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Tea Fair - China
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Tea Fair - China
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2005
Tea & Coffee
Industry
Forecast


Staff Report

As we say goodbye to 2004, our eyes look forward to exciting new prospects in 2005. Tea & Coffee Trade Journal asked some of the tea and coffee industries’ leaders their comments on the present state of the industries and their thoughts on what this new year (and beyond) will hold for all of us.


1 - What are the most important changes you have witnessed in the past year in your segment of the industry (and the industry as a whole)?

The most important change that I’ve seen and continue to watch is the involvement by the bigger commercial interests in sustainable coffee sourcing. Everyone closely watched P&G and Millstone to see if they were just “greenwashing” but I think that their commitment is pretty solid, all things considered. The announcement that both Wal-Mart and Target were sourcing Fair Trade came as a surprise but was welcome news. I think they have looked not only at Starbucks but also at Dunkin’ Donuts and have decided that there is enough resonance with “sustainability” issues in their customer bases that it’s a good move. It also tends to preclude any campaigns that might be aimed against them. Bottom line, of course, will be volume sourced at Fair Trade prices.
- Danny O’Keefe
The Songbird Foundation

Barista Trainers - The emergence of qualified barista trainers as a career development among baristas gives young budding coffee professionals a career path beyond the espresso machine. For talented baristas to succeed they have a common thirst for knowledge, but after a while they feel chained down working 10 hours a day behind an espresso machine. So the demand for barista trainers is a logical career step for them to follow and to earn more money, share their accumulated knowledge and explore more areas of the coffee world i.e. cupping, roasting and origin.
- Instaurator
Executive Director
World Barista Championship Ltd

The environmental discussion continues. In several countries customers are confronted with more and more rigorous obligations with respect to environmental issues. This is accompanied by the fact that people tend to roast coffee darker and darker and in some cases the coffee quality in the area of “Main-Stream-Coffee” seems to be still decreasing. Therefore the state of the art catalyzers sometimes are not enough.
- Stephan Lange
Probat-Werke von Gimborn Maschinenfabrik

The specialty coffee industry (our segment) is continuing to grow at a fast pace especially the number of coffee roasters, micro roasters and drive-thru retailers.
- Umberto Terreni
Astoria/General Espresso Equipment

There is now wide acceptance of liquid coffee bag in box everywhere. For several years, there was reluctance to add this dimension to a coffee roaster’s product line, but that is not the case any more. It allows a coffee roaster to fill a demand in a high volume application like a convention center or sports arena where they were previously unable to service.
- Cathy H. Kalenian
X Cafe LLC - Coffee Extracts

The most important changes I have witnessed in my segment recently are that people are going back to upscale displays. They are spending money again to look their best!
- Maryann Oletic
Innovated Products Manufacturing Inc.

Trends in global supply and demand for tea are worrying. As a net exporter of tea, Kenya is concerned about the low level of global absorption of tea against supply. Although demand for Kenya’s premium quality tea may hold, the same cannot be said of prices, which may continue to be suppressed due to poor demand.

Changes in the local economy have seen the dollar exchange rate with the local currency swing rapidly from KSh 74.00 at the opening of the year to KSh 82 currently. In the short term, a weaker Kenya shilling is good for tea exporters. However, any gains realized from dollar to Kenya shilling only cushions the industry from local costs such as labor. Other important inputs like fuel oils and fertilizers have to be imported at a higher cost. In addition, the combined ripple effect of a strong dollar and high oil prices have effect of increased consumer prices which affect purchasing power, and hence erode earnings to the grower.

Good weather during the past year-to-date has favored tea production. During the first nine months of the year, the crop is ahead of last year’s same period by 14%, standing at 230 million kgs compared to 201 million kgs in 2003. Cumulatively, the year promises to be better than last year, when 293 million kgs were produced.
- Stephen K. Nkanata
Tea Board of Kenya

Firming of the market (rising prices coupled with firming differentials).
- Steven D. Colten
Atlantic (USA) Inc.

Development and commercialization of all plastic single packet tea packaging specifications for us on high-speed tea packet lines.
- Larry Walton
American Packaging Corp.


2 - What recent trends have had an effect on your industry and what trends do you see developing? How will we meet these demands?

New WBC Nations - Nations holding their own Barista Championship for the first time ever underlines the strength and dynamic value of the World Barista Championship as a potential industry powerhouse. New nations include, Estonia, Lithuania, and producing countries like Guatemala, and Colombia. To increase world consumption in producing nations must also increase, so the fact that producing countries see the value in these competitions is a good sign for the future. The WBC delivers improved espresso-based coffee quality, which results in increased consumption. Also watch out! - the first nation to register for the WBC in Seattle was China - the world’s single largest untapped coffee market!

