southern India has strong historical ties to coffee
drinking habits, and promoting Bru instant coffee as something compatible
with cold coffee helped with its sales in the hot summers (Malviya, 2007).
Similarly, on the cafe front, the entry of Starbucks is seen as a threat for
CCD. While Starbucks charges a heavy premium on its coffee, it has an
extremely positive brand image amongst upper middle class, urban Indian
populace (Economic Times, 2016).

Entrant’s access to distribution channels and raw materials

Larger, and more established firms like Nestle, HUL and Tata Coffee has a
definite advantage with respect to access to raw materials and
 - 30 -

consequently, distribution channels due to the fact that they own large
amounts of coffee plantation holdings as well as distribution channels as
opposed to smaller, ‘indie’ vendors like Blue Tokai Roasters, a Delhi based
coffee start-up (Economic Times, 2016).
If the example of nestle is taken, nestle has 8 factories. After processing,
this coffee goes on to several distribution channels like RDC, OFC,
Wholesalers and retailers. Established brands like Nescafe and Bru have a
distinct advantage here as retailers and wholesalers might be unwilling to
experiment with newer brands, which might potentially reduce their profit
margins (Nestle, 2017).

Experience based advantages of incumbents

Due to the presence of some firms over such a long time, they enjoy some
privileges in the market. Some of these privileges include competitive
pricing, in ways that are described above. Some of these privileges include a
loyal customer base and pre-existing distribution networks (Parizat, 2015).

Network externalities

Brands like Nestle have demand side advantages as well as supply side
advantages. Due to the large amount of coffee plant holdings, Nestle has
enough raw materials to not only meet domestic demand as well as export.

Factors of Threat of substitutes

 - 31 -

Threat of substitution

The threat for substitution is very high as there is very little difference, apart
from brand differentiation which affects the preferences of customers in
this price range. The main competitor is bru, which delivers similar quality
coffee at a similar price point.
There is also a threat of indirect substitution from the tea industry. Coffee is
often considered to be a secondary beverage to tea, which over 80% of
Indian Households consume. As a result, the demand for coffee is highly
elastic as opposed to the demand for tea. Therefore, even a small increase
in prices of coffee would drop its demand

Coffee

Tea
Tea

Graph 7,Total Production of tea and Coffee in India, 2001 to 2015, Source:
Statista
 - 32 -

Threat from foreign coffee

The threat from foreign competitors is low as the import duties imposed are
extremely high. For instance, the Price of Davidoff Fine Aroma is Rs. 495 for
100g while the pricing of similar quality Nestle gold is 395 per 100g.
Therefore, even though both belong to the premium coffee category, Nestle
is able to price their product at a lower amount (Perez &Perez, 2018).

Factor affecting supplier power

Nature of firms

For brands like Nestle and Bru, the firm acts as its own supplier because
they own the plantations from which they get coffee .

Supplier concentration
Suppliers of coffee are largely fragmented in India. For instance, 98% of all
land holdings which cultivate coffee are small holdings (less than 10 ha)
while only 2% are large holdings. A large percentage of this crop is meant for
exporting, since India is the world’s sixth largest exporter of coffee (Coffee
Cooperation and Competition, 2017).

Ownership, forward integration and import substitution

The threat of forward integration from supply side is very low. As most land
holdings are largely fragmented, it would be very difficult for them to reach
 - 33 -

economies of scale (Coffee….. Cooperation, 2017) .Moreover, the barriers to

entry are very large in the coffee retail industry. With most of the market
share being dominated by Nestle and Bru, new firms would need
extraordinary amounts of capital to compete with these retail giants
(Thornton, 2015).

Factors affecting buyer power

Concentration of buyer power

Buyers are overwhelmingly urban. More people in South India consume

coffee as compared to other parts of India (Lewin, 2007).
Purchase volume of buyer
Consumers usually purchase coffee in small units as it is meant for
individual consumption.

Substitute products
Coffee can be very easily substituted for tea. Tea holds a very large market
share of the hot beverage market. The threat of substitution is even larger
as tea is cheaper than and coffee and more culturally relevant (Thornton,
2015).

