Coffee Market in Russia: Foreign Companies’ Investments Provide Growth

The total capac­ity of the cof­fee mar­ket in Russia is cur­rently esti­mated at 223,000 tonnes, with an aver­age annual growth rate of about 2–3%. The county’s cof­fee mar­ket is highly com­pet­i­tive and con­sists of sev­eral very dif­fer­ent seg­ments, each of which has its own lead­ers nar­rowly focused in work­ing in a par­tic­u­lar area. About 75% of the Russian cof­fee mar­ket in vol­ume terms account for instant cof­fee – freeze-dried, gran­u­lated, pow­dered and cof­fee drinks. The remain­ing 25% is belonged to nat­ural cof­fee, and in recent years, this per­cent­age is grad­u­ally increas­ing. Statistics show that cof­fee sales in the coun­try over the past five years almost dou­bled. As a result, Russia has entered the top ten con­sum­ing coun­tries in the world. Currently it occu­pies 7^th place in the list of largest con­sumers after the United States, Brazil, Germany, Japan, France, and Italy. Russia also ranked first place in the world in the con­sump­tion of instant coffee.

Russians chang­ing their con­sump­tion habits
Traditionally, the Russians have con­sumed tea, but in the last decade the aver­age Russian cof­fee con­sump­tion has rapidly increased – by 4 times in 2012 com­pared to the level of 2000, when only 68 mil­lion peo­ple in the coun­try reg­u­larly con­sumed cof­fee. In 2014, this fig­ure, accord­ing to numer­ous fore­casts, will rise to 94 mil­lion peo­ple. This accounts for more than 60% of the Russian population.

This trend came mainly by the devel­op­ing of fast food chains, such as Starbucks or Coffee House. However, at the same time, the coun­try remains one the largest tea-consuming coun­tries in the world. According to the offi­cial sta­t­ics in 2012 about 94% of Russians drink tea, with only three coun­tries in the world being higher: India – 95%, Indonesia – about 96% and the United Arab Emirates – about 98%.

It should be noted that in recent years, Russians are increas­ingly opt­ing for cof­fees that are more expen­sive. Thus, the share of the high­est price seg­ment in the Russian cof­fee mar­ket grew from 7% of the total mar­ket in 2005 to 16% in 2012. Gradually, Russians are mov­ing to the con­sump­tion of nat­ural cof­fee. Both these trends could be partly explained by the level of income growth in recent years.

Experts pointed out that the seg­ment of the freeze-dried cof­fee in Russia has already now reached its sat­u­ra­tion, result­ing in vol­ume grow­ing very slowly. The main growth of the indus­try in the com­ing years will be the nat­ural cof­fee sec­tor. According to pre­lim­i­nary fore­casts, the capac­ity of the Russian cof­fee mar­ket will rise to 350,000 tonnes in 2020. At the same time the share of instant cof­fee will decrease by 15% to 60% of the total mar­ket structure.

Specialty mar­ket is actively devel­op­ing with the road­side cafe­te­rias
At the same time the spe­cialty cof­fee mar­ket in Russia is pro­jected to boom in com­ing years. As it has been fore­casted in the inter­na­tional forum “Coffee and Tea” in 2012, orga­nized with the sup­port of the Specialty Coffee Association of Europe (SCAE) with new types of adver­tise­ment and pro­mo­tions, the total vol­ume of sales of cof­fee houses and retail­ers could grow 8% per year at least until 2016.

At the forum, it was announced that mar­ket play­ers are cur­rently see­ing the most promis­ing area for fur­ther devel­op­ment in the cre­ation of road­side cafe­te­rias. Already two large cof­fee houses in 2012 announced plans for the expan­sion in this seg­ment of the mar­ket: American cof­fee house chain Starbucks Coffee Company and the Russian cof­fee house Caffeine. According to some reports, the other mar­ket play­ers in Russia have sim­i­lar plans in var­i­ous stages of consideration.

Starbucks Coffee Company is expand­ing its Seattle’s Best Coffee chain the first restau­rants appear­ing in the coun­try by the end of the year. Such restau­rants will be able to serve up to 36 thou­sand vis­i­tors – a huge amount by the stan­dards of Russia, which has the poten­tial to sig­nif­i­cantly increase the con­sump­tion of coffee.

