A different approach to map growth opportunities in South America
Image courtesy of Agropecuaria Farallones
Euromonitor International proposes a growth decomposition model to help stakeholders more accurately map coffee market changes in regions such as South America. By Angelica Salado
With two of the top five coffee producers in the world – Brazil and Colombia – South America maintains its relevance not only as an exporter, but also for its current consumption standards. According to new data published by Euromonitor International, it is among the top regions in the world for total volume sales in 2019, with more than 1.3 million tonnes, only after Asia Pacific and Middle East & Africa.
Over the last five years, the region increased total volume sales by a three percent compound annual growth rate (CAGR) – among the fastest-growing regional markets in the world. Such a positive performance, however, is not expected to slow down. South American coffee sales should grow at a four percent CAGR between 2019 and 2024, per Euromonitor.
This may sound counter-intuitive at first, since the market is already so mature, coffee is so traditional and South American economies have struggled with recent economic and political crises. So, where is growth coming from?
Proposing a New Understanding Model
While a common denomination to refer to countries’ coffee development level is waves, ranging from those with incipient consumption to those in which it is omnipresent. These definitions are not always clear or even consistent enough for companies to base their strategic planning. Especially in South America, where social inequality is such a big issue, classifying a coffee market based on trends mostly present in urban areas is likely to discredit important social and economic movements in peripheral regions.
For that reason, Euromonitor International proposes a new way of understanding differences between markets and anticipating opportunities to further growth: premiumisation, income, population and soft driver markets. Premiumisation-led growth markets are those in which consumers are increasingly interested in products with higher added value, through greater understanding of products or even unique experiences. Income-led markets refer mostly to those where coffee is not perceived as essential, therefore more attached to available income. Usually, these markets tend to prefer other beverages, for example, yerba mate for countries like Argentina and Uruguay.
Population-led markets have growing market potential as the key driver, despite the possible competition with other beverages. With so many new consumers trying the beverage, the need to beat competitors and conquer share of throat is lower. Finally, soft-drivers-led markets are the ones in which most important factors are not related to macroeconomic or social-demographic factors, but on how the industry responds to new market movements. These are the markets in which companies have the highest power of influence, therefore less subject to market volatility.
While the waves model is mostly focused on the stages of development for the coffee market per se, the new rationale on the current growth model proposed by Euromonitor not only can be replicated to many other types of consumer goods, but also helps understand the local dynamics, new political, economic, demographic or even market scenarios that can accelerate or regress development.
No General Growth Roadmap for Sales
Looking at South America’s coffee volume sales outlook in the next five years, the most dominant growth drivers are still soft ones. On a regional level, this is particularly interesting, as many countries have been, currently are or will soon be in challenging economic and political scenarios. According to Euromonitor International’s Industry Forecast Model, the way the industry responds to market movements and new trends will be a key success factor in the future, potentially offsetting or at least smoothing negative impacts of other drivers.
A closer look into key coffee markets, however, is welcomed to help companies better adjust their growing strategies in the region. Brazil alone accounts for 72 percent of total volume sales in the region in 2019, per Euromonitor. While the country struggles to resume economic growth, coffee sales suffered only a light deceleration in 2016, quickly recovering since. The main reason being the industry’s fast reaction with new launches, focus on communication and advantage of non-fulfilled consumption occasions to grow in per capita consumption – soft drivers led growth. Even though trends might differ between urban and peripheral areas, many players were able to accommodate in their portfolio brands ranging from the most affordable to the most premium.
Colombia is the second largest coffee consumer in the region, with more than 82,000 tonnes in total volume in 2019, per Euromonitor. Despite being an important coffee producer and exporter, Colombia presents a hybrid future growth-led movement; volume sales should be boosted both by income and soft drivers. Demand for high-quality and premium coffees continues to rise with companies like Juan Valdez and follower brands. This is directly related to consumers’ available income; although more expensive, these offerings are in line with the quality level expected.
The third largest market in the region, Argentina, is registering 30,000 tonnes in 2019. As the country’s economy still faces instability, many consumers are resistant to spending money eating out and are more interested in at-home social experiences because of committed available incomes. Argentina has a high penetration of yerba mate as a significant hot beverage, which forces companies to have even more creative strategies to engage consumers.
Apart from the momentary relevance of prices level to final consumers, the industry’s response – the soft drivers – is the key growth driver to smooth retraction in volume sales. Investments in high-quality instant coffee and pods to help consumers replicate the foodservice establishment experience at home, as well as price incentives for new entrants in the category, have been an important strategy adopted by major players and should continue to be.
A Safer Approach to Business Plans
Brazil, Colombia and Argentina represent a significant portion of South American coffee and similar characteristics in market development. Such similarities, however, are not enough to explain growth movements in the future, as the drivers are different in each of them. The generalisation of these factors could result in misleading interpretations of opportunities to grow in the future.
Although the waves classification still provides significant value for the coffee industry to map the biggest coffee market changes at a global level, other rationales can be used to help stakeholders better anticipate future demand. A model that allows growth decomposition can bring more actionable insights, especially for such an unstable, dynamic – and fantastic – market, like coffee in South America.
In this article, the South American region includes: Argentina, Brazil, Bolivia, Chile, Colombia, Ecuador, Peru, Paraguay, Uruguay, and Venezuela.
- Angelica Salado is research manager at London-based market intelligence firm, Euromonitor International. She is based in the Chicago, Illinois office.