Price elasticity of demand

Since coffee is not the primary source of caffeination in India, demand for
coffee is highly price sensitive. The fact that coffee is a high valued good
also affects the perception and reception to coffee and coffee products.
 - 34 -

Coffee consumption is largely seasonal- it increases during winters and

reduces during summers. This phenomenon is particularly visible in North,
West and East India as opposed to South India, where coffee consumption
is largely habituated.
73% of coffee is consumed in urban areas as opposed to 27% in rural areas
(which are largely consumed in the south).

Threat of backward integration

The threat of backward integration is very low, since coffee goes through a
very complex supply chain process. The coffee supply chain goes through
growing, harvesting, hulling, drying and packing, bulking, blending, roasting
and finally selling it at a retail unit (Thornton, 2015).
The expertise of companies like Nestle and Bru lie in roasting green beans
into an enjoyable consumer product. The step which lies ahead of roasting
is retailing- which includes sale of these products by Super markets, hotels,
cafes etc. It is highly unlikely that Supermarkets or restaurants create
backward linkages and enter roasting (Supply Chain….. Study, 2017).
However, the likelihood of cafes making these backward linkages and
entering the industry is higher. For instance, Blue Tokai coffee is a cafe
which roasts its own beans. Interestingly, Nestle has made a forward
linkage by entering retailing via Nescafe cafes. These are simple coffee
stations which only provide nestle products which are usually low cost.
 - 35 -

PESTEL ANALYSIS
 - 36 -

Political/Legal
• Tariffs
• State oppositionto
Gadgil report
• Political isntability and
Productivity
Technological Environmental
• types of roasts and • Deforestation
pricing • adverse ecological
• brewing and price effects
• Infrared technology in • Kerala floods and
Coffee Production effect on coffee
production
Social
• research onhealth
effects
• cultural consumption of
tea

Economic
• Import tariff and pricing
• Global south vs Global
north

Fig.3 . PESTEL Analysis

 - 37 -

Political/Legal

Due to the social, economic, environmental and ethical consequences of

coffee production and trade, and the rising awareness about the same,
coffee production has become more and more political. Therefore, there is
social as well as legal pressure on the industry to be more ethical with their
trading practices. This also means that profit margins drop.
The relationship between the two countries involved in international trade
largely determines the pricing and demand for coffee. For instance, India
imposes heavy tariffs on imported coffees- and as a result, imported coffees
are very expensive in India.
For example, in June 2018, the US government imposed tariffs on Indian
iron and steel. As a retaliatory measure, the Indian government imposed
tariffs on several goods, and recommended a 10% tariff on coffee,
chocolate and coffee (Suneja, 2018).
The Gadgil committee recommendation had a clause which mentioned that
plantations in high slope regions be converted back into forests. However,
this received political backlash from estate owners and plantation workers
whose livelihoods were dependent on these plantations (Suneja, 2018).
North Africa and Latin America are coffee producing regions. However,
political instability in these regions has increased coffee prices in other
parts of the world. Even though the consumer prices of coffee are
increasing, it is coupled with lowered production levels, thus not making it
profitable for the producers (Pohl, 2017).
For instance, Ecuador, which formerly produced some of the highest quality
coffees in large volumes, had a large price drop due to political instability.
 - 38 -

The global economy is barely recovering from these price drops, which
happened even 10 years ago now (Pohl, 2017).

Economic

Consumption of coffee would be high when personal disposable incomes

are high. Per capita spending power is one of the best indicators of demand
for coffee.
When coffee powder or grounds are imported from countries from higher
exchange rates, they tend to be way more expensive. Davidoff coffee is
imported from Switzerland; hence it is expensive in India, even though it is
affordable in say, Geneva (The Future of Coffee, 2017).
The same happens with coffee chains as well. For instance, while Starbucks
coffee is expensive in the US, its price points are still accessible for most
Americans. In India, however, the price point is only accessible to a very
exclusive social class.
Another interesting facet of the coffee industry is that it is mostly produced
by the global south, while it is consumed by the developed, industrialized
global north. While a very meagre income is earned by the producers in the
developing world, the same goods are sold for up to four times the premium
in industrialized markets.

