External analysis of the French coffee industry (full value chain)

1. French Coffee Market: External
Analysis
TEAM 101, Section E3
Master Strategist Day

2. Executive summary - The Coffee Industry in France
Industry
Overview
● Market premiumization based on changes in customer preference is the key trend with high
likelihood of persistence and impact in profits. Coffee pods provide convenience and continue to
grow. Specialty coffee offers exceptional tastes and is expanding, but currently a niche market.
● Increasing concerns for sustainability is another trend. While the pod market faces is increasingly
criticized due to its high amount of waste, coffee with sustainability certificate can benefit from price
premium of 10-15%.
● Customers preference toward naturally flavored, low sugar beverages can be beneficial for
Ready-to-Drink (RTD) coffee (estimated CAGR: 13%).
Major Trends
Implications
● Overall, the French coffee industry is attractive due to premiumization, limited power of suppliers
and low threat of substitutes. However, it is highly competitive and entry barriers are generally low,
putting pressure on profits, except for a few dominant incumbents that benefit from a strong brand.
● The French coffee industry is a 5.8 bn EUR market, the 2nd largest in Europe. Consumption is
stagnant, however the market size is growing due to increasing premiumization.
● Players active in distribution capture over half of the value. The other half of the value is shared
between roasters, importers and producers.
● In-home and out-of-home are roughly equivalent in terms of value. However, in-home is highly
consolidated with a few dominant players such as Nestlé and Lavazza. Out-of-home is highly
fragmented, with international chains such as Starbucks making their first moves.
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3. The French coffee market is the 2nd biggest coffee
market in Europe with a matured consumption base
€5.8 Bn
Coffee Sales
+4.1%
2018-2023 Forecasted
CAGR for Coffee Sales
+1.6%
2018-2023 Forecasted
CAGR for Consumption
83%
Retail Share of
Consumption
61%
Retail Share of Sales
345 Mn
Coffee Consumption in
kg
Source: Euromonitor - http://www.portal.euromonitor.com/portal/?0CPUhiHgZWRugaeKav5RHw%3d%3d & Le Basic -
https://lebasic.com/wp-content/uploads/2018/10/BASIC_Coffee-Value-Chain-Study_Research-Report_October-2018_Low-Res.pdf2

4. Distributors capture more than half of the value in the
coffee industry
Production
Processing
Trading
Transport &
Logistics
Import
Roasting
Distribution
Coffee-making
equipment
Value Share1
,
% of priceDescription Example players
~12%
~15%
~17%
~56%
Growth and harvesting of green coffee, primarily Arabica
and Robusta.
First stage of processing, through dry or wet process.
Includes beans sorting and transport to warehouse.
Traded on international markets, notably through
Exchanges, higher prices for fair trade products
Green coffee is transported to the main import ports,
usually through container ships.
Green coffee is transferred to importer’s warehouses
after customs and dispatched to buyers.
Includes coffee machines (for in-home or out-of-home
use), roasting equipment, and other coffee tools.
Small to large coffee farms in
developing countries
Coffee is roasted, grounded, dehydrated; or left as whole
beans depending on desired taste and format.
Coffee is packaged, branded and distributed through
stores, or sold in cafés/restaurants.
Source: Illustration of value breakdown for coffee blend in French supermakets (Peruvian coffee ground in 250g packets). VAT excluded. Source: BASIC, 2017
Captured by
exporting
country
(outside of
France)
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5. Source: Team Analysis
The PESTEL analysis reveals opportunities for new
products and distribution models
PPolitical
EEconomical
SSocial
TTechnological
EEnvironmental
LLegal
Context Implications
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6. 9 major trends are shaping the French coffee industry
Production
& processing
Trading & Import Roasting
Distribution
Retail & Foodservice
Coffee-making
equipment
Most of the roasting is done in Europe
while green coffee is imported from
developing countries.
1
Roasting is
increasingly
centralized.
2
Out of Home consumption represents only 17% of
the volumes, but 39% of the revenue share.
3
General
Trends
Market
Structure
Consumer preferences are shaped by demographic changes, health concerns and increased sophistication.
Sales growth in value is expected to continue due to premiumization despite stagnant volume growth.
Certification for sustainability is becoming a market requirement and it offers price premium for producers & retailers.
Specialty coffee is growing by differentiation from competitors, and has further growth potential.
Pods growth will continue due to their convenience
despite environmental concerns.8
4
5
6
7
RTD coffee beverages benefit from shifting
consumer sentiment against traditional soft drinks.
9
Product
Trends n/a
Explored in following slidesx
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7. Most of the roasting is done in Europe while green
coffee is imported from developing countries
French green coffee imports, mn KG French roasted coffee imports, mn KG
Source: https://lebasic.com/wp-content/uploads/2018/10/BASIC_Coffee-Value-Chain-Study_Research-Report_October-2018_Low-Res.pdf
1
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8. Roasted coffee imports are growing due to
multinationals centralizing their roasting operations
French Coffee Imports, mn KG Key insights
● Over the last 15 years, roasted Coffee
imports have increased by an
average of 6.5% annually
● The main reason for this trend is the
fact that foreign groups manufacture
their products outside the country
(e.g., Nespresso capsules are
manufactured in Switzerland)
● There is a growing number of small,
artisanal roasters focusing on quality
in France, but not yet significant
enough to impact totals
Source: https://lebasic.com/wp-content/uploads/2018/10/BASIC_Coffee-Value-Chain-Study_Research-Report_October-2018_Low-Res.pdf
2
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9. ● Average price of out-of-home segment is more than 3x
that of in-home segment
● Out-of-Home value share of sales is 22% higher than its
volume share
Coffee prices in France (2018), € per cupCategory shares (2018), %
In-Home
Consumption
Out-of-Home
Consumption
Key insights
Out-of-Home consumption represents only 17% of
volumes, but 39% of the value share of consumption
3
Source: https://lebasic.com/wp-content/uploads/2018/10/BASIC_Coffee-Value-Chain-Study_Research-Report_October-2018_Low-Res.pdf8