According to the head of a net­work of cof­fee houses “Caffeine” Eugene Kogan, devel­op­ment of road­side cafe­te­rias has a great poten­tial in Russia. “Right now we have no cul­ture of drink­ing cof­fee in the car, but pre­vi­ously no one knew about Japanese sushi, but now they’re sell­ing all over the place,” – says Kogan. According to him, large invest­ments in this seg­ment could result in seri­ously chang­ing the cul­ture of drink­ing cof­fee in Russia within the com­ing five years.

Network “Caffeine” is also plan­ning to develop and launch the con­cept of road­side cafe­te­rias “It is in our long-term plans. In the mean­time, we are expand­ing the geog­ra­phy of our work with the open­ing of cafe­te­rias in Surgut, Ufa, Tyumen, Kazan and St. Petersburg.”

Natural cof­fee seg­ment has bright future
In the mar­ket of nat­ural cof­fee, dom­i­nance of for­eign com­pa­nies is not absolute. Here, the main play­ers are the fol­low­ing com­pa­nies: Orimi trade, Russia – 25–30% of the mar­ket; Paulig Group Finland – from 15.5% to 17%; Strauss Group, Israel – 13.5%.

The share of Russian com­pa­nies in the total mar­ket struc­ture is 50%. In 2012 in Russia, about 68,000 tonnes of nat­ural cof­fee was sold. It is pro­jected that in com­ing years, this fig­ure will grow 4–5% per year. As a result, nat­ural cof­fee may reach 100,000 tonnes by 2020.

However, accord­ing to experts, the prof­itabil­ity of small Russian com­pa­nies in the seg­ment of nat­ural cof­fee can be only half a per­cent, which is much lower than in the instant cof­fee seg­ment as well as the level of prof­itabil­ity of large com­pa­nies. Thus, accord­ing to experts the growth of the vol­ume of nat­ural cof­fee mar­ket will go in par­al­lel with the con­sol­i­da­tion of the industry.

Retailer Profile: The Coffeemunist Manifesto

Good morn­ing! Do not be sur­prised when your neigh­bor­hood gets a new cof­fee shop with Russian writ­ings all over it. It will prob­a­bly have a catchy name and Soviet inspired designs. No, the com­mu­nists did not take over the world just yet, but the Dazbog fran­chise arrived in your town. Brothers Leonid and Anatoly Yuffa, who fled the Soviet Union to escape the régime and start a new life here in Denver started Dazbog from scratch. I met with Leonid, so that we could find out more about their suc­cess story; here it goes:

V. Dobroe Utro Leonid! I love your com­pany name: it is solid, intrigu­ing, and Russian. Could you please explain what it means?
Y. Thank you. “Dazbog” is a com­mon term in Russia. When you start a fam­ily, have a new busi­ness, move, or get a new job, every­one that you know says “dazbog” to you, so that you will be for­tu­nate in your endeav­ors. The term sym­bol­izes hap­pi­ness, health, wealth, and suc­cess in every part of your life. We thought it was very appro­pri­ate for our busi­ness because when one con­sumes cof­fee he/she expe­ri­ences hap­pi­ness and peace of mind, even if it is just for a slight moment dur­ing their lives.

V. I am not too famil­iar with Denver’s cof­fee scene, how would you describe it and is there some­thing one needs to con­sider before open­ing up a busi­ness here?
Y. Denver’s cof­fee scene is very sim­i­lar to Seattle’s and Portland’s because of the weather – lots of rain, so the cof­fee cul­ture has boomed a lot faster than it has in other parts of the coun­try. Our com­pany has 26 cafes in Colorado and lots of whole­sale busi­ness, but Starbucks, for exam­ple, has over 400. The issue for any busi­ness owner in Colorado becomes the rent fac­tor: it is still very expen­sive here, espe­cially in the Denver met­ro­pol­i­tan area, com­pared to other parts of the coun­try with sim­i­lar demo­graph­ics. In addi­tion, the lack of den­sity (there is a lit­tle less than 6 mil­lion peo­ple in the entire state) fur­ther wors­ens the sit­u­a­tion by lim­it­ing the amount of rev­enue one can receive from a local business.

V. How did Dazbog come to be? Did your fam­ily have some pre­vi­ous expe­ri­ence with the cof­fee busi­ness in Russia?

Y. No, our fam­ily had noth­ing to do with cof­fee in Russia. I grad­u­ated from CU with an Accounting and Finance degree in ‘92, decided to open up a cof­fee shop, and did more research than I prob­a­bly should. At the time, it was really in the infancy of the gourmet cof­fee indus­try, because even in Italian restau­rants here you couldn’t get an espresso cap­puc­cino. I decided to import some espresso equip­ment to train and a few years later stum­bled on the fact that I had a great palate for bev­er­ages, for cof­fee in par­tic­u­larly. So, in ‘96 my brother and I started Dazbog.