Social
Consumer attitudes about coffee changes frequently, mostly in tandem with
developments on research on the health effects of caffeine. In more
industrialized markets, there has been a shift from coffee to herbal teas as
 - 39 -

the health effects of the later are an improvement upon that of coffee. The
coffee industry has responded to this by introducing decaffeinated coffee in
India (The Future of Coffee, 2017). The market for certified, sustainable
coffee is growing. Young consumers are more ethically conscious and would
prefer specialty coffee which is organic, fair trade or has other certifications
(Specialty Coffee Facts and Figures, 2018).
In many Asian societies, Indian society included, tea consumption is the
norm, while coffee is considered to be a ‘special’ drink which is only to be
consumed during specific occasions. The drive by Coffee board of India is
geared towards changing these consumption patterns to increase
consumption of coffee (Deodhar &Pandey,2008).
 - 40 -

Technological
The choice of roasting and brewing determines the nature and quality of
coffee. Generally, there are four types of roasts:

Light roasted
Medium • mild coffee, non-
oily surface
•stronger
flavorless oil,
referred to as the
American
Roast,Bittersweet

Dark
• 'European' Roast

Roasts
Fig.5 Types of Roasts

Similarly, there are different brewing techniques as well. They include:

 - 41 -

French Press

Cold Brew

Instant Mix

Single Serve Pods

Standard Drips

Fig.6: Types of Brews

Consequently, the price points of retail coffee will depend largely on the
quality and grade of coffee. Technological improvements in the agricultural
sector have also improved yields. For instance, the usage of infrared
technology has greatly improved coffee yields (Improving
Coffee...technology, 2018).Constant innovation and improvements in the
coffee machine industry will reduce prices and make these machines more
accessible to customers. Since most of these machines use roasted beans,
this would benefit companies like Nestle which sell these beans.

5. Environmental

There are some impediments to good yield in the coffee production industry,
and they are excessive rains, earthquakes, floods, irrational weather cycles,
 - 42 -

climate change etc. Many coffee plantations exist as a result of rampant

deforestation. Since many coffee plantations, especially in South India are
located in Hilly area, they follow the slope model of cultivation (WWF, 2016).
This increases the risk of landslides. According to WWF, coffee producing
countries (37/50) have high deforestation rates (ICO, 2018).
Environmental impact assessment
The recent Kerala rains have had a devastating effect on Coffee Production
all over India. The coffee board is predicting losses of up to 82,000 tons of
production this year. The official estimate for harvest was 350,400 before
the floods, and would be difficult to reach these figures unless there is a
large increase in supply during the winter months. The crop loss was the
most severe in Karnataka (Coffee Board Pegs Losses due to Rains in South
India, 2018).
The Kerala floods wiped out one-fifth of India’s coffee production. Kerala
had extremely high labor productivity- just 7% of people who work in the
industry produced one fifth of coffee production in the country (Coffee
Board Pegs Losses due to Rains in South India, 2018).
However, this might not necessarily affect coffee prices as the supply was
more than demand in the previous few years, which has depressed the
prices at which coffee was bought from plantations. There is a need for
larger scale government interventions to solve a perceived coffee crisis in
these parts. As a result of destruction of livelihoods, many coffee farmers
from Kodagu district of Karnataka now has to move to metro cities in search
of greener pastures.
 - 43 -

SCP Framework
 - 44 -

Structure
• Competitive
Market
• Barriers to entry
and exit
• vertical integration
• Types of firms

SCP

Conduct
• Pricing strategy Performace
• Capacity • Expanding market
investments

Fig.7 SCP Framework

Structure

Competitive Market

The market is extremely concentrated between two players: Nestle (50%)

and HUL (49%). The packaged coffee market, and in particular the instant
coffee market acts almost as a duopoly. There are some other brands like
Davidoff, which is a premium coffee brand (hence costly) and highly
 - 45 -

localized brands like Narasu (Karnataka) which has a market share in some
parts of the economy.
However, the coffee shop industry in India is monopolistic in nature. This is
because the low amount of capital required to enter the industry. While it
might be difficult to compete with chains like Cafe Coffee Day or Starbucks,
many independent coffee shops are successful due to their personalized
approach.