Latte Art Championship: In line with new machine and equipment developments the newest world coffee competition was successfully held in Singapore in October 2004. It fits firmly within the specialty coffee sector with its total emphasis being on coffee that “looks great and tastes great”! This is a format that can work with new espresso machine developments.
- Instaurator, executive director
World Barista Championship Ltd

New people and new companies are entering the business. Most of them do enter the coffee roasting business on different levels. Many of them are confident. Some of the first discussions that we are confronted with are whether it is easy or not to trade in a roaster which has become too small in the cause of their success. Many of them welcome the fact that for example our company has ten different sizes in the family of drum roasters alone. So when small and medium sized companies are doing business they can easily grow with their original roasting machine suppliers by trading in the used one for a very good price.

Another important fact is training. Almost every institution, equipment manufacturer and coffee enthusiast has started to begin “Coffee Classes”. This is even more important due to the fact that there are new people with little knowledge entering the business. They are driven by the fact that about 95% of the coffee consumed worldwide may be considered coming from the area of “Main-Stream-Coffee”. Only 5% or less are considered to be coming from the area of “Specialty Coffee”. Exactly these 5% of specialty coffee are getting about 95% of all the media coverage. Almost everybody would like to participate in this discussion on a high level. Naturally this is the area of the highest attention. But our customers can only satisfy their customers’ questions if they have the right knowledge and the perfect cup of coffee. This is something that our company has always supported and it rises the quality of coffee overall.
- Stephan Lange
Probat-Werke von Gimborn Maschinenfabrik GmbH

The recent trend in the segment of the equipment for espresso/cappuccino/latte is the growing interest for fully automatic or super automatic machines.
- Umberto Terreni
Astoria/General Espresso Equipment

We see a very strong trend toward a two-tier market in which the limited quantities of very high quality coffee are receiving a growing premium over the low quality commercial grades, particularly Robustas.
- Ted Lingle
SCAA

There will be more innovative liquid coffee dispensers coming to market in different sizes and forms. Some examples that we see coming forward are small scale, reasonably priced OCS or residential units - as well as dual-purpose commercial units for American coffee and espresso/cappuccino, all using liquid coffee bag in box.
- Cathy H. Kalenian
X Cafe LLC - Coffee Extracts

The development of high barrier films to replace foil for applications requiring the oxygen and moisture barrier of foil.
- Larry Walton
American Packaging Corp.


3 - Have you witnessed changes in consumer tastes? Do you see any new ones developing?

Consumer tastes remain the same. Consumer demand for larger sizes of coffee beverage is increasing
- Umberto Terreni
Astoria/General Espresso Equipment

Dark roast seems to be winning out over lighter roasts universally across the country, and flavored coffees are declining rapidly.
- Cathy H. Kalenian
X Cafe LLC - Coffee Extracts

There is always some change in consumer taste, but the good old fashioned coffee shop is still the way to go. People just expect coffee shops to be elegant, romantic, timeless. This attracts all people and all the time. Getting too funky/faddy in a coffee shop will only attract a certain type of customer. The consumer wants a good cup of coffee, and the surroundings need to meet that.
- Maryann Oletic
Innovated Products Manufacturing Inc.

Despite previous trends of consumers moving away from coffee, we now see entire countries move towards it. According to the ICO, Japan, once a tea-drinking nation, is now the third largest coffee importer. In the U.S., we see teens and young adults also drinking more coffee, and more coffee products come out every year. Not only do young, college-age adults appear to be drinking more coffee, but also they are rapidly becoming educated about fair-trade coffee and sustainability issues. Faith-based groups are important in this too.

In the espresso world, I think the single-origin espresso, a fad among baristi, could soon break out.

On the home machine front, a recent survey in July showed that only about 30% of coffee lovers would consider buying a home pod or capsule single-serving machine for themselves. But among those consumers that do have them, a search for more choice seems under way.

The manufacturer’s choices are limited and limiting. On the Internet, some people are now searching for pod adapters, or even ways to make their own pods, in an effort to get a proper-strength, fresher cup, from a favorite blend or origin.
- Fortune Elkins
C-Member
Specialty Coffee Association of America

A slight shift towards better quality
- Steven D. Colten
Atlantic (USA) Inc.

The breadth of tea flavor offerings is increasing. Our overall sales of the packaging for single serve tea packets is increasing reflecting the growth in the demand for tea.
- Larry Walton
American Packaging Corp.

