Export demand for coffee a study of intimex vietnam JSC

The biggest problem for Vietnam coffee export is how to increase volume and turnover as well as market share in existing and new markets including: EU, the US, Japan… Therefore, a study

PREFACE

Following the trend of globalization, especially after Vietnam joins the WTO, in order to enter the international playing field, Vietnam has determined that it needs to boost exports In terms of agricultural products, the export of coffee is one of the first priorities With that business orientation, enterprises specializing in processing and exporting coffee are looking for strategy to penetrate international markets One of the leading enterprises pursuing this direction is the Vietnam Intimex Joint Stock Corporation (Intimex) The biggest problem for Vietnam coffee export is how to increase volume and turnover as well as market share in existing and new markets including: EU, the US, Japan… Therefore, a study to find out the solutions to the

problems has been conducted: ―Export demand for coffee: A study of Intimex Vietnam JSC‖

CHAPTER I: INTRODUCTION 1.1 Background of the study

Coffee was introduced to Vietnam in 1857 by the French and slowly grew as producer of coffee

in Asia The height of coffee production occurred in the early 20th century as small scale production shifted towards plantations The first instant coffee plant, Coronel Coffee Plant, was established in Biên Hòa, Đồng Nai Province in 1969, with a production capacity of 80 tons per year

The Vietnam War disrupted production of coffee in the Buôn Ma Thuột region, the plateau on which the industry was centered Although seldom involved in conflict, the area was a crossroads between North and South and was largely depopulated After the North Vietnamese victory the industry, like most agriculture, was collectivized, limiting private enterprise and resulting in low production

Following ―Đổi mới‖ reforms in 1986, privately-owned enterprise was once again permitted, resulting in a surge of growth in the industry Cooperation between growers, producers and government resulted in branding finished coffees and exporting products for retail It was during this time that many new companies involved in coffee production were established, including Đắk Lắk-based Trung Nguyên in 1996 and Highlands Coffee in 1998 Both of these continued

on to establish major brands distributed through a widespread network of coffee shops By the

late 1990s, Vietnam had become the world's #2 coffee producer after Brazil, but production was largely focused on poor-quality Robusta beans—considered inferior to Arabica due to their bitterness—for export as a commodity (Vietnam Coffee Annual Report, 2010) Recent government initiatives have sought to improve the quality of coffee exports, including more widespread planting of Arabica beans, the development of mixed-bean coffees, and specialty coffee such as kopi luwak (Vietnamese: cà phê chồn, "weasel coffee")

1.2.Statement of the problem

American coffee-importing companies are mainly small and medium sized In order to do good business in this market, one company should know well about its competitors For Vietnam, the biggest and most important competitors are Indonesia and India Most American companies would like to do business directly without any midman They also demand to have quick and clear answer American market has a very high demand for coffee and this is a chance for coffee-exporting companies in general and INTIMEX Vietnam in particular In American, businesses have to be done under close and strict rules and regulations of government agencies They specially care about quality of the products and this can be a barrier to coffee-exporting enterprises to penetrate this market

In this context, the problem for Vietnam coffee is how to get to know well and understand thoroughly this highly potential market in order to increase coffee export turnover to the US

1.3.Objectives of the study

- To describe coffee consumption trends in the most coffee-consuming countries in the world

- To determine the export of coffee by country of destination and export share

- To identify the factors affecting export demand for coffee

- To estimate export demand elastic ties

- To find out what are the strengths and weaknesses, opportunities and threats to coffee export demand, find out solutions to increase export turnover in the next 5 years

1.4.Hypotheses of the study

- Coffee export turnover is affected by different factors including:

Qualitative data: existing competitors, product quality, coffee drink habit and taste

Quantitative data: commodity price, coffee beverage price index, price of the biggest substitute, and coffee market share

1.5.Significance of the study

This study has practical implications to coffee exporting companies to increase their export performance as well as turnover The study will figure out what are the key factors affecting export performance in general and in coffee industry in particular The figures are up to date and reflect the real happening so they should be a reliable source for companies who want to do well

in American market

Besides, this study also investigates the characteristics of American coffee market and the big companies in the industry Moreover, it also points out the weaknesses of Vietnamese coffee exporting firms that lead to their poor performance of failures over the past few years As a result, the study can help the companies to understand well about where and who they are doing business to in American coffee market It also helps them avoid some wrong activities that will cause failures