10. Demographic shifts, health concerns and increasing consumer
sophistication are challenging traditional consumption patterns
4
Health Concerns Increasing Sophistication
Population is aging with 32% of
the total population between 30
and 55 years - coffee
consumption reaches the peak in
this age group according to
research.
Over 80% of the population in
france has coffee 3-4 times a day
with a greater preference for
convenient coffee consumption
formats such as coffee pods and
RTDs.
Demographic Changes
Avoidance of sugary and
carbonated drinks is giving a rise
in preference for alternative
additive-free drinks like RTDs.
- Concerns about caffeine
consumption and the effects of
caffeine on health limits volume
growth. Coffee pods containing
lower coffee per portion is another
reason for the rise of pods.
Consumers are increasingly putting
quality coffee, good taste, ethics and
traceability of coffee origin on
pedestal. As a result, speciality coffee
enjoys increased interest.
Preference for coffee pods, capsules
and other innovative formats are rising.
Some brands (such as Cafés Méo and
San Marco) have introduced
compostable, eco-friendly capsules.
Preference for coffee pods/capsules
and speciality coffee has negatively
impacted sales through vending
machines.
9Source: Euromonitor, Coffee in France 2019 Report and Basic Coffee Value Chain Supply Analysis Report

11. Key insights
Source: Euromonitor - http://www.portal.euromonitor.com/portal/?0CPUhiHgZWRugaeKav5RHw%3d%3d
● French coffee consumption has stabilized with
retail CAGR 0.6% over the last 10 years
● Sales growth with retail CAGR 4.5% outpaced
volume growth due to growth in coffee pods
which are more expensive and contain less
coffee per serving vs instant coffee
● Per capita consumption is 5.43 kg per year, far
behind the Scandinavian countries, where per
capita consumption is 12 kg
● Stagnant population and health concerns
around coffee consumption are the other
factors limiting consumption
Sales growth in value is expected to continue due to
premiumization despite stagnant volume growth
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10