This year, the National Coffee Association’s 2004 National Coffee Drinking Trends found shifts in consumer taste and behavior that tell us the trend is growing.

The most significant change in 2004 was a huge increase in the “dual drinker” - that is, the consumer who drinks both traditional coffee and gourmet coffee beverages - up from 38% to 54% of coffee drinkers. This shift also sheds new light on the growing “occasional drinker” segment that’s been growing over the last few years. At the same time, coffee drinking jumped sharply in dayparts other than the most traditional, breakfast and dinner - up from 18 to 23% between breakfast and lunch, from 7 to 10% at lunch, from 9 to 15% between lunch and dinner, and from 9 to 11% after dinner. Consumers also drank more coffee outside the home in 2004, reversing a previous, three-year trend toward in-home drinking.

Putting these numbers alongside the increase in the “dual drinker” and the “occasional drinker”, a clear pattern emerges of a growing population of coffee consumers drinking different coffees at different times of day to fulfill different needs. In other words, consumers are viewing coffee as a spectrum of options that serve to fill new and different roles in their daily lives. For the industry, with more consumers jumping onto the variety bandwagon, that means more drinkers, more product options and more room for growth.
- Robert Nelson
National Coffee Association of U.S.A.


4 - What changes have you witnessed in the retail coffee/tea bar segment? Where do you see the segment going?

The need for quick, consistent coffee - especially in high volume or drive thru applications, will dictate the need for liquid coffee dispensers in certain places.
- Cathy H. Kalenian
X Cafe LLC - Coffee Extracts

The two biggest changes in retail have been and will continue to be 1) The professionalization of the coffeehouse owner. Coffeehouse owners can no longer get by on their passion for coffee. They must be equally passionate about cash flow and well consider, effective management of human resources if they are to survive. 2) Coffee retailers are no longer the end of the story, they are a part of the story. The end of the story is the consumer and their coffee experience at home. The “beverage store” has limited potential for growth outside of the disappearing ideal locations, but a “beverage and bean” store can become a destination, and is limited only by the number of customers it can transform into loyal connoisseurs of the bean.
- Mike Ferguson
Specialty Coffee Association of America

Transport cost will affect industry earnings due to escalating cost of petroleum products. The increased transport cost will be passed onto consumers, which may negatively affect demand of tea. This will erode any gains accruing from the weaker Kenya shilling due to a higher import bill on fuel and electricity.

Environmental concerns in consumer markets especially Europe in regards to use of wooden bases for tea pallets and lead poisoning (due to continued use of leaded fuel in Kenya) also affect the Kenya tea industry. All Kenyan agricultural exports to Europe, including tea, have been put on notice about these two transport-related issues.
- Stephen K. Nkanata
Tea Board of Kenya


5 - How does the exploding interest in fair trade and sustainability affect your industry?

While we all must admit that we’ve seen a sea change around issues of sustainability over the last five or six years, the core problems still remain: Effectively taking the issues to the public; the stabilization of living incomes for farmers; certifications and environmental issues. As we note that many in the industry are once again looking to Brazilian weather for the most dramatic changes in pricing we may not have come as far as we have hoped. The coffee producing countries in Latin America are still in very difficult shape and their economies are suffering. As drug economies dominate more and more we need a comprehensive policy that creates stability. The previous non-economic strategies have not worked. This problem is complex and cannot be overstated. Stabilizing these economies is much more cost effective than the eventual alternatives. Coffee is a considerable percentage of these economies and it would seem that it would behoove the governments involved (especially the U.S. government) to help stabilize the coffee and other agriculture sectors. While “free” traders may abhor the idea of price floor supports, when all the expenses are added up it may be cheaper in the long run. Communities that turn to drug cropping when they can’t make a living growing coffee endure far greater costs than the relatively small amounts it takes to help them maintain continuity of infrastructure. Enlightened mutual self-interest is always a good policy.
- Danny O’Keefe
The Songbird Foundation
Seattle, Washington

Fair-trade trend will be with us for a long time is part of the globalization era. All products will be affected in the long run. Everybody will benefit.
- Umberto Terreni
Astoria/General Espresso Equipment

We see a growing number of new certification programs now entering commerce, ranging from Rainforest Alliance, to Utzkafe and the 4Cs (Common Code for Coffee Community), as the commercial sector seeks out its own cloak of social responsibility.
- Ted Lingle
SCAA

During the past year, three bodies have audited Kenya for compliance to ethical production. Tea Sourcing Partnership (TSP) of the U.K. hired FUTERRA, an organization working with governments, business and non-governmental organizations to promote sustainable development, to audit the industry. Earlier, in September 2003, Ethical Trading Initiative (ETI) had contracted local researcher to pre-test “The Base Code” for smallholder tea and horticulture producers. TSP is also a member of ETI. From April to July 2003, the World Bank commissioned PriceWaterhouseCoopers to study options for strengthening implementation of corporate social responsibility (CSR) among suppliers of global supply chains, focussing mainly on labor, health, security and human rights standards. In a nutshell, the industry is in the spotlight from ethical trading interest groups.

