India's Taste For Coffee To Affect Prices

WSJ - Neena Rai(London) and Debi Nayak(Mumbai)

  "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 Wi-Fi, 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 Nestle 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 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," says Avani Saglani Davda, chief executive of Tata

Starbucks Ltd., a venture between the Seattle-based 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.

  Demand for instant coffee also is growing here. Nestle set up demonstration

farms in South India last year to help farmers improve productivity to help

meet demand for the company's instant Nescafe 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 fourth-largest exporter of robusta

beanscould be changed by domestic demand.

  "As more production is consumed domestically, it leaves less for exports,

supporting international prices," says Keith Flury, a 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. 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 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.