Coffee is being increasingly consumed in cafes and other commercial establishments apart from South India where coffee is readily consumed by households. The per capita consumption of coffee in India is only about 90 grams. This is considerably low when compared to other coffee exporting nations. This shows the immense potential for the domestic coffee industry to grow. Majority of Indian’s coffee production is exported. Global coffee production stood at about 7. 98 billion keg in 2011-12 (crop year). India is the 5th largest producer, accounting for only about 3-4 per cent share in total production.
On the basis of player presence in the value chain, the industry can be segmented into: (I) planters (it) planters-UCM-traders, and iii) non-integrated players From the consumption point of view, the industry can be segmented into (I) filter (it) instant coffee Filter coffee accounts for 40-45 per cent of total domestic consumption. Instant coffee accounts for around 55-60 per cent of the total domestic consumption of coffee. Indian Coffee Industry: an oligopolies competition The coffee industry in India is oligopolies with the presence of many players.
Major players include Unsafe (Nestle), Bur (HULL), Data Coffee (Data Coffee Ltd). An oligopolies competition is a situation in which a particular market is controlled by a mall group of firms. An oligopoly is much like a monopoly, in which only one company exerts control over most of a market. In an oligopoly, there are at least two firms controlling the market. Following characteristics make the Indian coffee industry oligopolies: 1. Few Sellers: Unsafe by Nestle clearly dominates the Indian coffee market.
Enjoying almost a monopoly status it accounts for almost 50% of market share. Bur accounts for approximately 49% of the market. Data Coffee is one of the largest integrated coffee producing companies in the world. It owns 19 coffee estates which are located in South India. Fig. Different Products in Market 2. Homogeneous or unique products: Unsafe and Bur, the major players in the Indian Coffee market have much in common be it their intentions or brand images perceived- young and glamorous like the beverages itself.
Both the brands have continued endearment to the youth. There is homogeneity in the kind of products they bring out for example HULL to continue on the growth path reverted to the oldest marketing mantra – straddling the pyramid. In simpler parlance, offering a product at each price point, HULL launched Bur Elite, for hose who like their coffee light. Then came Bur Exotica, a premium range of coffees for the well-heeled, well-traveled Indians who like international flavors.
And the latest addition to the portfolio is Bur Gold, a non-chicory coffee, a 100 per cent coffee, for those who like their drink strong. With Bur Elite, Exotica range and Gold, HULL has beefed up its portfolio which previous included ice and hot cappuccino and the original, Bur Green Label roast and ground further. Coming to Nestle for combating Bur elite it has Unsafe Sunrise premium, an instant Coffee- Chicory based beverage ix, then it has the Unsafe Classic its flagship product targeting at Bur gold.
Thus both of these have products catering to similar portfolios. Fig. (a) Homogeneity in Different Segments Price (Size. 50 GM) Light Coffee Unsafe Sunrise Premium RSI. 69 Bur Elite RSI. 70 Strong Coffee Unsafe Classic RSI. 106 Bur Gold Fig. (b) Homogeneity in Different Segments 3. Blockaded entry and exit: A barrier to entry is something that blocks or impedes the ability of a company (competitor) to enter an industry. A barrier to exit is something that blocks or impedes the ability of a company (competitor) to leave an industry.
The Indian Coffee industry has a blockaded entry and exit which can be understood from the facts below High setup costs: The amount of investment involved in setting up a Coffee plant is very high due to various large infrastructural requirements. Data Coffee recently had commissioned a new instant coffee plant at Then’ in Tamil Undue and the initial investment for the set up was to the tune of RSI 80 scores which is huge. Coffee industry is capital intensive. Economies of size: The need for a large volume of production and sales to reach the cost level per unit of production for profitability is barrier to entry in the Coffee Industry.