Barriers to Entry and Exit:

One of the major barriers to enter the packaged coffee industry is the large
amount of capital required to enter the industry. A large volume of coffee
beans need to be acquired from farmers, and capital requirements for
roasting are also high. The fiscal pressure of these two factors is quite high
in itself. Adding to that, because the market is already dominated by two
players, Nestle and HUL, the advertising costs to promote the new brand
would be very high. In addition to that, because Nestle and HUL has already
reached economies of scale, they would be able to price their product much
more competitively as opposed to the new entrant.
For the cafe industry, the largest impediment to growth would be real
estate. Real estate in Indian cities is extremely expensive, and the right
location contributes largely to a positive relationship with sales.

Vertical integration
There is possibility for vertical integration, as the supply chain is elaborate
and long. This is particularly an opportunity for companies like Nestle and
HUL, which is currently involved mostly in roasting and is involved in coffee
 - 46 -

production as well. Both the companies have also tried forward integration-
when they launched Nescafe coffee stations and Bru world cafe. While
Nescafe coffee stations were mostly a success, many Bru World Cafe
outlets had to be shut down.
Starbucks, a retailer also roasts and grinds its own coffee, so does cafe
coffee day. This is a successful example of vertical integration.

Type of Firms
The market is dominated by private players.
Economies of scale
As production grows up, the marginal cost per another unit of production goes
down. Therefore, larger firms have a significant advantage when it comes to
offering competitive pricing to consumers.
Costs
Fixed costs for packaged coffee business would involve rent/real estate
prices, electricity prices, salaries, Advertisements and Marketing. Variable
costs for packaged coffee business would involve coffee beans,
depreciation of capital, packaging costs (straws, cups etc.), etc.
Demand Structure
Due to the increasing disposable income with young Indians, the market for
coffee is set to soar in the coming years. An increase in consumption as well
as increased westernization has made the industry very attractive in terms
of profitability.
The recent expansion drive by CCD and Starbucks is indicative of the same.
Differentiated products, meant for different socioeconomic classes have
made the industry more profitable. For instance, Starbucks is being more
and more used by the executive class for having meetings and so. On the
 - 47 -

other hand, CCD has diversified internally and have started two different
strains of establishment, Lounge (which is the premiere strain) and Square (
A specialty coffee destination).
Power of customers
Customers tend to buy individual units; therefore their power to influence
the market is relatively low. A large chunk of customers belong to urban
upper middle class. Only 27% of coffee consumers are from rural India. Of
this, a significantly large portion of consumers are from Southern India,
where coffee consumption is habituated.

Conduct

Pricing strategy
The firms follow comparative pricing. Other than the costs of the inputs,
firms also take into account the pricing strategies of other firms.

Capacity investments
There has been an increase in capital investments which go into the coffee
industry, especially in the instant coffee segment in the past few years. For
instance, Tata coffee, in 2013 invested heavily in Premium instant coffee
business. Tata coffee invested around 300 cores in three years. Capacity
can also be built via Mergers and Acquisitions. Investing in research and
development can also be considered as capital investment (Naik, 2018).

Performance
 - 48 -

The Hot beverages industry has grown from Rs 25,166 crore in 2013 to Rs
41,800 crore in 2017. Therefore, it is to be understood that market is
expanding. Another positive factor which indicate growth in the industry is
the success of Starbucks in India’s urban markets. Adding to this, the
recent fall in real estate prices have made renting property easier for many
coffee shop businesses (India’s Coffee Market is Brewing, 2016).
 - 49 -

SWOT
 - 50 -

Strength Weakness
•Brand value •Questionable ethical practices
•Excellent Promotional Campaign •Quality Control issues in the past
•Large capacity for R&D •Competition with tea
•Growing demand for India's Exports in
western Europe

SWOT

Opportunity Threat
•Unexplored Rural Market •Climate change
•Demographic Shift •Increasing competition from health
beverages

Fig 8: SWOT analysis

Strengths

Brand Value: The Nescafe Brand is well known around the world. It is not
only one of the largest Swiss brands, but it is also a resource rich, financially
sound firm with a value of $17.4 Billion (Nescafe, 2017).
Because it is a large firm, due to economies of scale, Nestle has large
research and development capabilities which cannot be achieved new
entrants, unless they have extraordinary capital behind them. Since Nestle
is the largest coffee brand in the world, their costs of producing each
additional unit of Nescafe is very less, hence their profit margins are large,
since it has attained economies of scale.
Nestle has had an excellent promotional campaign in India, and a degree of
cosmopolitanism is associated with the brand, which is aspirational. Using
celebrities and sportspeople to endorse the brand has increased the
popularity of the brand.
 - 51 -