V. So Dazbog started from just one shop back in time?

Y. I actu­ally didn’t end up open­ing a cof­fee shop. We started off doing strictly whole­sale busi­ness focus­ing on our brand­ing, qual­ity and ser­vice. Our cus­tomers were cof­fee shops, cafes, resorts and spe­cialty stores. Only in the last five years we have been doing fran­chis­ing. We started with one cor­po­rate store and from there we opened more stores, and then franchising.

V. What was your moti­va­tion to become involved in retail after 10 years of suc­cess­ful whole­sale?
Y. You know the more we branded, the bet­ter our retail­ers and our whole­sale cus­tomers did, and at a cer­tain point we decided to test the brand on the streets to see how viable it was to have a stand-alone brand. So, we opened up the first store, which is still bloom­ing for us, and we have never looked back. People really have accepted our brand because it gets them inter­ested in try­ing it, and we deliver with the con­tent in the cup.

V. Successful fran­chis­ing is hard to orga­nize and man­age in any type of busi­ness. It appears to be like a walk in a park for your com­pany, what is your secret?
Y. It all came together for us in the right way and the right time. I believe that most cof­fee com­pa­nies out there who attempt to start fran­chis­ing and cor­po­rate stores do not under­stand the dis­tri­b­u­tion busi­ness and how to get prod­ucts to their stores. For us, we became experts in dis­tri­b­u­tion, man­u­fac­tur­ing, and ful­fill­ment, so we are now able to make sure that our stores are get­ting the high qual­ity prod­ucts on time with all of the sup­port. It is the oppo­site of how most retail­ers are doing it, but in our opin­ion, it really worked out for the best. However, we are very par­tic­u­lar in who we do busi­ness with in terms of fran­chis­ing espe­cially. We want peo­ple that do not only have pas­sion for cof­fee, but have a pas­sion for our brand as well.

V. How would you char­ac­ter­ize your roast­ing phi­los­o­phy?
Y. I believe the best cup of cof­fee is just a nat­u­rally sweet cup, but still retains the char­ac­ter of its ori­gins. For that rea­son we are big pro­po­nents of the medium roast, which to us is choco­late brown with nat­ural sug­ars carameliz­ing and with oils just start­ing to come out.

V. What do you think is the main rea­son behind your suc­cess?

Y. You know, one word that comes to mind is that we are authen­tic. Authentic in all terms of the word: we are who we are, we tell a story through our brand, and we are not mak­ing things up. The brand serves as a can­vas for telling our story. In addi­tion, the story of every ori­gin needs to be told. We trans­late it into the cup by rep­re­sent­ing the true sweet­ness and the nat­ural char­ac­ter of the beans, and that is the authen­tic­ity of the cof­fee and how it relates to us.

V. Any future plans?
Y. Smiles… People ask me all the time when are you going pub­lic? When are you guys going to sell? What is your exit strat­egy? To me it is like: what exit strat­egy? I love what I do every day, and I love that it is just me and my brother. Why would I ever want to stop doing what I love? We grow organ­i­cally and healthy based on what we can afford to grow with­out harm­ing the farms. As long as I am hav­ing fun, I could be doing this for the rest of my life, and there is no rea­son for me not to be doing any of those things.

Dazbog Coffee Company

www.dazbog.com
1090 Yuma Street
Denver, CO 80204
coffee@dazbog.com

Retailer Profile: From Thailand with Love

We have done café pro­files all over the U.S., and sev­eral in Peru and Russia. This month we are con­tin­u­ing our inter­na­tional explo­ration with the best in Thailand – get ready for Doichaang Coffee Shops to blow your mind away fel­low cof­fee freaks!

“I had restau­rants and hotels, but I sold them all to go up to the moun­tains and work with cof­fee farm­ers 12 years ago,” – replied Wicha Promyong, the Doi Chaang Coffee Co.’s pres­i­dent, when I asked him how he got into the cof­fee business.

