When we want a stimulant, we want it instantly. We don’t really care about the taste, do we? Well, some do. But for most, and the numbers in this category are adding up by the day, speed scores over taste. Hence, when it comes to coffee – the most popular stimulant of modern man – despite its inferior taste, instant coffee is more popular than its older cousin: filter coffee. What’s more? Other than adding taste to those rendezvous with significant someones, it’s also raking in the moolah for Indian exporters
Shivani Kapoor | July 2015 Issue | The Dollar Business
Have a mind block? How about a cup of coffee to unblock it? A lot can happen because of a cup of it, or that’s what coffee lovers believe. They swear by its powers to stimulate ideas in an instant. Be it the midnight canteen in an Ivy League college or the corner office of a MNC behemoth, coffee is omnipresent. Its fans are everywhere. But this was not always the case. Before the birth of its instant version, coffee was not everyone’s cup of tea (no pun intended). Preparing filter coffee was not only expensive, but also messy and time consuming – all that instant coffee is not.
Quick fix
Traditional coffee lovers don’t like instant coffee. Its taste doesn’t even come close to that of filter coffee. You don’t believe us? Ask Challa Srishant, Managing Director, CCL Products. “Filter coffee is far superior to instant coffee. Instant coffee can’t even come close to filter coffee,” Srishant, with more than a bit of vested interest in instant coffee, since CCL Products is the biggest exporter of instant coffee from India, tells The Dollar Business. What makes instant coffee a hit, though, is the ease of preparing it. “Just add boiling water and you get the foamy cup of your energy booster. For its quick and easy preparation, I have switched to instant from traditional filter coffee,” Abhijeet Ulal, an IT professional, who does long hours and an instant coffee convert, tells The Dollar Business. And Ulal is not alone. “The convenience, versatility, and branded experience of instant coffee make it an attractive consumer product in emerging coffee markets, while in established markets, instant coffee seeks to shed its commodity image to sustain consumer interest,” market research firm Euromonitor wrote in a June 2014 report. 
K. V. K. Raju, Director, Vayhan Coffee, elaborates this further. “Instant coffee is appealing because of its ability to satisfy the needs of new coffee drinkers. It is convenient and comes in a variety of flavours. Unlike established coffee markets, instant coffee is viewed as a multi-purpose product with endless flavours to suit consumers’ requirements. It can be used as an ingredient in several food and beverage products. Another important benefit of instant coffee is its substantially lower cost per cup. Since more number of cups can be prepared per kilogram of instant coffee, as compared to filter coffee powder, it is economical as well,” he tells The Dollar Business.
Feeling the heat
Instant coffee is prepared from the same green coffee beans that are used to make regular coffee, but involves two additional steps. First, the beans are roasted and ground to fine particles. Then they are dissolved in hot water to make a concentrate. The concentrate is then either freeze-dried or spray-dried. Once fully dry, the final step involves converting the coffee into either crystals or powdery substance. The entire process of preparing instant coffee doesn’t seem to involve anything that makes it inferior, isn’t it? Why then is it considered so? N. Sathapan, Managing Director, SLN Coffee, has the answer. “Since preparing instant coffee involves heating, a lot of the aroma and flavour is lost during the process,” he tells The Dollar Business.
The converts
An interesting aspect of the instant coffee market is that incremental demand is coming from consumers in traditionally tea-drinking markets in the Asia Pacific region and Eastern Europe. Silu Jacob, Manager (International Markets), Coffee Day Exports, terms them “the new breed of coffee fans”.
"Instant coffee is not only easier to make, but also cheaper than filter coffee"
“Amateur coffee lovers have acquired a taste for this hot drink. Besides, those with hectic schedules and fast moving lifestyles have started viewing instant coffee as a better quality alternative to fresh coffee,” she explains. That coffee and instant coffee, infact all kinds of coffee extracts, are entirely different sets of businesses becomes clear by taking a look at their top exporters and importers. Brazil, which is, by far, the biggest coffee exporter in the world is a distant second when it comes to coffee extracts exports. On the other hand, Germany, which is the biggest importer of coffee, is the biggest exporter of instant coffee. How? Simple, it imports a lot of coffee beans, uses its world class processing technology to convert them to instant coffee, and then exports them all over the world. On the other hand, India also seems to have learnt the benefits of value addition. For, while it is only the 15th biggest exporter of coffee, when it comes to instant coffee exports, it ranks at a respectable no.4.