Nestle sustainability initiative has made the brand popular among younger
consumers. For many young consumers, being ethically conscious and
indulging in sustainable good faith practices is as important as the price
point itself (Nestle, 2017).
Due to the demographic shift in the country, there is also a consequent shift
in the taste and preferences. Currently, over 80% of Indian households
drink tea. Since tea and coffee and direct substitutes, it is imperative to
understand that an increase in market share of tea would directly impact
coffee sales. Due to urbanization and westernization (two factors which has
earlier increased market permeation of coffee), a booming potentially
booming coffee industry would be beneficial for Nestle.
Exports: A growing demand for India’s exports in Western Europe is
beneficial for Nestle.

2. Weakness
There has been severe criticism against Nestlé’s ethical practices. Nestle
has not had particularly good track record in the past with sustainable and
ethical practices; it’s list bad faith practices include contamination of
natural resources, high usage of water in water scarce regions, forced child
labour and many more. A controversial statement by the then Nestle CEO
suggested that water is not a human right, when they were questioned
about their high value consumption of water in Africa.

There have been instances of voluntary recalling of specialty soluble coffee

products from Nestle due to contamination. This has affected nestles brand
as a quality producer. There has been an increasing demand side interest in
health beverages like coconut water and fruit juices which can act as
 - 52 -

substitutes for Nescafe. Due to the very crowded beverages market,

competition is very high in the industry. Since Tea is the primary hot
beverage of choice for Indians, it might be difficult to get Indians habituated
to the taste and feel of instant coffee.

3. Opportunity
Due to the demographic shift in the country, there is also a consequent shift
in the taste and preferences. Currently, over 80% of Indian households
drink tea. Since tea and coffee and direct substitutes, it is imperative to
understand that an increase in market share of tea would directly impact
coffee sales. Due to urbanization and westernization (two factors which has
earlier increased market permeation of coffee), a booming potentially
booming coffee industry would be beneficial for Nestle.
Unexplored rural market: Coffee does not enjoy market penetration in rural
India. Introducing low price alternatives can be used to increase market
share in these parts. Large numbers of young people are interested in
specialty coffee- if Nescafe can branch out into flavoured coffee as well as
certified coffee types like Gourmet coffee. Since this is a very young and
niche market, Nestle can capture the market attention at this moment to
sell these products at a premium.

4. Threat
Due to Climate change, the price and quality of coffee beans could be
volatile in the coming years. Both positive and negative price shocks for
coffee beans can unfavourably disrupt the supply chain. This would affect
 - 53 -

Nescafe especially badly since instant is at the top of a very high value
supply chain.
Increasing competition from health beverages and other beverages is a
threat for the coffee industry as these goods can be easily substituted.,
Water is extremely necessary for roasting of coffee beans. Water scarcity in
many parts of the country where the roasting plants are located raises
several questions about the profitability and sustainability of the business.
 - 54 -

Key Success Factors

 - 55 -

•Quality •Advertising
•Uniqueness and
Promotional
Campaigns

Product Marketing

Mergers
Localization and
Acquisition
•Globalised •Profit
Product for Maximisation
Local
Audience

Fig 9: KSF Analysis

Product: Quality and uniqueness of the product can be the biggest
decider of success. Proprietary blends, parent company, attractive
packaging, and attractive price points can determine the success of a
particular product in the coffee industry.
Marketing: Since the price elasticity of demand for coffee is high, it is
clear that coffee is not an essential product. Therefore, marketing and
branding plays a huge role in creating a customer base. Nestle and Bru
has had very successful advertising and promotional campaign with
celebrities endorsing their product. This has proven to be a successful
strategy.
Localized Products: Amidst global expansion, Nestle focuses on
creating products and strategies which are customized for the local
audience.
 - 56 -

Mergers and Acquisition: Even Though instant coffee is a duopoly

market, there are other segments of the coffee industry in which firms
would do better by consolidation of the market. The acquisition of blue
bottle coffee by Nestle is a successful example of this, while the Barista-
Lavazza was not successful, and resulted in Lavazza exiting the market.
 - 57 -

