March 17, 2013, 1:07 p.m.

ET

India's Taste for Coffee to Affect Bean Prices

By NEENA RAI in London and DEBI NAYAK in Mumbai
A barista works behind the counter at a new Starbucks in New Delhi.
"I used to drink tea every day. But, these days, after the arrival of coffee retail outlets, I am going
to those places to have a cup of coffee," says Jovinson Duarte, a 29-year-old brand service
manager at an advertising agency in Mumbai.
Mr. Duarte, who says a new Starbucks gives him and his friends a place to meet and use free WiFi, is part of a growing number of young Indians increasingly drinking coffee.
Booming coffee demand in India is prompting international companies such as Italy's Lavazza
SpA, Switzerland's Nestl SA and U.S.-based Starbucks Corp. to set up shop in the traditionally
tea-drinking subcontinent, offering growth when returns are harder to come by in more
developed markets.
Rising coffee consumption in India also is likely to support world coffee prices, with analysts
forecasting a decrease in bean exports from the country as domestic demand rises.
While India only represents 1.4% of global demand, the subcontinent's coffee market is forecast
to grow almost 9% to $486.6 million this year, according to market-research firm Euromonitor
International. That would follow growth of almost 80% over the past five years.
India's annual coffee consumption of about 85 grams per capita is tiny compared with the 4.1
kilograms consumed in the U.S., according the International Coffee Organization, an
intergovernmental group of coffee importing and exporting countries. But in a population of 1.2
billion people, it is the expanding middle class of 300 to 400 million that lures multinationals.
"The size of the Indian economy and the rate of growth of the cafe sector, combined with rising
spending power and shift in consumer preferences present a tremendous opportunity for us," says
Avani Saglani Davda, chief executive of Tata Starbucks Ltd., a venture between the Seattlebased coffee chain and India's Tata Global Beverages Ltd.
Ms. Davda says there is a trend in India toward out-of-home consumption and a steady shift in
consumer preferences, with coffee changing from a beverage that was consumed mostly in South
India to one sipped nationwide.

Starbucks, as part of its venture with Tata, opened its first Indian stores in October and now has
seven outlets in Mumbai and New Delhi.
Lavazza, which sells coffee under its brand to other retailers, recently opened a coffee shop in
Bangalore. Attilio Capuano, the company's Asia and Pacific director, says opening stores in
India's main cities is part of as strategy to strengthen its brand in the country.
"Young people are turning to places like Starbucks because they want a trendy place to socialize
and can take their iPhones and connect to the free Wi-Fi," says Roberio Oliveira Silva, head of
the London-based International Coffee Organization. "Coffee culture has taken India by storm
and it will continue to do so because of higher incomes and greater urbanization."
Demand for instant coffee also is growing here. Nestl set up demonstration farms in South India
last year to help farmers improve productivity to help meet demand for the company's instant
Nescaf products across the country.
India's large population means that even a small increase in coffee consumption by individuals
can affect global supply and demand for the commodity. India's status as the world's fourthlargest exporter of robusta beansafter Vietnam, Brazil and Indonesiacould be changed by
domestic demand.
"As more production is consumed domestically, it leaves less for exports, supporting
international prices," says Keith Flury, a soft-commodity analyst at Rabobank in London.
India is expected to produce around 315,500 metric tons of coffee during the 2012-13 crop year,
according to the state-run Indian Coffee Board. Around 70% of production is the robusta type of
beans, the more bitter and cheaper variety than arabica. Robusta is mainly cultivated in the
southern Indian states of Karnataka and Kerala. Shipments of Indian coffee fell about 9% last
year to 310,021 tons, according to the coffee board.
Anil Bhandari, president of the India Coffee Trust trade group, says India could stop exporting
most coffee in the next five to 10 years because of rising domestic use. "Coffee consumption in
India started around the coffee-producing areas,but now things are changing as more and more
Indian coffees are consumed domestically." He says India also will become an importer of
Arabica beans.
"The market is already suffering from a lack of Indian coffee beans, so if more is consumed
domestically, high-end coffee will suffer," says Rachel Hamburger, chief executive of Portofino
Coffee Ltd., a roaster which buys Indian beans.
Indian coffee beans are favored by high-end roasters over beans from countries such as Vietnam
because they bring a unique taste to coffee blends.
The likelihood of increased production meeting rising domestic demand and sustaining exports is
unlikely, says Ramesh Rajah, president of India's Coffee Exporters Association, citing the high
cost of cultivating plantations. He estimates that costs for growers, including fertilizer, fuel and

labor, have risen about 40% in the past two years. "For two decades, the coffee board has wanted
to increase production in nontraditional areas. But, it has not been increased," he says.
Rumman Ahmed in Bangalore, India, contributed to this article.
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