Product and Service
Companies, who have been grouped in Coffee (green bean wholes) /Tea sector of food industry, wholesale unroasted green coffee beans.
Demand for Product and Service
Growth in demand for Coffee (Roast/unroasted green bean) has been faster since 2018 compared with previous years probably due to economy growth and decrease in price of green coffees. On the other hand, profitability depends on stability of price of green coffee.
The Sector
Sector’s current, trend, causes behind trend, and future
Current and Trend
- The organic demands for coffees have been growing slowly in US market, which presents a lower growth rate than the average growth rate of food and non-alcoholic beverage consumption. However, the demand may be accelerating in 2018.
- Demands/ unit sales may fluctuate in a narrow range with economy elastic impact of green coffee price.
- Companies’ profitability is harmed by fluctuation of commodity price; a better than average ability to manage supply costs may be required but a more stable price in green coffee market will benefit everyone.
- Companies should focus on premium and innovative coffees products to improve their profitability.
Causes behind the trend
- Coffee is mature industry where the demands usually present high sensitivity to price. At the same time, competition and low entry barriers also make the market price highly sensitive to any downturns in the cost of green coffees supply, which can often be reflected on the price of final coffee products price more quickly than the time in which most companies can take advantage of lowered cost of their supplies. On the other hand, when green coffee price goes up, it is usually not easy for companies to pass on increased costs to the price of their final products quickly. Therefore, for any changes in green coffee from either direction it is very common and possible for companies in this sector to suffer loss. On the value chain of coffee products, the closer to green coffee the final product of a company is, the smaller buffer will be that it can utilize to mitigate its loss when unexpected changes in price of green coffee happen. Generally, it should be able to bring more earning stability for companies to pursue high end customers with premium products.
Industry Future
Since we cannot see any significant changes in stimulating demands for coffee products, especially on the end of low to premium products, we assume that unit sales of this sector may have to continue its moderate growth. Green coffee price presents closer relationship with factors dominating in commodity market such as monetary policies than with its vertical relationship from the demands and supplies in coffee industry. It means that predicting green coffee price is not something that the companies can deal with and that companies in this sector may have to live with the uncertainties that the fluctuation in price of green coffee bring to their profitability.
Numbers
General Financial Performance of Companies In the Sector
It seems that the growth in demand for roasted coffee and thus unroasted green bean has been accelerating in 2018 after a few years of moderate growth (average unit sales growth of 12-17% in 2018 VS 3-4% between 2016 and 2017).
Green bean price presented huge volatility in the past several years. The large fluctuations in price of green coffee in the past three years (around +/- 80%) not only makes huge uncertainties in the price of those companies’ products and also direct impact on their margins and profitability.
We think that the organic demands for coffees will be consistent or even beyond the average growth of food and non-alcoholic beverages. Since the demand is strongly related with sales price and thus with commodity price of green coffee we expect the pace for growth in this sector may be accelerating as global commodity’s price move down. However, individual company’s profitability may depend on their abilities to effectively make the fluctuation in green coffee’s price passed on to roast coffee products. It seems, as reflected by the margin and profitability, many companies’ operation has been stocked in previously contracts of green bean when green bean price was high. The typical gross margins are 34% for roasted coffee companies and 16% for unroasted coffee companies.