Instant coffee is prepared from the same green coffee beans that are used to make regular coffee, but involves two additional steps
Losing flavour
If one takes a look at India’s instant coffee exports, the move away from the flavoured variety to the non-flavoured one is startling. For, while 10 years back, the country’s flavoured instant coffee exports were 35.2x of that of the non-flavoured variety, in FY2015, there were just 13.3% of latter. Quite surprising, isn’t it, particularly considering the fact that versatility of flavour has been one of the main drivers of the rising demand for instant coffee? “People prefer the normal coffee taste. Flavoured coffee is a once-in-a-while drink. Secondly, there is a premium associated with flavoured coffee because of the cost involved in adding flavour, which makes it more expensive than regular coffee,” explains Srishant, clearing all doubts. Jacob too shares similar views. “It is about usage patterns. Regular instant coffee is used throughout the week in households, but its flavoured counterpart comes out of the shelf only on special occasions,” she tells The Dollar Business.
"Instant coffee exports are entitled to 5% incentive & 3% duty drawback"
All in a name
While coffee can be termed a commodity, instant coffee can never be. Brands do play a significant role in this segment. In fact, according to International Coffee Organisation (ICO), “Nestlé and Kraft Foods account for just under 75% of the world market.” Acknowledging the role that brands play in the instant coffee market and validating ICO’s observations, Srishant says, “Nestle is the premium brand in instant coffee. It has its own global presence. Till date, no other brand has even come close to it. It has its own manufacturing setups. Moreover, they have more than 100 years of experience in the market and that counts.” And this branding has been a big problem area for Indian instant coffee exports. “One of the main challenges is to create brands and consistently nurture them in order to improve the top and bottom lines, so as to compete with competitors operating overseas,” Raju says and adds, “India has good potential to improve its position in the global market but it needs substantial investments in order to make itself more competitive. Higher domestic costs are restricting Indian companies from positioning themselves in the branded segment.” Indian instant coffee exporters, however, haven’t allowed the absence of strong brands to deter them. They have, instead, found a lucrative business in catering to private labels. S. Sivakumar, Group Head (Agri & IT Business), ITC, says, “We don’t export under our own brand. Our exports are primarily to private labels.” 
Smelling success
Despite challenges, instant coffee exports from India have grown at a CAGR of 15% over the last 10 years, as compared to a 9.4% CAGR of the overall market. At the same time, they are entitled to 5% incentives under MEIS and 3% duty drawback. Still got a mind block whether to export it or not? You know what to do!
“The government should absorb some of the costs to encourage the industry” - S. Sivakumar, Group Head, (Agri & IT Business), ITC
S. Sivakumar, Group Head, (Agri & IT Business), ITC
TDB: ITC was primarily into green coffee exports. What made you enter the instant coffee business?
S. Sivakumar (SS): We were the largest exporter of green coffee in 2014. Instant hasn’t been a part of our portfolio in a significant manner. Conventionally, Indian instant coffee exports were at the lower end of the market, primarily focused on destinations like Russia. Overtime, as Indian policy became a little import-cum-export friendly for value addition within India, the country started importing a lot of coffee, which was cheaper than Indian coffee. Since Indian processing cost was lower, the country became a re-exporter. This helped the rapid expansion of instant coffee exports. Even then, instant coffee wasn’t on our radar, since we were not importers ourselves, nor were we processers. What made us interested, however, was the slow emergence of niche instant coffee that was of relatively higher value. As a large green coffee exporter, we had customer contacts in different countries. So, with the opportunity opening up for high value instant coffee exports, we got interested and started working on developing a somewhat niche and specialty instant coffee variety.