1.6 Scope and Limitations of the Study

The study investigates current situations of coffee exporting in Vietnam It also points out the personalities of American market and key players in coffee industry INTIMEX Vietnam is the chosen company who has been exporting coffee to American market over the years

Because of the nature of this study, the results and findings will be mainly based on data from various secondary sources The secondary data was taken from industry reports, books, academic papers, periodicals, editorials, articles, databases, studies different authors, and websites related

to the coffee industry The data of coffee export shows trends in coffee industry However, the data might not make a good forecast of future in such a fluctuating world business environment This study shows an in-depth analysis of coffee export to American market However, the other markets like EU and Asia have not been given enough consideration US are the biggest and

most potential market for Vietnam’s coffee export It is the biggest coffee importer of the world

in general and of Vietnam in particular This is the reason why the study aims mainly at US market and compare with other markets

CHAPTER II: LITERATURE REVIEW

Analyzing international marketing opportunities to identify unfulfilled or under fulfilled needs that a marketer may satisfy through its products or services This analysis can be done through information seeking and analysis or through market research (secondary or primary data collection and analysis) A marketer may have a product or service concept developed first and looks for the needs in the market that can be satisfied by these products or services The marketer may also first identify unfulfilled or under fulfilled needs in the market and then develop a suitable product or service offer to satisfy these identified needs

Once the marketer has identified the potential opportunities in the first step now is the time to select the groups of potential international customers (target markets) to whom to sell the products or services This step also involves identifying the potential buyers, demand measurement & forecasting, market segmentation, market targeting & market positioning Segmentation involved identifying groups of potential customers from the total potential market that are homogeneous on certain aspects of identity and behavior and are heterogeneous on the same aspects from others in the target population The aspects on which the segments are based must be relevant for the marketer to develop its products and services and the marketing programs

This step also requires the marketers to decide what key benefits in a product or service to offer

to the selected target customers and on what aspects to differentiate from the competition

Since a firm needs to offer best value to the potential customers to makes its products and services more salable compared with competitors, firms have to adopt appropriate business and marketing strategies

Various researchers have studied successful companies around the world and attempted to identify how these firms have aligned and coordinated their activities and efforts Porter has concluded that successful firms have adopted one of the three strategies, i.e., cost leadership,

differentiation or focus Other scholars have identified that successful firms adopted strategies that were aligned with their market position, i.e., a market leader, challenger, follower & niche strategies Other researchers have asserted that firms have achieved success in markets through adopting one of the three value discipline strategies, i.e., operational excellence, customer intimacy or product leadership Details on these strategies may be found in strategy subject and books

The fourth step in the marketing process is developing the international marketing mix, product, place, price & promotion Marketing mix identifies four key areas for developing a well-coordinated marketing strategy To create a strong marketing impact a firm needs to develop appropriate programs in these four key areas and also need to ensure that all these four aspects of

a firms marketing program are well coordinated and in conformity with each other to give a clear image to the target market of the firm’s brands and its products

Developing a good marketing program is not good enough for success A firm also needs to manage the international marketing effort properly Quite often firms fail not because they did not have a viable marketing program, but that they failed in properly implementing their well-designed plans Firms also need proper analysis, planning, implementation and control of their marketing programs

Hopp and Foote (1955) studied the factors responsible the variability in coffee prices by running

a regression They found that world coffee stocks, Brazilian exportable production and the consumer demand for coffee were the most important factors that impacted the coffee prices They concluded that coffee prices depict a cyclic pattern They also mentioned that buyers’ expectations about the supply also affect coffee prices but this is increasingly becoming less relevant because of improvements in supply forecasting techniques

