Today’s post is about Coffee.
Allow me to take you through the journey of how the coffee beans travel from Columbia to your cup in Starbucks. While all my articles end with an appeal to buy me a coffee, let’s re-invent the wheel today and make you buy some good coffee too.
Clearly, as a part of the WFH experience, people from all across the globe are missing their cup of java.
Why write about coffee today?
Well, if you have been even slightly aware of what has been going around in the world, man-made climate change is unfolding. As a result of this, global temperatures have been on the rise.
Most of the coffee beans in the planet are of the ‘wild’ variety. The two most popular variants used are Robusta and Arabica.
While Robusta beans are a little bitter, the Arabica is more popular and regarded as the superior bean. The use-case for Robusta becomes espressos and Instant Coffee whereas Arabica, the better variant finds it way into high – grade speciality coffee – think Starbucks, Blue Tokai and other niche cafes.
Something that tastes so good, makes you feel elated should not come that easy, should it?
The Arabica variety has strict growing parameters –
- Temperatures between 18 to 21 degree Celsius
- Adequate Rainfall followed by three months of dry season
These climatic conditions are specifically found between 25 degrees North and 30 degrees south of the equator.
As a result, Columbia becomes the most ideal place to grow the crop followed by Brazil, Vietnam and certain part of western India (think the hilly flanks in South – western India).
Now, as a result of climate change, growing Arabica is getting tougher day by day. On top of that ~85% of the crop is still grown by small farmers who cannot afford to upgrade their farming practice to combat climate change. This would mean –
- Putting up Shade Trees to maintain the ideal temperature
- Consolidate land holdings and go higher up the altitude
While we have seen protests happening in Columbia in earlier days with farmers asking for subsidy to continue sustaining incomes, the problem still needs to be fixed.
Well, it’s not just coffee.
Almost a year back, we heard a similar story around the latex supply chain (sourced in Malaysia) being in trouble and a 2012 Bloomberg report once stated that we are going to run out of Cocoa by the next year.
Coming back to Coffee.
Let’s take a look at the Coffee value chain.
While this image gives a great perspective, let me break it down for you.
In the Indian context, the majority consumption that occurs throughout the country is Instant Coffee (think Nestle and Bru). While the skew between Roasted & Grounded (R&G) coffee is higher (~90%) in South Indian states, North India prefers consuming ‘pheta hua coffee’ (We recently saw Sunbean from ITC Limited launch this variant) or simply put, Instant Coffee.
Instant Coffee is made by mixing coffee powder with chicory which makes it instantly soluble and easy to make.
Brewing your own coffee is still a trend that is catching amongst people. Coffee Connoisseurs (including yours truly) have recently started investing in good coffee equipment to make the most out of their cup of java. Majority of speciality coffee is still brewed through espresso machines at cafes.
Going back to the cafes
To get a brief idea of the pricing structure, here’s a brief overview of the pie. Look at these charts on a scale of 100.
To put these charts into context, a 250 rupees cup of Frappuccino at Starbucks is going to have 10 rupees worth of coffee (at wholesale prices). Out of these 10 rupees, 1 rupee goes to the grower.
So the coffee bean from 1 at the farm goes all the way up to 250 when it comes in your hand.
Let’s take a short coffee break here to take all of this in.
While you’re at it, here’s the distinction between Espresso, Cappuccino and a Latte.
So what have we learnt till now?
- Coffee growers are the least paid in the value chain and the future is under threat
- In the farm to bean space, the roaster has the biggest pie in terms of cost and profit
- The retailer has overheads and staff cost as the biggest cost items in the cup
The India Story – Retail to the Bean
India has seen a mix of multiple coffee chains come up and close but the only chain that has managed to survive and reasonably do well is Starbucks (Thanks to their long term partnership with the Tatas).
While Starbucks does not comment on numbers, it’s run rate has been promising. With CCD, Costa Coffee, The Coffee Bean & Tea Leaf almost having limited to nil existence, it is well poised to capitalize on the opportunity. Presently, they have close to 187 stores in 11 cities.
As early as last year, Starbucks brought in Navin Guraney from Georgia to head the India operations.
Formed as a JV with the Tatas, the Company has been replicating multiple strategies from it’s global playbook in India.
For Starbucks, it is all about selling an experience. The strategy that the company took globally was to be ‘The Third Place’ in your life.
According to them, you have a home, you have an office – let Starbucks be the third place in your life. A place where you can catch up with an old friend, read a book or just have good crafty coffee.