TDB: As a new entrant in the instant coffee business, what is your USP?
SS: We started product development two years back and last year, initiated exports of instant coffee. We are still a novice in this business. So, the advantage we have as a new entrant, and being a small player in the instant category, is our ability to tailor make products as per the customer’s wants. We produce coffee based on the requirements of our customers. At this point of time, our primary focus is the Middle East. Currently, we export to four countries in the Middle East. We serve the unique needs of customers in small lots. Customer centricity is very important for us.
TDB: What are your expansion plans when it comes to instant coffee exports?
SS: We don’t export under our own brand. Our exports are primarily to private labels, which are the customers’ brands. Our customer base is, typically, retailers and wholesalers, who own their distribution systems. Our strategy is to work in niche markets, with smaller customers and in high-value products. Whoever is operating in the instant business is potentially our competitor.
TDB: What are the real challenges for Indian instant coffee exports?
SS: When it comes to high-value exports, the key challenge is the product development time. Our focus is the customer. If a customer wants a particular variety of coffee, the big challenge is to develop that variety, test it, bring-in the changes and improvise. It’s a long cycle. Therefore, the gestation period is bound to be long. Then there are cost implications and operational challenges, particularly if we are starting with a model of niche customers and small volumes. High value instant coffee requires proper mapping all the way from the plantation to the customer, because your ability to understand what impacts the quality of coffee grown in a plantation makes all the difference. The supply chain design also needs to be taken care of.
TDB: What, according to you, should the government do to encourage more instant coffee exports from India?
SS: In any business, a lot of time and effort is invested. A lot of cost is incurred for a potential benefit, which will only happen later. Therefore, when it comes to high value exports, we think the government should partially absorb some of these costs, at least the ones that are higher in India, as compared to competing countries. It doesn’t make sense for the government to give subsidies to free market operators. But it should compensate for the absence of infrastructure. For example, quality testing laboratories are not accessible in India as they are in many other countries. Given our infrastructure, transportation costs are also higher. So, offsetting some of these higher costs should be part of the government’s plan to encourage the industry.
“Duty free imports for re-exporting has helped India’s instant coffee exports” - Challa Srishant, Managing Director, CCL Products
Challa Srishant, Managing Director, CCL Products
TDB: Tell us a bit about the instant coffee business. Which instant coffee varieties do you export and to which countries?
Challa Srishant (CS): We are majorly into exports. We sell in bulk to private labels. So, our customers are not the final consumers, but retail brands and store owners. We manufacture based on what the customer wants. Currently, we are exporting 200 varieties of instant coffee to more than 80 countries. Two decades back, when we started the business, we used to produce only 10-15 varieties. But now, with several changes in technology, we have increased the varieties. We use Arabica, Robusta and sometime, a blend of both the varieties.
TDB: How is instant coffee different from filter coffee?
CS: When it comes to quality, filter coffee is far superior to instant coffee. Instant coffee can’t even come close to the former. But while making a cup of coffee by the traditional filter method, efficiency is low and there is a lot of wastage. For example, by spending Rs.100, if you can make 100 cups of instant coffee, the same money will give you only about 25 cups of filter coffee. The difference in efficiency is huge. This is what makes instant coffee economical. But in order to achieve higher output, you are sacrificing on quality. Today, however, technology has helped minimise the difference between filter and instant coffee to a large degree.
TDB: Why are more and more people, especially traditional tea-drinkers, taking to instant coffee?
CS: India has always been a predominantly tea-consuming nation and coffee has always been about aspirational values, thanks to branding done by companies like Nestle and HUL. However, with the rise in purchasing power of the middle-income group in recent years, consumption patterns are changing. Thus, coffee, which used to be considered an elite treat, is now becoming a necessity for even the common man.
TDB: What makes India one of the top exporters of instant coffee?
