Coffee retailers may brew better margins on beans surplus

Singapore

CONSUMERS can't tear themselves away from that cup of joe for its caffeine kick - be it from their "home offices" or at cafes that may now have opened up with lockdown measures easing here and around the world.

This relatively inelastic demand for coffee, combined with the expected over-supply of coffee beans, may brew a stronger margin for coffee retailers and processors.

This comes as the prices of beans have softened by 17.3 per cent since the start of the year.

To be sure, coffee prices have been volatile this year, going from as low as US$95.60 per pound in June to as high as US$134 per pound in September. Coffee prices have already "come off their lows" as the global economy shows signs of recovering, said Victor Mah, president of the Asean Coffee Federation.

But analysts at Fitch Solutions pointed to an increasing surplus of coffee beans in the market. The current surplus of six million bags for 2019/20 is set to double to 12 million bags in 2020/21.

Beyond 2021, they are expecting the global market to post an average surplus of eight million bags, which will cause prices to "remain broadly around spot levels but weaken from previous annual averages".

These lower prices are beneficial for processors and retailers, especially if demand from end-users is little changed. At Singapore-listed Food Empire Holdings, chief executive officer Sudeep Nair told The Business Times that some of the company's products, such as its three-in-one coffee mix, are now able to enjoy higher margins. "Most of our (coffee) products use robusta beans, and these prices have become lower in the last few years," he said.

Food Empire sells instant coffee, frozen foods and snacks, mostly to grocery stores in Eastern Europe and the Middle East, and has continued to report relatively robust sales.

For the first half of the year ended June, Food Empire saw revenue dip just 4 per cent to US$132.9 million on the back of declines in contributions from its Russia, South Asia and other markets.

These declines, the group said, were due in part to disruptions that were brought about by the pandemic. The group said in its second-half results that its main focus had been to "optimise sales and rationalise sales-related expenses".

"Promotions during the Covid-19 lockdown period may not be effective due to lower traffic at retail outlets and other restrictions."

Consequently, earnings for the period inched up 1.1 per cent to US$13.4 million on tighter cost controls. "Packaged products like ours have been less impacted in the pandemic compared to retail outlets," said Mr Nair.

Agri-food giant Olam International reported similarly consistent demand patterns from end-consumers.

Vivek Verma, CEO of Olam Coffee, said there has since been a "positive demand uptick in retail and online sales for in-home consumption".

This has "largely offset the drop in out-of-home consumption", he said.

"The current consensus is that coffee demand will see only a small decline for the year," he added

Olam Coffee hopes to enlarge its market share amid the pandemic.

"Coffee buyers - from specialty coffee houses to roasters, brands and retailers - are likely to depend more on expert supply chain originators... (with) sound financial strength," Mr Verma said.

Food Empire, meanwhile, is looking to diversify its customer base and product lines. Besides instant coffee and coffee mixes, Mr Nair said the company is looking to get into the roast and ground market segments as well as freeze-dried instant coffee products in a bid to "catch possibly all the trends and widen the company's consumer base".

"The aim is to have offerings for everything and to work out strategies in all segments, hopefully by the end of next year," he added.

Food Empire will also expand from Vietnam, where it is a "sizeable player", to countries such as Thailand and the Philippines once pandemic pressures are lifted.

For companies that thrive on low coffee prices, the coming year may be a good one for expansion.

Fitch recently lowered its coffee price forecasts through 2024, anticipating prices to average roughly flat year-on-year in 2020 and "broadly lower" thereafter.

Rabobank analyst Carlos Mera echoed concerns about a "clear oversupply" in the market at the moment. He is forecasting a "record crop production" from Brazil of 67.9 million bags for 2020/21.

The trajectories of Robusta and Arabica coffee, however, could diverge.

Rabobank's Mr Mera, for one, has a more bullish outlook for Robusta coffee, versus a more neutral one for Arabica. The market share of Robusta, he said, is increasing as the demand for home consumption segments such as soluble coffee grows.

"The pandemic clearly favours Robusta-heavy blends, and we are likely to still see demand growth moving forward especially in regions like Asia," he added.

The Arabica variant, however, tends to be associated with premium coffee brands, which could face some demand headwinds.

Christoph Saegner, senior economist at the International Coffee Organization, said rising unemployment and lower household incomes could make consumers "more price sensitive". This could impact sellers of speciality coffee and certified sustainable coffees, he said.

Still, he said demand for coffee "tends to be relatively inelastic".

Some of the local coffee retailers have certainly found this to be the case. Ingrid Leboeuf, operations manager at Bacha Coffee, said she has seen a 30 per cent increase in purchases of coffee for home preparation and gifting.

And Dutch Colony Coffee, which has four outlets in Singapore, said its online store saw "unprecedented sales" during the "circuit breaker".