12. ● Consumers are increasingly concerned
about social/ecological impact of their
consumption, especially in Europe
● Through the certification logo, customers
can quickly assess each coffee’s impact on
sustainability
● Retail prices include a premium for coffee
with label, typically 10-15% higher vs. coffee
without certificate
World coffee production per certification scheme, tonnes
Sales for fair trade products in France, € million
Major certificatesMajor certificates
Key insights
Source: CBI, Exporting sustainable coffee to Europe (https://www.cbi.eu/market-information/coffee/sustainable-coffee/)
Certification for sustainability is becoming a market requirement
and it offers price premium for producers & retailers6
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13. Customer
Intimacy
Product
Leadership
Operational
Excellence
Positioning within the Value discipline
● Customers have higher WTP: Typically
€40-70/kg for specialty roasted coffee beans,
vs. €4-10/kg for low-end coffee
● Growing market: number of specialty coffee
shops in France increased from 850 in 2010 to
1,060 in 2017
● Further growth potential with market share of
specialty coffee in France still 1-2 %
● Similar to wine in that origin, production
and preparation are important
● Social media and e-commerce enable small
specialty roasters to compete with existing
large players
Key insights
Specialty
coffee is...
High quality in flavor achieved
through its selected value
chain (i.e. origin of beans,
processing and roasting)
Source: CBI (https://www.cbi.eu/market-information/coffee/france/#what-are-the-end-market-prices-for-coffee-), LHR
(https://www.lhotellerie-restauration.fr/journal/salon-concours-syndicat-association/2017-01/la-scae-france-veut-promouvoir-les-cafes-de-specialite.htm),
Les journées du café (https://tokster.com/article/les-journees-du-cafe-2017)
Specialty
coffee
Specialty coffee is growing by capturing consumers’
increasing demand for sophistication
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14. Source: Euromonitor: http://www.portal.euromonitor.com/portal/?d0vfE4h%2f34%2bUDMyrJzDCJg%3d%3d -
ECF: https://www.ecf-coffee.org/publications/european-coffee-report -
Le Basic: https://lebasic.com/wp-content/uploads/2018/10/BASIC_Coffee-Value-Chain-Study_Research-Report_October-2018_Low-Res.pdf
● Globally, existing coffee drinkers switch to pods for convenience
● Plastic & metal waste generated by pods and toughness of recycling may constrain
growth. Refillable, recyclable and biodegradable pods started to emerge
● Growth in pods also trigger growth in coffee machine sales
● Brands experiment with alternative distribution models like subscription
Key insightsLargest players
Pods growth will continue in the lower single digits due
to their convenience despite environmental concerns
8
13

15. ● Increasing health concerns and regulation around
sugar in beverages: Studies suggest links to sugar
consumption and cancer; 2nd French “sugar tax”
implemented 2018
● Consumer preferences shift toward naturally
flavored, low sugar beverages, such as coffee, tea,
and bottled water, which is projected to grow through
2022. All other beverages projected to decline at 6%
● RTD coffee market projected at CAGR of 13% with
Starbucks and Nestlé leading market share
● RTD coffee segment limited by shelf-life and
concerns about seasonality of demand. New
entrants can innovate on supply chain and beverage
styles to overcome these limitations and access new
customers
Trends & Key Insights
Share Growth Projected 2017/2022 RTD Volume
of All Beverages (Alcoholic + Non-alcoholic)
Sources: RTD Coffee in France (Euromonitor, 2019), COFFEE IN 2018: THE NEW ERA OF COFFEE EVERYWHERE (Euromonitor 2018)
Ready-to-Drink (RTD) coffee will benefit from shifting consumer
sentiment against traditional soft drinks categories9
14

16. Source: Team Analysis
Strong global
competition from
large incumbents
& private labels
Sub-markets
Strong competition
in Europe but
specialty growing
Raw materials are
commodities
Rivalry
intensity
Suppliers
power
Buyers power
Threat of new
entrants
Threat of
substitutes
Overall
attractiveness
Low switching cost.
Differentiation
possible through
labels and quality
Low entry costs &
capital
requirement
Tea and soft
drinks are an
alternative to
some buyers
In-home
E.g., Nespresso
Coffee houses
E.g., Nespresso
Coffee equipment
E.g., De'Longhi
Roasting
E.g., Café Richard
French coffee
industry
Most large coffee
brands have
in-house roasting
Growing but
entry of global
chains
Strong global
competition,
selling at losses in
capsule market
Instant coffee is
the only
(declining)
substitute
Most parts are
commodities
High entry costs &
differentiation
through
technology
Good information
availability and
high price
sensitivity
Large choice of
European roasters
Premiumization of
the market
Low entry costs
but strong brands
& limited access to
large retailers
Shift to
out-of-home
consumption
Many suppliers
but growing
importance of
brand
Relatively low
price sensitivity
Low entry costs
and capital
requirement
In-home
consumption or
other soft drinks
Strong
competition in
most segments
Green coffee is
commoditized
Premiumization
of the market
Entry costs
generally low
Saturated market
but niche
opportunities in
specialty
High competition
but opportunities
through
innovation
Healthy margins &
value growth but
heavy competition
from incumbents
Healthy margins
& value growth
but low entry
barriers
Healthy overall
margins but
competitive
environment
Attractive Not attractive
Porter 5 forces
The French coffee industry is attractive due to trends
towards premiumization, but highly competitive
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17. Source: Team Analysis
ImpactonProfits
Likelihood of persistence
Low Medium High
Low
Medium
High
Market
premiumization (5)
Growth of Pods
consumption
(8)
Stable In-Home / Out of Home
volume and value share (3)
Growth of speciality coffee
consumption (7)
Increase in
sustainability
concerns (6)
Growth of RTD consumption (9)
Increasing centralization of
roasting (2)
Stable share of imports of
green and roasted coffee (1)
Companies should focus on trends with the highest
expected impact on profit and likelihood of occurrence
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