Habituation of Coffee
Consumption India- Cultural
factors
According to ICO, around 150M cups of coffee was consumed worldwide in
2014/2015. However, the west accounts for a large part of this
consumption. This is why India, despite having a very large population and
staggering consumer demand has very little domestic consumption
relatively. Cultural consumer behavioural differences can be attributed to
these differences (ICO, 2014).
Products cannot be viewed completely on their material characteristics
alone. There are certain implicit associations which the consumer makes
with these products which strongly influence their purchasing decisions. For
instance, in reference to a study conducted regarding consumer behavior
with respect to coffee consumption in China and Sweden, Collectivists
cultures like that of India tend to have more inertia when it comes to
switching over from tea, which is a traditionally consumed beverage, to
coffee, which has attached has connotations regarding westernization and
urbanization. Tea in India is much more than a source of caffeination, but
rather is very rooted in what is associated with traditional Indian culture.
The famous tagline adopted by Chai Point, “India runs on Chai” illustrated
India’s relationship with the much beloved drink.
 - 58 -

Social group influences also influence consumer choice with respect to

coffee and tea. Since tea is more widely consumed, it is more likely to be
available at most social functions. Therefore lack of availability on its own
can change consumer inclination regarding beverage preferences.
Pricing plays an important role with respect to consumer decision making as
well. For instance, “A cup of 354 millilitres of Latte coffee costs 27 RMB
(about 33.75KR) in China as compared to only 19.98RMB (about
24.975KR) in Chicago, 14.6RMB (about 18.25KR) in Mumbai and
24.25RMB (about 30.3125KR) in London” (Daily, 2013). Even Though the
price of a latte in Mumbai is lesser than that in say, China or London, the
per capita income or purchasing power of a person in Mumbai is also
significantly lesser than that of a person in the other listed cities. Adding to
this, if none factors in the point that over 80% of coffee produced in India is
exported, the extravagant pricing points of the cafe retail markets in India
makes even less sense. A large part of the reason why coffee is less
preferred to tea is due to their unequal price points- while a 500g Kannan
Devan price sells for 225 rs in the Indian market, Nescafe classic, which is a
comparable beverage in terms of utility sells for 950 rs for 500g, around
four times the price for the same amount of good.
1. Purchase motivation: 80% of coffee consumption is accounted by
urban India. This purchase motivation can be further divided into
functional motivation, experiential motivation and social motivation.
2. Functional motivation: Functionally, tea and coffee serve the same
purpose- to caffeinate. In those terms, coffee has higher amounts of
caffeine in it as opposed to tea, even though tea is still largely
preferred by the audience.
 - 59 -

3. Social Motivation: ‘Chai pe charcha’ is a cultural phenomenon in

India-tea is often associated socialization as well as heated
discussions about society, politics, culture and many more. However,
these are associations which can be broken. For instance, many
urban young Indians have replaced tea with coffee in this ritual. This
can be witnessed by the overflow of corporate culture and
subsequent meetings in urban centers at cafes like Starbucks, Le
Pain Quotidian etc.
4. Experiential motivation: This is a driving factor of the Indian coffee
industry. Many young urban Indies, with an excess of disposable
income are turning towards specialty coffee options like fair trade,
organic, flavored varieties, single origin coffee etc..
A product should not only satiate the material needs of the customer, but
rather the social and psychological needs as well. Several factors which are
derived from the socioeconomic conditions of the customer, like access to
media channels, income, caste-class backgrounds, ethnicity, linguistic
preferences, and strength of regional associations affect the local
perception of a product among the consumers as a social group.
 - 60 -

Fig 10: Motivation to buy Coffee

 - 61 -

Rural sector opportunities

The FMCG industry is fast going in the rural sector, and is aimed to cross
$100B USD by 2025 (Thornton, 2015).For instance, HUL earns 45% of its
overall sales from rural India. There has been a recent surge in productivity
as well as purchasing power for India’s rural population, due to
improvements in agricultural technology as well as outcomes

Challenges to marketing coffee products in rural areas:

Poor distribution • Transfer responsiblity

to Clearing and
channels Forwarding agent

Highly elastic, • Increase accesibility

and availability
price sensitive • Better priced
market products

Lack of • Extensive awareness

awareness about and marketing
the Product campaign

Fig 11: Challenges to Marketing Coffee in Rural Areas

There is a question of whether or not the opportunity cost of marketing in
rural India is worth the rate of return. Due to poor distribution channels and
non-equipped infrastructural development. This is where capital restrictions
play a large part. For instance, larger companies do not have the same
capital restrictions small firms do. Therefore, large amounts of capital
expenditure are required for non-price competition.
 - 62 -

There is also the challenge of adapting the product to the market, which is
highly elastic and price sensitive in the case of coffee. Large number of rural
Indians lives below the poverty line. To include a non-elastic product like
coffee in their consumption basket would be very difficult.
Distribution problems are many when it comes to making the product
available in Rural India. For instance, only 50% of rural India is connected by
roads. Getting the product across into the small convenience stores in these
parts can be costly and time consuming. The availability of ‘knock offs’
continue to be a main problem for established brands as spurious versions
of such brands, which have a competitive advantage with respect to pricing
due to reduced quality standards.
Transferring responsibility of logistics to Clearing and Forwarding agents
who specialize in the Indian rural market as a solution to inefficient
distribution channel. Point of purchase marketing, along with TV, radio and
cinema promotions can be used to further the case for the product. The
case for radio arises from the poor electricity supply in rural areas, due to
which tab broadcasting is often interrupted (Indian Coffee….potential,
2016)
 - 63 -

Recommendations/ Future Prospects

Incresing awareness about coffee

Improving distribution challenges

Availability of knock offs

Ecological Problems

Targetting young urban residents

Improving Infrastructural developement

Fig 12: Recommendations and Future Prospects

Coffee companies are making profits currently, but an extremely large part
of the hot beverages market is dominated by tea. Indians prefer drinking
tea, for historical and financial reasons. Tea is cheaper, more accessible
and is a cultural product in itself. For profits to soar for coffee producing
firms, consumption base for the same has to be expanded. This can be
done by increasing rural marketing efforts and increasing production and
marketing for specialty coffee.
Low literacy rates act as an impediment to marketing coffee products, which
are often considered ‘highbrow’ in this part of the world. Almost 45% of rural
Indians are illiterate, which means marketing coffee as a good which is to
be included in the consumption market is going to be a marketing
challenge. An education campaign is required for most of country- if coffee
 - 64 -

is to be looked at as a substitute for tea; it is a poor substitute because of

its higher prices. Coffee consumption is still extremely elastic in India, as
opposed to how it is in the west.
Arguably, rural India has more socioeconomic diversity as compared to
urban India, which makes it a harder market to capture. Catering to large
amounts of socioeconomic diversity is hard enough from a marketing
perspective. A lack of cultural congruence also increases advertising and
branding costs for the firms.
There is also a question of whether or not the opportunity cost of marketing
in rural India is worth the rate of return. Due to poor distribution channels
and non-equipped infrastructural development. This is where capital
restrictions play a large part. For instance, larger companies do not have the
same capital restrictions small firms do. Therefore, large amounts of capital
expenditure are required for non-price competition.
There is also the challenge of adapting the product to the market, which is
highly elastic and price sensitive in the case of coffee. Large number of rural
Indians lives below the poverty line. To include a non-elastic product like
coffee in their consumption basket would be very difficult.
Distribution problems are many when it comes to making the product
available in Rural India. For instance, only 50% of rural India is connected by
roads. Getting the product across into the small convenience stores in these
parts can be costly and time consuming.
The availability of ‘knock offs’ continue to be a main problem for established
brands as spurious versions of such brands, which have a competitive
advantage with respect to pricing due to reduced quality standards. The one
singular way to distinguish between products of different quality standards
is by engaging in non-price competition regarding the same.
 - 65 -

The ecological problems caused by monoculture plantations like coffee are

many. With the increasing introspection towards environmental efforts, the
political and social sentiments against coffee plantations are likely to be
larger. In addition, there is also a larger issue of sustainability- be it
environmental or otherwise.
The exploitation of workers in the global south also plays a role in
delegitimizing the sustainability of coffee- the fact that coffee is sold at
prices four times more than the farmer who produced the same in the west
makes it an unethical industry. This is where fair-trade specialty coffees gain
relevance. This is particularly popular among young, urban residents with
plenty of disposable income.
 - 66 -

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