It seems like suc­cess inevitably fol­lows the foot­steps of a tal­ented busi­ness­man: Wicha sold every­thing to seek a quiet refuge in the Thai moun­tains, but 12 years later found him­self run­ning one the best cof­fee com­pa­nies in the coun­try. Wicha’s Doi Chaang now owns 20 cof­fee shops in Thailand, sup­plies cof­fee to 300 oth­ers, and his cof­fee con­sis­tently ranks among the top in the world.

Let’s talk to the man:

V. Many cafes in U.S. like to announce them­selves as being green and organic as soon as they receive the first deliv­ery of biodegrad­able cof­fee cups, but you guys are really tak­ing it all the way. Look at this jun­gle that you have built here: water­fall, gar­den with plants all over, and lots of organic prod­ucts for sale. This is a beau­ti­ful shop! What is its his­tory?
W. Thank you (smiles). Well, this is our very first shop that got opened 9 years ago. I opened it so that peo­ple could try our cof­fee and know how it tastes; how­ever, I have never pre­dicted such rapid growth and pop­u­lar­ity. A per­son would come in, try our cof­fee and tell 5 oth­ers – it is magic what word of mouth can do. As far as the design in this par­tic­u­lar shop I have used a tra­di­tional Thai style of build­ing that brings the nature inside and makes the atmos­phere really peaceful.

V. Could you tell our read­ers a bit about cof­fee cul­ture in Thailand – how did it progress over time?
W. In the old days in Thailand, peo­ple mostly drank instant cof­fee with con­densed milk. Then Starbucks came along and intro­duced the cul­ture of drink­ing fresh cof­fee, so now the major­ity of con­sumers turned to fresh brew. They know how to drink cof­fee, and instant cof­fee con­sump­tion has got­ten lower and lower espe­cially in the last 3 years.

V. How did you man­age to acquire enough exper­tise and knowl­edge to open up and oper­ate one of the best cof­fee shop chains in Thailand?
W. Simple. I just went around the world, looked at the way good shops were oper­ated, and drank cof­fee here and there slowly learn­ing day by day.

V. You have trav­eled the world exten­sively, what makes Doi Chaang cof­fee shops unique among oth­ers?
W. I think the biggest “unique” fac­tor for us is that 100% of the cof­fee in our cof­fee shops comes from our own plan­ta­tion in Doi Chang province. We sell only what we grow and process at the plan­ta­tion. However, because of that we have a lit­tle prob­lem now: our cof­fees are being sold really well, but the demand has got­ten too high. From Malaysia to Australia peo­ple are com­ing to us, but we don’t have cof­fee to sell because we sell only what we produce.

V. How is your com­pany plan­ning on resolv­ing this sit­u­a­tion?
W. We have expanded by 8000 acres in the Doi Chaang area, but we have to wait for another 3 years for the plants to suf­fi­ciently grow. In the future, we will be able to pro­duce about 2000 tons a year, so it’s just a mat­ter of time.

V. You have men­tioned that Starbucks con­tributed to cof­fee cul­ture progress in Thailand, but do you see more and more peo­ple choos­ing Doi Chaang cof­fee shops over Starbucks in Thailand?
W. You know yes, inde­pen­dent cof­fee shops are becom­ing much more pop­u­lar in Thailand, espe­cially with locals. They try our cof­fee once and always come back again. Maybe around 8 per­cent of our cus­tomers are for­eign­ers: the major­ity is still walk­ing the floors of Starbucks.

V. Wicha I think what you have man­aged to cre­ate with Doi Chaang Coffee Company is absolutely genius! What is the secret behind it?
W. I think the secret behind it all is – happy farm­ers. We pay them $1 per kilo of cher­ries! It used to be 12 to 15 cents per kilo before, and now it is $1. Plus our farm­ers col­lec­tively own 50% of the com­pany, so they receive part of the company’s prof­its in addi­tion to their sales. This is the way cof­fee busi­ness should be – not just one man mak­ing all the money – farm­ers should make good money too because they are the ones who produce.

V. Having done so much for the com­pany and the farm­ers, what is the biggest reward for you to be part of all this?
W. Maybe I am get­ting old, but I don’t need money any­more. The money that I make I use to build schools and hos­pi­tals. In this stage of my life, I am con­cerned about help­ing oth­ers to achieve their goals, and trav­el­ing the world to demon­strate that our model can be applied to any place around the world.

Doi Chaang Coffee Company

www.doichaangcoffee.com
Wicha Promyong
t: (+66) 86 071‑7403
miga@doichaangcoffee.com