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The European market and industry.

The European market and industry

The following is a brief extract from a recent major study of leading European retail coffee markets. The survey has been prepared and published by E.R.C. Statistics International Ltd., of London. The publication provides in-depth analysis and coverage of the retail markets in West Germany, Italy, Spain Belgium, the United Kingdom, France and the Netherlands.

Belgium, France, the U.K., the Netherlands, Italy, West Germany and Spain: these seven coffee markets, covered in a recent E.R.C. study, represent the bulk of coffee trading and consumption in Western Europe and nearly all are fairly mature markets, with most countries demonstrating high per capita consumption levels. Growth in retail volumes has therefore not been dramatic in these markets overall, although the total volume of coffee consumed in-home increased to well over 900,000 tons in final product equivalent in 1989, up a respectable 10.3% over 1984 and comparing well to many other mature food and drink markets.

Roast coffee products clearly dominate the European coffee arena, accounting for around 90% of the total volume, although it should be remembered that the figures for soluble coffee consumption are usually given in final product equivalent and will therefore account for a considerably higher proportion of cuppage than is apparent from the figures. However, even if soluble coffee in-home consumption is converted into roast coffee equivalent, the sector still accounts for only 19.4% of the total; moreover, the proportion of soluble volume sales to the total has been gradually declining throughout the 80's and the 1989 market share is down from 21.2% in 1984.

Two important riders should be added to this analysis of the development of the roast and soluble sectors in relation to one other; first, it will be noted that ground coffee has only been widely available in the expanding Spanish market since 1983 and has since been an area of rapid growth; and second, consumption of soluble coffee mixtures has increased significantly in several markets (most notably France), with the figures for pure soluble coffee obscuring growth in the solubles market overall.

In terms of volume growth over the 1984 - 1989 period, it is clear that the soluble coffee sector has remained static overall, while the roast coffee sector has progressed by 10.4% and is expected to show further growth in 1990.

The total value of the seven retail markets, expressed in U.S. dollars has increased by a considerable margin over the 1984-1989 period, although here too the figures require careful interpretation; since the base year is 1984, one would expect to find massive increases in retail value in the years immediately following this as a result of the supply crisis of 1985/6, and this is indeed what one finds. The spectacular increase in green coffee prices in 1985 and 1986 should therefore be taken into account when considering the value trends in the market. Subsequent years therefore show either small increases in market value or a decline, with the sudden fall in roast coffee retail value in 1989 owing to the collapse of the International Coffee Agreement, which as we all know, was initially designed to keep prices stable and thus ensure a steady income to the ailing economies of the producing countries.

The total value of the markets included in the study is estimated at US$8.84 billion in 1989, up 65.4% from US$5.35 billion in 1981. It is clear that the roast coffee sector has increased in value at a slower pace than the soluble sector over the period under review, accounting for just under three-quarters of total retail value in 1989, down from 76.2% in 1984. Growth of 76.0% is calculated for the soluble coffee sector over the 1984-1985 period, this superior value increase resulting in a value market share of 25.4%, from 23.8% in 1984.

The Industry

These days, in these areas of the European coffee market no-one but no-one, can afford to be complacent, not even the largest of multi-nationals. Is it just too simplistic to assume that the big roasters will get bigger and occupy a larger area of the market stage while the smaller are pushed out to the wings and beyond? Although economies of scale, the benefits of massive buying power, super-efficient production, financial strength allowing the exploration of all marketing avenues and--not least--longstanding experience in a wide variety of markets all add up to a formidable force, recent history has shown that there is no reason to suppose that David cannot fight with Goliath and, under the right circumstances, win. How has this been demostrated in recent years? Well, one only has to turn to the Italians to see just how much can be achieved if there is the will to invest, the means and experience to implement effective marketing and distribution practices and the vision to expand business at the international level.

Admittedly, the Italians provide the outstanding example of triumph in the face of adversity: perhaps it is their deeply-engrained--and justifiable--spirit of national pride which has spurred them into offensive action--the best kind of defense and possibly the only effective kind. Thus, the Italian roasters provide a bright foil to the plight of other national coffee roasting industries: the U.K. has no significant national roaster to its name, while in Spain it has taken only a few years for the Swiss, Dutch and American corporations to stamp out competition from the national roasters, in spite of the not inconsiderable opportunities afforded by the liberalization of the market in 1983.

Elsewhere, which here means other Northern European markets, a familiar pattern has established itself, with a small number of major suppliers dominating retail sales, faced by a competition much reduced in stature and comprised of smaller suppliers and the retailers. Of these, it is the retailers which are showing the brightest prospects for further growth and the reasons for this are not only to do with the retailers' "traditional" strengths (buying power, broad inter-industry relationships, wide experience in product sourcing, low overall marketing costs) but also and increasingly a result of more determined, even aggressive, marketing policies.

The major national retailers, which are also becoming more international in their outlook, have already commenced the branding of their coffee--and other food and drink--products; the question now for all coffee roasters both large and small must surely be: when will they start manufacturing volume and, more importantly, exporting volume? One major retail chain operating a large roasting plant which comes immediately to mind is A. Heijn in the Netherlands. The manufacturing subsidiary of the Ahold parent company, Marvelo B.V., supplies large quantities of roast and soluble coffee to the Dutch market, including the HoReCa and institutional sectors, with a small amount of one product going to the U.S. under the Perla Mild name.

