Industry Analysis:

Steady Volume Growth for Hot Drinks in India Hot drinks in India recorded a low single-digit growth rate in total volume sales in 2010. Though growth rates for other hot drinks and coffee were higher, the dominance of tea in hot drink sales served to restrict growth. Certain categories in hot drinks saw exceptional growth, either due to a health and wellness positioning or convenience of preparation. Offtrade value sales of hot drinks saw double-digit growth in 2010, highlighting the significant increase in average unit prices. Unit Prices Escalate Significantly On the back of consistently increasing commodity prices, hot drinks experienced substantial growth in off-trade unit prices in 2010. The percentage rise in off-trade unit prices for tea reached low double digits, as tea manufacturers passed on at least some of the increased costs deriving from the significant increases in raw material costs. However, major players such as Hindustan Unilever and Tata Global Beverages chose to absorb much of the increase in input costs in their quest to maintain volume sales. Several local small players were forced to shut down due to the continuously increasing input costs over the review period. Multinational Players Dominate Hot Drinks Hindustan Unilever, GlaxoSmithKline Consumer Healthcare and Tata Global Beverages together accounted for more than half of off-trade value sales of hot drinks in 2010. Horlicks retained its status as the number one hot drinks brand in terms of off-trade value sales, followed by Tata Tea and Brooke Bond. Innovative product launches by the leading players kept them abreast of changing consumer preferences, and in some cases even opened up new consumer segments. Both Hindustan Unilever and GlaxoSmithKline Consumer Healthcare attempted to expand their rural presence by launching Brooke Bond Sehatmand and Horlicks Asha, respectively. Kirana Stores Continue To Dominate Retail Sales Independent small grocers, or kirana stores, accounted for two thirds of off-trade volume sales in 2010. With no significant dip in popularity among consumers, such stores managed to retain the confidence of all national hot drink manufacturers in selling their respective products. The traditional appeal of kirana stores reflects that of the most popular hot drink category: black tea. Though supermarkets/hypermarkets experienced a marginal rise in their share of off-trade volume sales, they are still far off from competing with kirana stores as the primary retail channel. Declines in share were experienced by forecourt retailers and convenience stores.

Forecast Period to See Higher Volume Growth Total volume sales of hot drinks are expected to see a marginally higher CAGR in the forecast period than that seen in the review period. Exploration of rural consumers as a major target segment will contribute to this rise.

The relatively mature tea category will be driven by premium products which offer additional health benefits, while coffee will increasingly move towards the more expensive but convenient instant coffee format. On-trade sales through specialist outlets coffee shops for coffee, and the slowly upcoming tea lounges for tea will popularise these beverages further. Other hot drinks will see continuous growth as parents, especially in urban households, look for the best nutritional benefits for their children. The inclusion of adults in the age group targeted by other hot drinks also provides manufacturers with a tool to bolster growth in the forecast period. Competitive Landscape: The two primary coffee brands on a national scale are Bru by Hindustan Unilever and Nescafe by Nestl India. Bru Roast & Ground captured 25% of off-trade volume sales of fresh coffee in 2010. In the absence of any substantial national competition in fresh coffee, it is likely to hold onto its position as the leader, and possibly increase its share. There are many regional players in fresh ground coffee, mostly concentrated in South India. Instant standard coffee, priced at three to four times the unit price of fresh ground coffee, was led by Nestl in terms of volume sales in 2010. Nescafe Classic and Sunrise together accounted for around 53% of instant standard coffee volumes in 2010, with Bru accounting for another 40%. Nestl India and Hindustan Unilever both experienced an upward trend in off-trade coffee value sales in 2010. Rises in unit prices were, however, the major driver of revenue growth, with Bru instant coffee seeing 17% value growth in 2010. Growth was also assisted by a strong increase in instant standard coffee volumes in 2010. Mr Bean (under the Tata Coffee umbrella) on the other hand, recorded a 36% value sales. This was due to a lack of advertising by the company, which is looking to focus its attention on the plantation and coffee growing / supplies business in the near future as opposed to final consumer coffee product. Conversely, Coffee Day saw a notable rise in retail value sales of 22% in 2010. Fresh & Honest Cafe has launched some 100% fresh ground coffee brands from the portfolio of the international coffee player Lavazza, but has yet to establish a significant brand presence in India. The international players Nestl India and Hindustan Unilever maintained their strong presence in Indian branded coffee in 2010. Some domestic coffee players, like Narasus Coffee, Amalgamated Bean Coffee Trading Co Ltd (ABCTCL) and Tata Coffee, are present