However, the cost of compliance is causing concerns in the industry as there are no guarantees that compliance could result in proportionate price increases. The pressure from consumer lobbies may erode rather than enhance CSR among corporate producers. The grower ends up earning less, thus putting to doubt the sustainability of fair trade and social responsibility initiatives. The industry welcomes fair trade and sustainability initiatives that have built-in mechanism for rewarding compliance directly. We also welcome negotiated and gradual implementation of these initiatives that result in a win-win situation.
- Stephen K. Nkanata
Tea Board of Kenya

"Exploding?" Growing! It is another avenue to focus on as an opportunity to satisfy customer demand
- Steven D. Colten
Atlantic (USA) Inc.


6 - How do the new concerns over healthful products affect your industry?

Demand and consumption of decaffeinated products will grow.
- Umberto Terreni
Astoria/General Espresso Equipment

Probably the industry’s toughest challenge is reversing old negative misperceptions about coffee and health. Doctors still tell patients to drink less coffee, with little explanation, as do athletic trainers and other health professionals.

In the 2004 National Coffee Drinking Trends, in fact, we found consumers are cutting back on coffee based on health concerns. In a new question, we found that 25% of respondents feel they’re drinking less coffee than last year, while only 14% say they’re drinking more. When asked why, 57% identified health concerns, and only 28% agreed that coffee is good for your health, while 72% disagreed.

We then did extensive market research and found that people are, nevertheless, very eager to hear good news about coffee. We tested potential messages and found that consumers said they’d drink more coffee if they knew it was good for their health - both body and mind. Digging through the scientific literature we regularly monitor, we found a rapidly growing body of evidence confirming that coffee has significant, measurable health benefits - to date, 19,000 studies in all. Among them, coffee has been proven to protect you against diseases such as Diabetes, colon cancer, cirrhosis, Parkinson’s disease and gallstones, as well as to promote physical stamina, endurance and hydration, and enhance cognitive performance. Coffee is also a powerhouse of antioxidants - 1,000 compounds in the bean and another 300 created in the roasting process - that’s more than in red wine and four times the antioxidants in green tea

Putting our market and scientific research together, the NCA rolled out a groundbreaking public information campaign - Coffee Delivers - that aims to increase coffee consumption across the category by making this goldmine of information available to the press and the public. Launched at an Editors’ Symposium at the New York Academy of Sciences in October, the campaign is already increasing awareness and changing old thinking. As the science continues to roll in, we will continue to communicate it with information and creative programs. Imagine, after years of negativity, achieving media coverage that describes coffee as “the next health food.” But, that’s exactly where we’re at, and charging forward.
- Robert Nelson
National Coffee Association of U.S.A.


7 - What do you see as the top challenges facing the industry today?

Maintaining stomach share as compared to waters, sodas, juices, etc.
- Cathy H. Kalenian
X cafe LLC - Coffee Extracts

Both the specialty and commercial coffee sectors need to continue to engage and educate the coffee-loving consumer on all fronts. To continue to deliver on quality coffee - at every level of the industry. To continue to raise quality standards from tree to incoming green to roasted bean to Mylar bag to pod to can to paper cup. To advocate and adopt higher import standards so the USA doesn’t become the dumping ground for impure “coffee-by-products.”
- Fortune Elkins
C-Member
Specialty Coffee Association of America

The industry is very much concerned about the multiplicity of ethical audit groups and the motives of the groups, especially considering their composition. The end result of compliance has increased cost of production without any corresponding increase in producer price of tea. Since much of Kenyan tea exports is in bulk, the middlemen in the value chain might not pass the ethical premium down to the producer if it were to be paid.

Understandably, the consumer is entitled to know how “ethical” the tea he/she pays so dearly at a London or New York retail store was produced. The question that arises is: How ethical can production be when the price paid is “unethical”. The average cost of production in Kenya is $1.00 per kg, while the earnings have stagnated between $1.40-$1.50, over the last 10 years. The biggest cost element is labor, which is guided by labor laws and collective bargaining principles. To spend more on labor (in health, security and human rights standards) than we are currently spending would result in negative returns on the producer, unless he/she gets “ethical premium” unstuck from the buyer or his/her agent.

