ASEAN’s coffee market is perhaps as complex as its diversity in culture. Multinationals that feel they are missing out on part of China’s growth story, may start setting their sights on The Association of Southeast Asian Nations (ASEAN), which includes Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand and Vietnam. China’s economic slowdown and market maturity in first-tier cities may also encourage some multinationals to look elsewhere in Asia for further exploration of the full Asian story. However, it should be noted that this is one of the world’s most diverse and competitive regions in terms of market development and consumption habits. The motto of ASEAN is “One Vision, One Identity, One Community”, but, as the long-awaited ASEAN Economic Community comes into effect in 2015, member countries remain divided along the lines of income and consumer expenditure. In 2013, average household spend in Singapore was US$72,198, compared to US$3,100 in Myanmar, while Indonesia stood out as the largest market in absolute terms. With this in mind, investors should not rely on a “one-size-fits-all” strategy. This article uses Singapore and Indonesia as examples to highlight the disparity of growth patterns and the possible factors to consider for local expansion or market entry.
Overview Of The Business Environment
ASEAN has the advantage of a large population size, which is especially important for emerging markets, as the consumption of fmcg normally remains based around middle-to-lower-range staple products. Naturally, large populations can help provide a platform for volume sales, thus helping generate value sales. The improving living standards can also mean that consumers will have a chance to trade up to added-value products, such as coffee pods, premium instant coffee or premium fresh coffee in foodservice. This “consumer coffee evolution” can already be seen in China’s coffee market development. While ASEAN as a whole has a large labour force and a youthful population overall, the demographics differ from country to country. Singapore is ageing, but has a highly affluent and mature consumer market, contrasting with Vietnam’s youthful workforce and rapidly expanding consumer expenditure.
The diversity in the region is also reflected in culture, language and religion. For example, Roman Catholicism is the dominant religion in the Philippines, while 95% of Thais are Buddhists. Local preferences and cultural sensitivities should therefore be taken into account when making market entry in all types of sales channels (on-trade, off-trade or office settings). Indeed, the entry or expansion strategy for each market has to be specifically designed. Overall, diversity may mean an extra level of complexity and higher entry costs compared to a simple and uniform business environment. The key common trend is that urban consumers are well connected by the internet, especially in Singapore, Indonesia and Malaysia; they aspire to modern lifestyles and the retail formats and settings that tend to go with this. So, the digital marketing mix for new coffee products or services may easily reach young consumers in relatively advanced urban areas with ready accessibility of modern technology. In some countries, such as Myanmar, traditional advertising may work better.
Singapore – Consumer Affluence Produces The Largest Pod Sales
Despite the small population size, the high levels of purchasing power and well-established consumer market mean that Singapore has by far the largest coffee pod sales in ASEAN, amounting to US$6 million in 2014. The consumption levels of coffee in Singapore are higher than for tea and consumer sophistication in terms of coffee drinking is growing. The widened coffee pod ranges have also encouraged purchases of pods. The category is expected to continue to see the strongest growth in Singapore’s coffee market in 2014-2015. From a competition perspective, Nestlé dominates pod sales with a share of around 99%. There is certainly some room for other brands such as Tassimo or Lavazza to explore.
However, potential entrants need to bear in mind that many consumers still prefer to have instant standard coffee due to its taste, convenience and familiarity. Local company Super Group Ltd has a strong brand portfolio in instant standard coffee and keeps extending existing lines by introducing new flavours that meet local tastes. The company takes advantage of its position as a regional player and develops products to fit the local preferences.
Traditionally, Singaporean consumers seem to choose fresh coffee in the on-trade rather than the off-trade. There are seemingly good prospects in the office channel, although this may affect the potential growth in both the on-trade and off-trade. Office workers who have their fresh coffee in the office may reduce consumption of fresh coffee at home and in foodservice. That said, the small and affluent Singaporean consumer market has very limited capacity for growth, anyway. Nevertheless, as the most affluent consumer market in the region, Singapore is seen as one of Asia’s shopping malls. According to Euromonitor International’s Travel and Tourism database, inbound arrivals to Singapore amounted to 22.5 million trips in 2013, and China remained top of the list of visitors, even recording 20% growth. Therefore, establishing a toehold in Singapore’s foodservice could also lead to brand exposure to large numbers of Asian tourists. This is a positive factor in raising brand awareness among new, or newish, coffee consumers.
Indonesia – Premium Coffee Should Look To Target Exposure In High-end Outlets
Indonesia shows a very different growth trajectory from that of Singapore. In terms of total volume, the country will see absolute growth of around 49,000 tonnes in 2014-2019, compared to Singapore’s 780 tonnes, with sales strongly supported by its large population. In 2014, retail value sales of fresh coffee were higher than those of instant coffee in Indonesia; but, instant coffee sales are forecast to largely outpace fresh coffee, with instant coffee set to see a net increase of US$165million, contrasting with fresh coffee’s US$91 million; meanwhile, coffee pods will see minimal growth. While Singapore had a “ready consumer base” for coffee pods, Indonesia will not see a boom in the use of pods and the format will almost certainly remain a luxury product consumed only by upper-class consumers over the next few years. Potential pod entrants to Indonesia will have to be particularly patient and perhaps focus first on raising the profile of the product, building up the category and generating consumer interest.
In terms of competition, Nestlé leads the overall coffee market, with a 26% value share in 2014. Indonesia is a major coffee-producing country and local companies are very active in selling their products in the middle-to-low end in both modern and traditional retail outlets. The distribution of premium coffee is generally limited to upscale supermarkets, although the availability of premium coffee has improved as more outlets, such as chained hypermarkets, began stocking it thanks to rising incomes. Among imported premium coffee brands, Illycaffè SpA’s Illy continues to enjoy the highest brand awareness, the result of its relatively long-standing presence in Indonesia and its very well-established distribution networks, which allow the company to supply a wide range of on-trade channels, in particular 5-star hotels. For new entrants, seeking collaboration with high-end foodservice establishments or hotels is of importance to gain initial exposure and catch the attention of high-income consumers.
Meanwhile, Malaysia and Thailand also showed different growth patterns in terms of coffee consumption. While Malaysian consumers’ fresh coffee consumption will be influenced by the quick expansion of chained cafés (McCafé, Starbucks, Gloria etc), Thai consumers may be distracted by the constant launches of premium instant coffee that has a taste closer to fresh coffee. One thing that is for certain is that all markets will see positive growth in retail sales of fresh coffee in the next few years.
In brief, multinationals should seek to fully understand each national market, then design a specific strategy for each ASEAN market to ensure a smooth entry. To stress once again – there is no “one-size-fits-all” strategy for the ASEAN market.
Analyst Insight by Hope Lee - Senior Beverages Analyst, Euromonitor International
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