in the fresh ground coffee category, but are still far from threatening the share of Bru Roast & Ground. A notable feature of the Indian coffee category is the continued popularity of coffee-chicory mix formats in both instant and fresh ground coffee, due to the lower prices of these products. The largest brand in off-trade value sales terms in 2010, Nescafe Sunrise, is in this format. There were few new product launches in 2010, with Nestl India and Hindustan Unilever Ltd concentrating on building their existing brands. Both Nescafe and Bru have recently launched new advertising campaigns focusing on the Indian youth and the possible use of coffee in the context of socialising. Both of these companies have used film and television stars to establish brand equity. The eagerness of these leading brands to connect with young people is indicative of the importance of the young working population as a target market in India. Instant coffee packaging is changing in India. Previously, the main packaging types used were pouches and PET bottles. However, Aveon Premium and Royale Coffee are packed in glass jars to give a premium and classy look. Illy Coffee Ground Roasted Powder is, meanwhile, packed in an expensive looking metal tin. India has a few premium coffee brands, such as Illy and Lavazza. However, coffee is highly dominated by standard priced brands, such as Bru and Nescafe, along with some lowpriced fresh coffee brands, concentrated in South India. Aditya Birla Retail and Reliance Home have ventured into private label coffee, but such products are a rarity in coffee in India. Most plantations sell their produce to major coffee producers, such as Hindustan Unilever and Nestl, which process, pack and market the products. The high investment and continuous innovation required in coffee discourage new entrants from entering the category. Background The history of coffee in India dates back to the 17th century, when a pilgrim to Mecca smuggled coffee beans to India which later went on to become the first coffee plantation in India. But it was only during the British rule of 1840s that coffee became an important export item. Today, coffee industry of India is the 6th largest coffee producer of the world, accounting over 4% of the total world coffee production. There are over 170,000 coffee farms in India, cultivating nearly 900,000 acres of coffee trees. Most coffee production is concentrated in the states of Karnataka, Tamil Nadu & Kerala. Consumption of coffee in India as a hot beverage is not a new trend. According to an estimate, only 35% of the total coffee produced in India is exported to other markets and the rest is consumed by the local market. Traditionally, Southern India (Tamil Nadu, Karnataka, Andhra Pradesh, & Kerala) has been the dominant consumer of coffee, about 78% of the total coffee consumption in India. Although a big chunk, South India prefers filter coffee over instant coffee, while the other three zones prefer the later over the filter coffee.

The background provided a great platform for NESCAF, a brand of Nestl, which entered the Indian market in 1963. As of today, NESCAF enjoys a market share of 55% in the Indian coffee industry. Consumer Analysis According to the Indian Coffee board, the domestic consumption of coffee is rising at a rate of 5-6% annually, partly due to the introduction of coffee caf culture and the widespread acceptance of coffee as a hot beverage options in the non-traditional markets of the North, East & West. According to a report published by the board, over 73% of consumption comes from the Urban areas & 27% from Rural areas in the South. The coffee consumers are segmented based on the consumption rate: non-drinkers, occasional drinkers, and regular drinkers. While the cluster of regular drinkers is mostly concentrated in the Urban cities, mostly in South India, the consumption level has increased significantly, at a rate of around 13% across other regions. The primary target segment of Nescaf is the Young urban working population, in the age group of 18-39 years, which is 59% of the total urban population and cumulatively contributes around 51% of national income. Among the target segment, the penetration of tea is about 90% and that of coffee is only about 46% according to the Euromonitor report. According to a study conducted by MTV India Insights Studio, the wallet share of coffee is only about 7% in males and 5% in females. Though the most common sales channel is the hypermarket & modern retail channels.

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