Coffee Market in Iran

Coffee - Iran

Coffee Market in Iran

HEADLINES

Current value sales increase by 16% from 2008 to reach IRR447 billion in 2009

The relatively low base of the category and change in consumption behaviour boosts sales

Instant standard coffee records fastest growth of 17% in current value terms in 2009

Value growth is boosted by inflationary pressure rather than more expensive and sophisticated products

Nestlé Iran PJS Co maintains leadership with a 51% value share in 2009

10% CAGR in volume terms is predicted for the forecast period

TRENDS

Young Iranians are becoming more interested in coffee and this has boosted sales of the category in Iran. Younger consumers are keen to switch from traditional tea to coffee. It is a general belief that coffee is a modern beverage and this change in consumption can be regarded as part of the Westernisation trend in Iran. In addition, for the first time sudden increases in the importation of coffee has made it available in many stores, and it is therefore more accessible to consumers.

The 10% volume growth recorded in 2009 was in line with the CAGR achieved over the review period, indicating steady growth for the category.

Instant standard coffee remained the most popular category and recorded the fastest growth rate in current value terms. Instant standard coffee accounts for 96% of coffee sales in Iran. Most Iranians are not aware of fresh coffee and its preparation methods. Usually coffee is synonymous with instant standard coffee for many consumers. In addition, most of the suppliers are only active in this field due to the relatively higher demand.

In 2009, as a result of the high inflation rate (20%), unit price continued its fast increase. The growth rate was 6% for the category and it was more significant for multinational brands.

Off -trade volume experienced growth of 10%, which was more than on-trade at an average of 8%. This higher growth rate is mainly because of the general trend for buying bigger packages for the home, which is believed to be economical. Furthermore, tea remains the drink of choice at on-trade outlets despite the penchant of the young for coffee, as they are also easily distracted by soft drinks, particularly carbonates.

In the past, coffee was sold only in certain grocery outlets, however during the review period this hot drink was widely distributed in all supermarkets/hypermarkets and independent small grocers. Among grocery retailers, independent small grocers still accounts for 68% of volume sales, which is a consequence of the traditional distribution network of the Iranian market.

Coffee shops emerged at the start of the review period, as a result of demand from young people for Western style cafés. Many teenage boys and girls used this type of outlet as a place to meet when authorities prevented interactions between non-married men and women in public places. In recent years, book stores also started to create a café area inside their outlets. However, Amaken-e Omoomi, the Iranian police who deal with shops and businesses, announced in 2008 that these outlets must be closed. Amaken justified the closures by declaring that the coffee shops constituted an illegal "mixing of trades". However, critics suspect the move is aimed at restricting the gathering of intellectuals and educated young people.

On-trade coffee is very fragmented with lots of brands holding very small volume share. Usually customers are less concerned about the brand served in the shops, as more importantly, this type of outlet offers a safe place for talking and exchanging ideas with the opposite sex.

COMPETITIVE LANDSCAPE

Nestlé Iran PJS Co remained the leader in coffee with a 51% value share in 2009. The company benefits from offering a wide variety of products with good quality packaging. It also profits from broad distribution of its instant coffee, making it very successful in Iran

Kraft Foods Inc with its Jacobs instant coffee experienced one percentage point increase in value share in 2009 due to the expansion of its distribution network, which has lead to increased availability of the brand in many independent small grocers.

Coffee is dominated by leading multinational brands, which are mostly imported premium products or produced under license in the country. Premium products performed well in 2009, with Nestlé’s leading Original and Gold instant coffee, Kraft’s Jacobs and Tejarat Parjam Co’s Tchibo brands increasing their off trade value shares to 51%, 11% and 8% respectively.

Multinational brands, particularly Nestlé, use similar point of sale advertising and marketing in different outlets, especially supermarkets/hypermarkets and independent small grocers, to target potential consumers. Advertising in magazines and newspapers is also used to drive sales. In addition Nestlé introduced free sampling for the first time, and its booths can now be spotted at the entrance of hypermarkets in key urban areas, especially Tehran. These type of activities played a key role in volume growth and helped many consumers to get acquainted with the taste of coffee for the first time.

Nestlé’s investment in Iran was authorised by virtue of the Foreign Investment Promotion and Protection Act allowing Nestlé SA, with the Iranian private sector to establish Nestlé Iran PJS Co in 2001, in order to locally produce some of its internationally renowned brands.

Nestlé’s factory in Qazvin, 200km west of Tehran, had to halt its operations after demonstrators, demanded it close following the Israeli military invasion of Gaza, but begun operating again after intervention from the state inspection organisation. The company has repeatedly been accused of having links to Israel by Iranian hardliners in recent years. The government has banned any international companies that may be owned or partly owned by Israelis, but Nestlé has denied any connection with Israel and claimed that these rumours had been spread by rivals of the company.

PROSPECTS

Forecast growth of coffee will be driven by the low base of the category, the increased Westernisation of Iranian lifestyles and by rises in household income. Improved distribution and availability, increased spending on advertising and promotion and the expansion of modern retail outlets will also boost consumption. The youth demand for an interesting substitute for tea will be another reason of this healthy growth.

Coffee is expected to experience a CAGR of 10% in volume during the forecast period, slightly outpacing that achieved in the review period. This shows that the steady growth of the category will continue in the coming years.

Iran has one of the highest consumption levels of tea in the world. It is expected that most of the multinational producers of coffee will make significant efforts to convince Iranian traditional tea consumers to convert to coffee. This change in consumption behaviour is vital for further growth of the category in the forecast period.

Instant standard coffee will remain the most important category during the forecast period and new coffee consumers are likely to use this type due to its broad availability and ease of preparation. In contrast, fresh coffee will remain a niche category in spite of its fast growth, which is mainly because of the low base of this type.

Unit price for coffee is expected to continue to rise but at a slower rate than during the review period. This will be due to the considerable inflation rate in Iran, as well as an increase in the price of raw materials and production costs.

Nestlé Iran PJS, as the most important supplier of coffee in the country, will try to improve awareness of its brands and expand its activities during the forecast period. It is expected to increase the visibility of its products on supermarket shelves. However, the company will avoid making too much noise or attracting unnecessary attention to itself, because the conservative elements of the government still claim that Nestle has links with Israel and further controversy could seriously threaten its business in Iran.