Nestles first Unsafe plant was set up in Mega (Punjab) in 1961 and the first BUR plant was set up by Hindustan Milliner in 1968 and both are economies of size. Now for any new entrant to come in and establish itself at this Juncture is a humongous task, even the Data with huge backup and established way earlier than Nestle and HULL has a market share of approximately 1 %. Established brand identity: Industries dominated by branded products are difficult to enter due to the large amount of time and money required to create a competing branded product.
Nestle, HULL and Data Coffee have created an aura around them and it is highly impossible for a new entrant to make leeway and capture market share. Investment in specialist equipment – Investments in specialized equipment that cannot readily be used in other industries tends to be an impediment to leaving the industry. As we have seen that to have an integrated Coffee manufacturing unit the investments to the tune of scores need to be made and that is definitely an impediment for an entrant who hasn’t made it big in the 4. Imperfect dissemination of information :
A lot of R in terms of technological up gradation takes place in Coffee industry in the way how the beans are extracted and processed and the companies have patented their work, this hardly provides any information for other players. Also the cost and product composition information is withheld from buyers. Producers, policy makers, roasters and even consumers are constantly faced with asymmetric information on the actions of other players within the coffee market, consumers under normal circumstances have very little access to information on market practices beyond the store shelf. 5.
Opportunity for above normal (economic) profits in long run equilibrium : Profits in the long run are determined by the barriers to entry. If there is high barriers to entry, new firms cannot enter the industry easily and hence cannot competed with existing firms for profits. Being an oligopoly, Indian Coffee industry is characterized by high barriers to entry and hence can look for above-normal profit in the long run. According to ‘India Coffee Shops / Cafe Market Forecast & Opportunities, 2017’, the cafe market in India is expected to grow threefold in the next five years to become a hopping RSI. ,600 scores ($ 1 billion) market by 2017. In India the Coffee industry is not as big as the Tea industry and for players like Nestle and HULL to achieve super normal profits and to increase consumption non- price factors like improving quality standards and communicating the same to the consumers via generic promotion campaigns and/or brand advertising needs to be done. Coffee Board and CARE Research estimate domestic coffee consumption to grow at a CARR of 6% in the opened CAGY-1 5. Fig.
Estimate of Domestic Coffee Consumption Profits in an oligopolies competition Short Run In an oligopolies market it is possible to make supernormal profit by the firms I. E. Profit over and above normal rate of return. As coffee industry is oligopolies in nature there is supernormal profits available for the players as shown in the figure below. Long Run An Oligopolies competition can turn into perfect competition in long run if large number of new players enter into the market.
In this situation there will be change in equilibrium till the point where marginal cost will be equal to the average cost such hat there will be only normal profit available for the firms. However, looking at the few major players will be there in the market. Hence they will continue to enjoy price making power and have supernormal profit. Fig. Short Run and Long Run Equilibrium Demand analysis of Coffee in India Over forecast period, retail sales of coffee are expected to witness a constant CARR of 9% in constant value terms, to reach Errs billion in 2017.
The growth of modern retail outlets and coffee chains is expected to drive coffee growth over the forecast period. Exotic flavors and premium variants of existing offerings will continue to be launched by the top players, leading to predomination of the coffee category over the forecast period. The price elasticity of demand for coffee is low, it is much lower in the short-run than in the long-run. This suggests that temporary price incentives will not achieve any significant demand increase.
Moreover, coffee demand is characterized by habit formation. Therefore, demand for coffee can be increased by non-price factors like improving quality standards and communicating the same to he consumers via generic promotion campaigns and/or brand advertising. Though 90% Indians drink Tea, we are taking to drinking Coffee in a big way, the arrival of retail Coffee outlets has changed everything and Indian’s large population means that even a small increase in coffee consumption by individuals can affect global supply and demand for the commodity.
Multinational Coffee retail outlets are thronging to India to set up their base, Lava, Barista, Struck are few of them. Conclusion We analyses data for the coffee industry from various databases (CRISIS, Capital Line), cooked at market share of major players, their cost and pricing, entry-exit barriers from which identified coffee industry as an oligopolies form of competition.
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