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Starbucks concerns not stimulating Euro coffee fears

By Neil Merrett , 03-Jul-2008

With global café chain Starbucks this week announcing a major restructuring of it US operations to boost profitability, similar concerns are not being shared by European coffee manufacturers and retailers.

Roel Vaessen, director general of the European Coffee Federation (ECF) told BevererageDaily.com that coffee manufacturers in the bloc were not currently panicking over the possibility of major operational setbacks owing to global economic factors.

 

 

 

Starbucks, the US-based coffee store chain that has arguably been one of the main drivers of the high street resurgence for the beverage, caused a stir in financial markets this week when it suggested it will close 600 of its domestic stores.

 

 

 

The company said that worries over current economic climate in the US were behind the plan, reflecting the potential volatility of supply and production cost in the coffee industry that has also led to groups like Procter & Gamble (P&G) rethinking its operations in the market.

 

 

 

European concerns

 

 

However, Vaessen claims that European coffee groups, from instant coffee makers to out of home suppliers, were not expecting to have to make any significant changes to how they operate in the immediate future.

 

 

 

He added that the strength of the single European currency over the US dollar was one key factor in this.

 

 

 

"The situation we see in the US market, where consumers may be having to refine their priorities over spending concerns, is quite different to what is happening here," Vaessen stated.

 

 

 

"While we may see a little fine tuning in the nature of demand, possibly in a decline of the out of home segment as consumers opt to drink at home instead, coffee remains an affordable luxury for most Europeans."

 

 

Coffee bean price

 

 

Aside from heightened oil and energy prices that have affected all aspects of food and beverage production, coffee prices have continued to rise during the current year according to International Coffee Organization (ICO) figures.

 

 

 

The body said in March that the composite price for the bean had continued to rise by 13.5 per cent to $1.32 (€0.83) per pound (lb) on growth seen back in January, due to both a steep increase in the cost of fertilizers used in cultivating the crop and increasing demand for the product.

 

 

 

Demand growth

 

 

Coffee consumption in Europe has nonetheless continued to increase at steady levels, buoyed in part by growth in emerging markets within the bloc, according to Vaessen.

 

 

 

In Western Europe alone, the retail of value for coffee is expected to have risen to about $13.4bn (€8.4bn) by 2009, a rise of $387.3m (€245m) from 2007, according to consumer analyst Euromonitor. The same figures suggested that in Eastern Europe, over the same time period, coffee retail value will rise by $611m (€387m) to $7.5bn (€4.7bn).

 

 

 

Innovation impact

 

 

Alongside the traditional hot beverage enjoyed by many as a so-called 'affordable luxury', a number of companies including Coca-Cola are also beginning to look at innovative new ways of providing coffee kicks to customers.

 

 

 

The group announced earlier this year that it is set to launch a line of ready to drink (RTD) coffees in cooperation with Italy-based Illy.

 

 

 

Coca-Cola claims that the current market for RTD coffee - excluding Japan - has grown by 10.1 per cent over the last five years to $16bn (€10bn), a pattern expected to continue in the future.

 

 

 

Vaessen said that the potential profitability of new RTD coffee brands in the current market was more difficult to predict.

 

 

 

"The market for RTD products, which are very big in Japan, is not so significant in Europe, so we wouldn't expect them to immediately have a huge impact on the industry," he stated.

 

 

 

"While it is impossible top say how costs may affect the market for these products, the developments within RTD coffee will help ensure interest remains in coffee."

 

 

US difficulties

 

 

Despite general optimism over the prospects of the European coffee industry, a number of US groups remain Bullish over the long-term prospects for coffee.

 

 

 

Procter & Gamble (P&G), which manufactures the Folgers brand, said back in February that it was considering hiking the list prices for its coffees by six per cent, according to some press reports.

 

 

 

The group is also considering a separation was announced of Folgers from its operations in a bid to offset higher commodity and energy costs, despite improved revenues over the last financial quarter.

 

 

 

A spokesperson for P&G told BeverageDaily.com back in February that as the number one retail coffee label within the US, Folgers remained an exceptional brand. However, they added that its prospects were not in line with the group's high growth focus of between four to six per cent annual growth.