Heating Up: A Guide to India’s Coffee Industry
By Samuel Wrest
India’s coffee industry is predicted to experience a period of growth. The country’s coffee exports are estimated to rise to approximately 5.02 million bags for the current marketing year; a comparative increase of 400,000 bags over the previous year. Moreover, the price of Robusta – one of its most important varieties of coffee – is expected to rise by 94 percent over last year and sell for US 196 cents per Ib.
While many would not associate it with India, coffee has been one of the country’s leading export sectors for a number of years. With further growth forecast and with a domestic consumer market that is thought to hold huge untapped potential, in this article we take a look at the current and future outlook of India’s coffee industry.
A Brief History of Coffee in India
India’s coffee industry can trace its roots back to the 18th century, when British entrepreneurs turned forests in South India into commercial coffee plantations. The southern states, such as Karnataka and Kerala, have subsequently grown to become both the most dominant coffee producers in India and its most popular consumer base, accounting for approximately 75% of coffee consumed in the country. However, the North East and other parts of the country are also increasingly beginning to produce their own coffee beans.
Robusta and Arabica are by far the most commonly produced varieties of coffee in India, with the former making up 60 percent of the country’s total production output and the latter 40 percent. India is widely reputed to be one of the best places in the world to grow coffee in the shade, and the majority of Arabica – a mild blend of coffee – is grown this way in high altitude areas. Robusta, a stronger blend of coffee, is better suited to warmer climates and is grown at temperatures of between 200°C and 300°C.
A Strong Export Sector
Production of coffee has been growing at an exponential rate in India, with export volumes averaging between 200,000 and 340,000 tonnes. As of the 2009-2010 fiscal year, over five million Indians derived their income from the industry, and from October 2013 to September 2014 India exported US $776.69 million worth of coffee.
Coffee is primarily an export-driven commodity in India, with around 70 percent of what it produces exported to various parts of the world. The country is currently the world’s sixth biggest exporter of coffee after Brazil, Vietnam, Colombia, Indonesia and Ethiopia. Italy, Russia and Germany make up the bulk of India’s export markets, with mostly European countries accounting for the remainder.
Here, we break down the main importers of India’s Robusta and Arabica coffee:
The Indian Consumer Market
The coffee retail business has struggled to make its mark in India. A number of big coffee chains have maintained a presence in the country since the turn of the century, but the vast majority has failed to make a profit and many have been operating at a loss. India’s economic slowdown during the financial crisis and the perception of coffee as a luxury item are commonly identified as contributing factors to its unpopularity, but a more obvious reason exists. Quite simply, India is not traditionally a nation of coffee drinkers.
That being said, the future of India’s coffee retail market is not without hope. Coffee is far more popular with India’s younger generations, and the country is now poised to reap the benefits of its demographic dividend. 65 percent of its population is aged between 15-65 and 29 percent below the age of 15.
Perhaps for this reason, foreign investment in India’s coffee retail sector has increased in recent years. Industry giant Starbucks has been prolific in the country, opening new stores in Delhi, Bangalore and Pune in a joint venture with Indian firm Tata Global Beverages in the last couple of years. Speaking in an interview on the eve of the stores’ opening, John Culver, president of Starbucks in Asia, explained that it was the potential for market growth that had persuaded the chain to expand in India: “We are going to move as fast as we possibly can to take advantage of the opportunity that exists in India,” he said. “It’s an economy that is moving very quickly, and the consumer is evolving very quickly.”
Prospects for Foreign Investment
When foreign entities directly invest in India, their investment will fall within one of two foreign direct investment (FDI) routes, which will determine the amount they are able to invest in the sector in question:
Government Route: For investment in business sectors requiring prior approval from the Foreign Investment Promotion Board (FIPB).
Automatic Route: For investment in business sectors that do not require prior approval from the government.
100% FDI is currently allowed in India’s coffee industry through the automatic route. Combined with India’s low-labor costs, the constant expansion of the industry’s production base, and the rising market value of what it produces, the country’s export sector is undoubtedly an attractive one for foreign investment.
Investors have far more reason to be dubious about India’s coffee retail industry. Whilst the sector does undoubtedly have market growth potential, profits will be limited and retailers are still likely to initially run at a loss. The retail industry is therefore better suited for firms that are able to enter the market with a long-term business strategy in mind, at least for the time being.
Asia Briefing Ltd. is a subsidiary of Dezan Shira & Associates. Dezan Shira is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in China, Hong Kong, India, Vietnam, Singapore and the rest of ASEAN. For further information, please email firstname.lastname@example.org or visit www.dezshira.com.
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