Mundlak and Larson (1992) used a panel data for 58 countries for 60 commodities/products using a time series panel data for different qualities of coffee They concluded that producing countries’ commodity policies affect the levels of prices of the commodities but these policies do not prevent the movement of domestic prices with the international prices of those commodities Gilbert (2005) concluded in his research that ICA regulations and Brazilian production trends affect coffee prices He predicted that the coffee prices would fall after 2005 as he suggested that

prices were 30 percent higher than the normal and theorized that prices would come down in the near future because there was no parallel consumption increase so markets would readjust However after 2004 prices actually increased continuously, possibly because of the changing dynamics in the coffee industry

Gilbert (2007) found that the previous monopoly in the US market for coffee has been transformed into a highly competitive environment and that the US coffee market is the largest roasted coffee market which influences the whole coffee trade UK and US markets are quite different as US is highly competitive compared to the U.K coffee market Absence of concentration of roasters supported the coffee consumption and boosted the price levels

Mehta (2008) studied coffee prices at three levels, farm prices in Brazil and wholesale and retail prices in the United States He studied the effect of the ICA (International Coffee Agreement) on coffee prices at different times and pointed out the downward movement of coffee prices when quota regulations were in place He found that Brazilian farm prices did not move with international coffee prices in the short run He also found that retail prices are more sensitive to wholesale price increases than wholesale price decreases He finally concluded that ICA interventions disrupted the natural supply and price cycle for coffee and cautioned against the use of predictions using time series data

Gilbert (2008) by using the GVC (Global Value Chain) analysis mentioned that only half of retail coffee costs can be attributed to the price of unprocessed or green coffee Hence it can be inferred that there is a considerable amount of added value taking place beyond green coffee He mentioned that the coffee buyers refer to the major terminal markets (New York and London) for price quotes while purchasing green coffee and do not consider production cost as a major factor affecting coffee prices Similarly the sellers also refer to New York and London commodity markets for coffee price determination Hence coffee price at New York Board of Trade (NYBOT) and London (LIFFE) market can be used as a proxy for the commodity price at a given point of time

Fitting and Kaplingsky (2001) were convinced that coffee can be branded because of its vast variety at the retail level and that coffee stands next to wine with respect to variety at retail level

They talk about the transformation from trading as a commodity to so much variety at the retail level and provide evidence that there is a large value- added component before the coffee reaches the consumers It is also evident that factors other than the commodity coffee prices are important in determining the retail prices of coffee

Mohan (2007) concluded that liberalization in the coffee trade has transferred the risk to coffee producers from other stakeholders This trade risk is caused by the price fluctuation of coffee but terminal markets (NYBOT/LIFFE) reduce that risk He further recommends that these terminal markets should open their branches that could be accessed by the producers directly He highlighted the importance of these terminal markets in price discovery and minimizing the producers’ risk

Kolk (2005) found that retailers in the U.S pay high prices for quality and certified coffee Also retailers differentiate and are willing to pay more for Fair Trade coffee Still coffee producers are facing problems and are not able to realize the benefits of such a strong market He further argues that coffee consumption has to increase in order to improve the livelihood of the coffee farmers in developing countries

Ponte (2002) stated the importance of coffee quality rather than the quantity with respect to the producers of coffee He argued that producers should keep in mind, the final consumers’ preferences and the characteristics of the coffee for which consumers would be willing to pay more Quality coffee provides more revenue to producers and it is a better strategy to earn more revenue for same quantity of coffee compared to low quality coffee

CHAPTER III: METHODOLOGY Population: The population of this study is companies which have been exporting coffee to the

US market for at least 5 years in Hanoi and in HCMC This is primary source which will be mainly used to discuss qualitative variables of the hypothesis

Sample: From the population, 20 of these companies were chosen as samples of the study After

that, interviews would be conducted and questionnaires would be given out for data collection

Primary data: Questionnaires will be given to mangers of 20 companies which export coffee to

foreign markets including the US The questionnaire consists of 10 questions: 7 open-ended and

3 close-ended I use the first question to figure out the time from which the respondent started export coffee to foreign markets Then, the second and the third questions are designed to find whether coffee export is a major business area and if the US is a big market for the responding company The next 3 questions pose the potentials, advantages as well as disadvantages which the respondents face when exporting coffee to the US Question number 7 and 8 are given to find out the possible barriers in policies of the exporting country – Vietnam and the import country – the US which has influences on coffee exports Question 9 and 10 ask the respondents about their future plans to expand export business and their solutions to the existing problems