What the global tea industry needs is a universally accepted and enforceable code of practice applicable to both the producers and traders. This would eliminate the multiplicity of pressure groups (including non-stakeholders such as human rights groups) agitating for all manner of fair trade practices.
- Stephen K. Nkanata
Tea Board of Kenya

Increasing raw material and energy costs.
- Larry Walton
American Packaging Corp.


8 - How have the new bioterrorism rules changed or affected your business? Or have they at all?

We undergo an annual third party audit every year by an agency like AIB or NSF. This year for the first time, we were asked a series of questions relating to security and bioterrorism. We had to implement a program relating to this specific area in terms of facility security, employee security and product security. We are already registered with the FDA bioterrorism dept and have our number, which was required by the audit.
- Cathy H. Kalenian
X Cafe LLC - Coffee Extracts

Added cost, sampling charges, time, customs/FDA. freight delays.
- Steven D. Colten
Atlantic (USA) Inc.


9 - In what direction do you see the role of barista going?

From our point of view, the baristi will gain in their importance in terms of coffee knowledge in the future. The awareness of quality regarding the prepared coffee drinks has been raised and strengthened by the development of the national and World Barista Championships during the past years, supported by an increasing offer of training and education in this field. The resultant expectation is an increasing interest of the Baristi in also the two other steps of the coffee processing chain: the green coffee and the roasting process. In addition, the espresso stands for one preparation method of many different ones, which differ from area to area because of various coffee consuming habits. Also an extension of the Baristi’s knowledge and skills on these various coffee preparation methods is anticipated.
- Inga Jerkovic
Probat-Werke von Gimborn Maschinenfabrik GmbH 10.

The “barista” will become like a graduated bartender or a sommelier, a well paid professional, but their profession will be challenged by automation, the vending industry and fast food chains.
- Umberto Terreni
Astoria/General Espresso Equipment

Highly trained baristi are becoming the point of differentiation between successful independent coffee cafes and the multi-unit chains that are moving toward fully automated espresso machines.
- Ted Lingle
SCAA

In Italy, a barista generally must apprentice about two years. Because there it’s a real profession, and people understand that baristas are serious food crafters. While the long apprenticeship period is perhaps impractical in many places, the general attitude must spread more widely.

Retailers need to understand that consumers do appreciate latte art; they understand that a trained professional barista, skilled in cupping, preparation, and creative beverage service is the sign of a superior shop.

I think one of the reasons barista competitions and jams have taken off like wildfire is not only because the baristi themselves are beginning to really dive deep into the concept of an artistic coffee cuisine, but also because the most savvy retailers understand what a true barista brings to a shop. Right now the barista world is on a roll, and in that sense maybe we’ve never seen a more motivated, creative coffee scene.

I hope this enthusiasm is going to spread out to consumers. More retailers need to sit up and take notice of what’s going on there, to develop the potential latent in their employees.
- Fortune Elkins
C-Member
Specialty Coffee Association of America


10 - What transport issues are affecting your business?

Higher costs of transportation related to higher prices of oil combined with the declining value of the dollar can pose a risk, and limit profitability.
- Umberto Terreni
Astoria/General Espresso Equipment

The only transport issue that is affecting myself is the high cost of gas. The transport companies already charge a lot and this can make or break my deal, so many times I need to absorb part of the cost. With the extra costs, it is getting harder and harder.
- Maryann Oletic
Innovated Products Manufacturing Inc.

Availability of containers due to shifting economic trends globally, freight costs
- Steven D. Colton
Atlantic (USA) Inc.

One of major aspects affecting shipping industry today is the need to increase security with regard to vessels, containers and terminals. This has been done in response to the perceived threats to ships and port facilities in the wake of the 9/11 attacks. As a consequence, ocean surcharges and terminal surcharges have been implemented under the auspices of the ISPS (International Ship and Port facilities Security) code, which is a global directive from the IMO (International Maritime Organization).

The limited number of vessels - both container and breakbulk -currently available to the market has led to an increase in the cost of chartering vessels and of new buildings. This, combined with the growing demand from China for shipping services has led to significant increases in vessel charter hire costs as well as increased freight rates on most trade lanes.”
- Didier Willemse
Safmarine

Increased freight costs that we are unable to pass on to our customers.
- Larry Walton
American Packaging Corp.


Tea & Coffee - December/January, 2005
Modern Process Equipment

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