Another example of a retailer which is directly involved in the roasting business is the French retailing group Continent, which maintains a roastery in Marseilles. Although this plant does not yet export significant volumes of coffee, the expansion of the Continent retailing business into other Southern European markets must mean that this retailer will sooner or later consider the possibility of supplying its new external stores with coffee from its own roastery.

Apart from the retailers and the established major volume roasters then, of what is the remainder of the European roasting business now comprised? In Italy there is a thriving myriad of family-owned companies supplying the parts which the multinationals cannot or do not want to reach; in Spain a similar situation exists but with most of the considerably smaller number of small firms excluded from the retail arena; in Benelux there are but three branded companies of import since the demise of Van Nelle (Rombouts, Drie Mollen, Fort); in West Germany there are now but four independent branded roasters of which only two are in the top four as far as retail market share goes; in France "only" Leporq remains independent, while in the U.K. industrial density approaches that of the Netherlands, with the only competition for the "big two" coming from Brooke Bond.

It has recently been argued--by the director of a prominent Hanseatic coffee trading group--that by the year 2000 there will be 18% or less of each of these retail markets available for the coffee products of the smaller roasters and the retailers, with a handful of large branded roasters dominating the retail scene and allowing little room for others to maneuver. Moreover, it is argued that consumer's choice will not be unduly restricted by this high degree of industrial concentration, since there will always be market niches served by the entrepreneurial small coffee firm. Having taken a dispassionate look at recent trends in the European coffee industry, I would disagree with this analysis on at least two points.

First, the hypothesis that there is a tangible limit or "ceiling" to the market share obtainable by the larger roasters and that this is likely to fall in the range 85%-99% for the top five suppliers, is clearly undermined by the current--not the future--situation regarding control of the major European retail markets. For example, in the Netherlands concentration is already well on the road to the envisaged limit and although it may be true to say that the top five roasters represent 99% of the market, it is more enlightening when one is aware that one company accounts for over three-quarters of the total, with a share which is growing if anything; likewise, in the Spanish market, three multinationals account for over two-thirds of retail sales now; in Belgium one branded player and the retailers collectively account for nearly 90% of the market; in the U.K. only two firms account for around 80% of retail sales value and if the major retail chains (Tesco, Sainsbury et al) are included this rises to over 90%; and in France nearly 60% of the market is controlled by two multinationals, rising to 76% if the retailers are included and leaving less than a quarter of retail volume to the independent branded suppliers. Thus, Italy appears to be the only exception to the general rule, with a large number of independent concerns continuing to supply the national market as well as local bar and retail markets.

The second hypothesis, that consumer choice will not be adversely affected by the reduction in the number of roasters operating, is again clearly misguided since industrial concentration must inevitably lead to a smaller number of more important brands. This has clearly occurred in national markets; in spite of claims made that there is adequate choice in the U.K. coffee market, for example, with "100 brands" on offer, the consumer will be hard pressed to find more than a dozen of either soluble or roast coffee names on the shelves of even the largest of food stores. It makes good marketing and financial sense to concentrate marketing resources on key brands, especially since competition has never been more aggressive, maturity means dynamic growth in specific market segments, and even niche areas which were once the preserve of the specialist supplier are now considered fair game for the big companies (Douwe Egberts' Cafinesse furnishes a recent example). So, the multinationals are not likely to

overlook any area of the market and will be involved in every sector and subsector; witness the "Italian" coffee currently marketed in various places by a certain Swiss company which has even had the nerve to include the Italian flag on the pack front--there must be some very angry Italian coffee peopel out there.

Finally, a word or two of optimism--albeit tinged with skepticism. The opening up of the coffee markets of Eastern Europe will inevitably provide a sponge to soak up some of the world coffee surplus and ensure that there is no return to the despised two-tier supply system. The effective enlargement of the European operating areas of the multinational corporations will mean that their resources are spread more thinly, at least initially, allowing the medium-size and smaller roasters time to develop strategies for expansion--and hence survival.

However, it remains to e seen what is to become of the Eastern European roasting industries if liberalization proceeds at the current pace; this writer for one can envisage control of the inefficient state-run roasteries eventually transferring to the major Western conglomerates with very little resistance. After all, the people will need jobs, their countries will need a major inflow of Western capital in order to invest in the future of all industries and they will need to export in order to earn foreign currency and stand on their own feet in the world trading arena (the parallel of Japanese investment in a country as well-developed and "affluent" as the U.K. springs immediately to mind).

Thus, the next 20 years are likely to see some far-reaching changes in the European coffee world and not only in terms of the structure of the markets but also the industry which supplies to them. In the last 20 years the shape of this sector in terms of control of market share has changed radically, although the difference now is that there is almost no significant branded European coffee-roasting interest left to acquire which does not hold the potential for organic growth and continued commercial viability on its own.

In conclusion, although further significant industrial concentration is therefore unlikely, especially since the acquisition of Jacobs Suchard by Philip Morris has created a new European coffee superpower, the ball is now clearly in the court of the larger independent companies, which must either expand for eventual prosperity or remain entrenched in national markets and prepare for eventual capitulation. The Italians have demonstrated the potential. It is up to the others to prove that they too can sell coffee in a big way.
COPYRIGHT 1991 Lockwood Trade Journal Co., Inc.
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Copyright 1991 Gale, Cengage Learning. All rights reserved.

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Title Annotation:coffee
Publication:Tea & Coffee Trade Journal
Date:Jan 1, 1991
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