Secondary data: The reports and news about U.S market on newspaper, commercial

magazines, and the related research From these data, we can know about the U.S market and the exporting coffee market in U.S The strategic reports, report on export activities of the company are also a reliable source of data From these data we can find out about the current situation of company’s export coffee and company’s strategic direction

Because of the nature of this research, secondary data is mostly used to interpret the trend of coffee export demand Based on data collected from various secondary sources, statistics of coffee export demand were taken from year 2001 to year 2013 (quarterly figure), total of 44 observations in 11 years This figure is processed in E-view program to give statistical evidence for the results and findings discussed in chapter 4 Secondary data is the main source in the study

to describe the influences of quantitative variables on coffee export demand

Secondary

data

Overview of US cafe market

Strategy and objectives and reports

of INTIMEX

Interview leaders of INTIMEX, managers other coffee export Company

Questionnaires to mangers of coffee export companies Primary data

Requirements of MKT mix for exporting cafe to

US

Current situation of MKT mix for exporting café to US

at INTIMEX

Problems need to be improved

Solutions and recommendations

Figure 1: Data collection and process

CHAPTER IV: RESULTS AND DISCUSSIONS Qualitative data analysis

Existing competitors and market structure of coffee export

Data analyzed in this section comes from the FAO database The international trade has few really important export commodities Oil is the first one and coffee is the second most essential article of trade Coffee is an important product in many economies especially for the financial system of the least developed countries Coffee exporters contribute to the national income Many authors (Otero, 2000; Bacon, 2004; Nestel, 1995) stress the fact that coffee is the main source of the foreign exchange, employment and value added For some countries, coffee is one

of the most valuable products of the agriculture The trade with coffee can be divided by different criterion One of the divisions depends on the species of coffee – in this case, we are talking about coffee Arabica and coffee variant Robusta Robusta forms 90 % of world production Arabica (9 % of the world production) is more valuable due to the finest flavor (Kemsley et al, 1995) However, for necessary to distinguish between green (or not roasted) and roasted coffee and into consideration the coffee substitutes containing coffee in any proportion

Product Quality

The velvety coffee slowly dripping from the filter into my glass is bitter and dark But once mixed with the sweet, silky condensed milk at the bottom, it turns into a rich chocolaty brew It

is a fitting metaphor for the story of coffee in Vietnam

French colonists introduced coffee here in 1857 The central highlands region – known as Buon

Ma Thuot – proved a perfect area for growing Robusta beans But a century later, the Vietnam War devastated the country and coffee production was severely disrupted

After the long war, the government, supported by development agencies, launched vast coffee-growing programs in the region to help put the country on the road to recovery Its success has been astonishing

In just two decades, Vietnam went from the scorched earth of Agent Orange to become the second coffee exporter in the world after Brazil, and the number one for Robusta – one of the

two main coffee species, often used in instant coffee (Arabica, the other main variety, is grown

at a higher altitude and comprises about 75% of world production)

This spectacular comeback has been a huge boon to the economy – coffee is Vietnam's key export, generating an income of more than $1.5bn In total, the coffee sector represents 3% of national GDP, providing a livelihood for around 2.6 million people – 600,000 of them farmers and many from minority ethnic groups Only 5% to 7% of the total production is used for domestic consumption; the rest is exported, mostly to the US and Europe

Coffee drinking trends in the American

According to the newly released National Coffee Association National Coffee Drinking Trends (NCDT) market research study, 83% of the U.S adult population now drinks coffee That figure represents a jump of five percentage points this year vs last year In addition, daily consumption remains strong and steady at 63%, while those who drink coffee at least once a week is up slightly to 75%

Leading the pack in coffee consumption are Hispanic-Americans The study, which began tracking ethnic data last year, found that 76% of adult Hispanics said they drank coffee yesterday, 13 percentage points ahead of the total population By comparison, 64% of Caucasian-Americans and 47% of African-Caucasian-Americans said they drank coffee yesterday

46%

5%

15%

34%

Coffee export of Vietnam 2002-2012

EU Japan US Others