Another strategy that Starbucks is notoriously popular for is opening a lot of stores close to each other in densely populated places (something which CureFit replicated too when they started in Bengaluru in India – more on that here). As a result, it becomes really important to work with good real estate partners. As we noticed above, rentals and staff costs are a major chunk of the cost structure.
Coming closer home to the home-grown Indian player – Blue Tokai Coffee Roasters.
While most companies focus on integrating backwards, BT has integrated forwards. Initially starting off as a B2B player primarily engaged in roasting coffee, (they presently have three roasteries in the country) they integrated forward to open cafes.
While real estate costs are exorbitantly high in the country, and not being backed or partnered with someone like the Tatas with deep pockets, even BT took a leaf out of the Starbucks playbook.
Blue Tokai has partnered with boutiques and bookstores and managed to open small niche outlets across the country. They have not been aggressive or overambitious and presently have around 26 cafes. While commercial chains do not pay their Baristas enough (except Starbucks), BT has managed to retain a few of the best Baristas available in order to bring the whole gourmet café experience to its users.
While Covid 19 has kept the outlets shut, we have seen some innovations taking place. While Starbucks recently opened a drive through outlet, Blue Tokai has made a neat speciality brew available in easy to use home packs. (I tried their assorted blends, zeroed in on the Vienna Roast.)
The Bean Guys
The two firms from the listed space are CCL Products and Tata Coffee.
Let’s look at a quick comparison between the two. All figures below are in INR Crores.
Clearly, CCL Products has been an outlier in the space. While both of them are not comparable, the financial parameters have been superior for CCL. It should come as no surprise that CCL is a part of Professor Sanjay Bakshi’s value investing portfolio (ValueQuest India Moat fund owns 1.8% of the Company).
While Tata Coffee’s product mix is skewed between coffee, tea and now pepper, CCL is a pure play on coffee powder. As a result, while Tata Coffee has underperformed when it comes to Sales, Profit and Stock Price CAGR, CCL has stayed its course in terms of outperformance.
Different companies are operating in the different segment of the value chain in India.
While companies like Tata Coffee go right from Growing to Grinding, Blue Tokai is focused on Roasting to Retail. CCL Products is mostly engaged in export, Starbucks focuses on well, retail (with getting its beans procured from Tata Coffee).
The new Indian millennial wants to drink a better brew, make his own coffee and at times also try and understand which blend of beans to use. Multiple cafes in the country today are using their own mix of unique beans right from 100% Arabica to a mix between Arabica and Robusta.
While India continues to be a tea drinking country, over time we can see coffee drinkers grow. Majority of the coffee consumption still takes place in the country in office spaces and through machine ready brews – either loaded on pre-mixes or lower grade coffee beans.
While the world continues to consume ~500 billion cups of coffee a year, climate change can make this commodity dearer. Either we no longer get to consume the finest beans in our cup or we get ready to save for coffee inflation apart from well, retirement.
Can coffee become Gold? Or will it still remain in abundance?
My guess is as good as yours.
As promised, here are a few exotic coffee brews you can try for yourself.
The Blue Tokai Assorted Box – This basically does not require any equipment, you can easily use their unique packs to brew yourself a great brew of speciality blends and add milk / sugar as you may want to (Please don’t add sugar. Please.) If you miss visiting Blue Tokai at the Bahrisons book store like me, this will bring some of that experience home.
Wild Vanilla Columbian Brew – This is a vanilla flavoured instant coffee. You can use it as a great alternative to regular Nescafe or Bru – both hot and cold. I have basically done a Delhi NCR distribution program for free to make people sample this. Purely out of love, that’s all.
The French Press – This brings the whole café experience home. Invest in one only if you wish to play around with grinded coffee in the future. Makes a great aesthetic add to your kitchen / study room.
The Dark Vienna Roast – In case you plan on investing in the above, you can start your coffee journey with this blend.
While you’re at it, here’s a little mobile stand I got myself when the lockdown started to be on video calls, it has freed up my water bottle, pen stand, 4 book support and a host of other jugaad that took my space. Trust it helps you too.
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DISCLAIMER: No content on this blog should be construed to be investment advice. You should consult a qualified financial advisor prior to making any actual investment or trading decisions. All information is a point of view and is for educational and informational use only. The author accepts no liability for any interpretation of articles or comments on this blog being used for actual investments.