CS: The prevailing law in India is one of the biggest reasons for this. For instance, Brazilian law restricts manufacturers from importing coffee from any other country even for re-exports. However, in India, for re-exports, one can import coffee from any part of the world without paying duties. Besides, lower cost of production and cheap labour also contribute to increased production and hence, increased exports.
TDB: Why have India’s flavoured instant coffee exports been falling continuously for the last several years, while that of non-flavoured variety been rising?
CS: People prefer the normal coffee taste. Flavoured coffee is a once-in-a-while drink. Secondly, there is a premium associated to flavoured coffee because it involves additional processes. Also, for any brand, creating the distinction between flavoured coffee and regular coffee involves separate promotional activities. All these factors make flavoured coffee expensive. Hence, the falling exports.
TDB: Tell us a bit about your installed capacity and export volumes. Also tell us about your competitors.
CS: We have, by far, the largest capacity in India. The combined capacity of all other manufacturers, who export instant coffee, is less than ours. Since we have the first-mover advantage and handle large volumes, we are more competitive price-wise. Thus, we are far ahead of everybody else in India. However, globally, there are several producers in Brazil and Mexico, who supply huge quantities to the US market, and hence, are our competitors.
TDB: Can you give us a sense of the margin involved in the instant coffee export business.
CS: As far as exports are concerned, margins vary depending on the customer. While with some customers, we operate at 3-5% margin, with some others, the margin can be as high as 25-30%.
“We also supply instant coffee to UN Missions” - Silu Jacob, Manager (International Markets), Coffee Day Exports
Silu Jacob, Manager (International Markets), Coffee Day Exports
TDB: What do you think is the main reason for instant coffee’s rising popularity?
Silu Jacob (SJ): A convenient and quicker preparation method is the main driver of the surging growth of the instant coffee market. Unlike filter coffee, where you need to first brew the beans and then filter them to get a cup of coffee, instant coffee is ready in moments. Moreover, it is economical as well. Besides, the shelf life of instant coffee is higher than that of its roasted counterpart.
TDB: Is instant coffee a commodity or does branding play a big role in its pricing?
SJ: India has a fair share of private-label instant coffee exporters, who might differ in opinion, but for us, branding is everything. It determines the price the customer wants to pay for the product, the loyalty the customer has towards the product and the trust he/she has in the product line extensions. On the global front, the FMCG sector is a tough nut to crack, since many A Class stores offer instant coffee under their own private labels. Hence, getting listed in those outlets is an uphill task, if you are not a brand that customers recognise.
TDB: How many varieties of instant coffee do you export? Which countries do you mostly export to?
SJ: We started our branded instant coffee exports in 2013. It’s a new business and is picking up pace. We export pure instant coffee and a 3-in-1 instant coffee variety in different flavours. Our main markets are the Middle East, Canada and the US. In the Middle East, UAE has the most potential, since it is home to a lot of Indian expats, who can identify with our brand. We also supply instant coffee to UN missions.
TDB: What has made Indian instant coffee a major hit in the international market?
SJ: Indian instant coffee has great taste and comes at a competitive price. We believe India is a great amalgamation of high quality agricultural produce, manufacturing technology and marketing.
TDB: Why are India’s exports of flavoured instant coffee just a fraction of that of its non-flavoured counterpart?
SJ: Even for us, flavoured instant coffee is a small fragment. We have just started flavoured instant coffee exports, with the first batch dispatched earlier this year. According to us, while regular instant coffee is used throughout the week, its flavoured twin comes out of the kitchen shelf only on few occasions. People drink coffee for the caffeine kick. Flavours are a rare craving.
TDB: What are the real challenges for an Indian instant coffee exporter?
SJ: There is competition from both domestic, as well as global players. Packaging regulations also keep changing. Municipality permits are another challenge to counter. Optimising the supply chain and ensuring that a ‘stock out’ situation doesn’t arise is an ongoing challenge, especially while exporting to countries that are geographically distant. But I would say these are the bitter-sweet joys of being an exporter and nothing compares to the pride of finally seeing your product being appreciated in another country.
