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Coffee Prices Rise at Faster Pace on Growing Demand, Unseasonal Rains

Rising Coffee Prices in India: Implications and Analysis

Source and Citation: News article published by Economic Times on January 23, 2024

Layman’s Analysis

The rise in coffee prices in India is a result of various factors affecting production, including weather conditions and labor shortages. Despite these challenges, demand for coffee, especially among urban professionals, has surged post-COVID-19, driving the growth of cafe chains. This demand, coupled with tight supply, has led to inflation in coffee prices.

Coffee Prices Rise at Faster Pace on Growing Demand, Unseasonal Rains

Impact on Retail Investors

For retail investors, the impact of coffee inflation varies across the value chain:

  • Plantation Stocks (Tata Coffee, CCL Products): Higher realizations may benefit profit margins, but crop losses could impact volumes.
  • QSR Chains (Jubilant Foodworks, Tata Starbucks): Input costs may rise, potentially affecting menu prices and footfalls. Investors need to monitor for margin pressure.
  • F&B Companies (Nestle India): Diversified portfolios and pricing power can help mitigate risks associated with cost inflation.
  • Retail (Avenue Supermarts): Coffee in the grocery basket may drive footfalls, but higher inflation in the category poses a risk to volume growth.

Investors should monitor coffee prices and demand patterns among youth to identify lasting trends and differentiate between stock-specific strengths.

Impact on Industries

Plantations (Tata Coffee, CCL)

  • Higher domestic coffee realizations may support earnings, but lower volumes and export competitiveness could be impacted.

QSR Chains (Jubilant, Starbucks)

  • Margin pressure may arise from higher coffee input costs, potentially leading to product price hikes and affecting volumes.

Packaged Food (Nestle, HUL)

  • Strong brands, market reach, and a diversified portfolio can help absorb cost inflation. Pricing power becomes crucial.

Retail (Avenue Supermarts)

  • Coffee’s presence in the grocery basket could drive footfalls, but inflation in the category risks volume growth.

The fallout from the supply-demand mismatch and cost inflation around coffee will affect industries differently based on their reliance on coffee, pricing power, and ability to diversify.

Long-Term Benefits & Negatives

Positives

  • Rising aspiration and spending capacity of youth benefit premium discretionary categories like coffee.
  • Success of cafes makes coffee more mass-market, expanding beyond its previous perception as a beverage of southern states.
  • Export competitiveness improves with increased production meeting domestic and overseas demand.

Negatives

  • Climate risks to plantations pose consistency challenges.
  • The commodity nature of coffee exposes it to global price movements beyond India’s control, leading to market volatility.
  • Limited potential for rapid output growth as the area under cultivation has plateaued.

While the demand outlook seems positive, more policy support is needed to aid supply-side expansion and reduce long-term downside risks.

Short-Term Benefits & Negatives

Positives

  • Current supply shortfall supports prices and domestic value realization in the short run.
  • Rising inflation brings attention to coffee as a priority in policy discussions.
  • Mainstream brands can leverage captive retail and QSR reach to sustain volumes despite higher prices.

Negatives

  • Beyond a certain point, price rise may impact affordability and middle-class consumption.
  • Import dependence may rise, affecting forex outgo.
  • Export orders may be compromised due to domestic supply falling short of estimates.

The current price spike, supported by demand drivers, may not sustain if crop shortfalls become a recurring phenomenon rather than one-off events. Monitoring the situation is crucial for investors.

Coffee Price Hike: Potential Gainers and Losers in the Market

Indian Companies:

Gainers:

  • Tata Coffee Limited (TATA COFFEE): As India’s largest coffee producer and exporter, Tata Coffee stands to benefit from higher prices for both robusta and arabica beans. Increased export value could boost their top line and profitability.
  • Nestle India Ltd. (NESTLE): With strong brands like Nescafe, Nestle leverages robusta beans heavily in its instant coffee products. Higher prices will increase input costs, but strong brand loyalty and potential price adjustments could minimize the impact.
  • Coffee Day Enterprises Ltd. (COFFEE DAY): As a leading coffee chain operator, Coffee Day might face initial pressure from rising coffee costs. However, they can potentially pass on some of the cost increase to consumers due to strong brand recognition and customer loyalty.
  • Institutional Coffee Suppliers: Companies like Food Solutions India Ltd. and Blue Tokai Coffee Roasters, supplying coffee to businesses like hotels and restaurants, could benefit from increased contract values due to higher coffee prices.

Losers:

  • Small Coffee Roasters: Independent coffee roasters focused on specialty single-origin beans, especially arabica, might face significant pressure from rising input costs. This could impact their profit margins and competitiveness.
  • Small Coffee Shops: Smaller coffee shops with lower price points and margins might struggle to absorb the increased cost of coffee beans. This could lead to profitability issues or customer price increases.
  • Chicory Manufacturers: With traditional coffee drinkers turning to chicory as a substitute, companies like Amalgamated Bean Coffee Trading Co. Ltd. could see increased demand for chicory, potentially offsetting some losses from lower coffee sales.

Global Companies:

Gainers:

  • Large Global Coffee Producers: Companies like JDE Peet’s (owner of Douwe Egberts and Peet’s Coffee) and Starbucks, with diverse sourcing and roasting capabilities, might benefit from the overall higher coffee prices by adjusting their blends and potentially increasing profit margins.
  • Shipping Companies: As coffee exports are expected to remain strong despite lower volume, companies like Maersk Line and CMA CGM could see increased demand for shipping services from India, potentially boosting their revenues.
  • Commodity Traders: Trading firms like Cargill and Louis Dreyfus Company, involved in coffee sourcing and trading, could potentially benefit from the increased volatility in coffee prices by taking advantage of favorable market positions.

Losers:

  • Instant Coffee Manufacturers: Smaller instant coffee producers in competing markets who rely heavily on cheaper robusta beans might struggle with increased input costs, potentially impacting their competitiveness and profitability.
  • Independent Coffee Shops: Similar to small Indian coffee shops, independent coffee shops in other countries could face pressure from rising coffee prices, potentially impacting their profit margins and customer affordability.

Market Sentiment:

  • Overall, the news is likely to be mixed for the coffee market. Indian coffee producers and exporters are likely to see positive sentiment, while smaller roasters and coffee shops might face concerns.
  • Global coffee giants with diversified operations and strong brands are likely to be less impacted, while smaller independent players in different segments might experience challenges.
  • Increased market volatility due to price fluctuations could attract interest from commodity traders and shipping companies.

Please note: This analysis is based on the provided information and is not intended to be financial advice. Investors should conduct their own due diligence before making any investment decisions.

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