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COFFEE IN UKRAINE IN 2004...
…tastes better, yet smacks bitter
While worldwide coffee consumption is dropping, in Ukraine it's steadily increasing. It is expected to grow by 10-15% or $240-270 million in this year alone. Similar growth was experienced last year. The number of cafes is also growing rapidly, and they are predicted account for 30-35% of total coffee sales. Despite this impressive growth, overall coffee consumption in Ukraine still remains lower than in other European countries - less than a kilogram per head of the population. By comparison, in Finland this amount is 10,4 kilograms, in Denmark - 9,4 kilograms, in Estonia - 2,4 kg. Quite a few Ukrainians continue to prefer locally produced tea, milk, and fruit juices. This preference is reinforced by the fact that high-quality teas are still considerably less expensive than high-quality coffee. However, many famous coffee companies are paying more attention to the growth figures than the current market size: they consider the Ukrainian market an emerging, high-growth one, a delectable prize to conquer in a world with a current excess of coffee.
Today, there are scores of large and small companies on the Ukrainian market. Nestle Ukraine LLC (Nescafe) is considered the leader in instant coffee. Coffees produced by "Kraft Jacobs Sushard (Jacobs), Paulig export ltd (Paulig), Tchibo Gmbh (Tchibo) are also popular. Since 1997, the Singaporean company "Future Enterprises" (MacCoffee), has become famous for its "3 in 1" prepacked instant coffee. Ukrainian consumers also seem very interested in coffee-cappuccino produced by "Bravo".
Another big contender is "Elite Forte", registered in Israel, which has recently build two huge factories in Poland producing goods for the Eastern market. It has backed up this increased production with a costly advertising campaign. As a result, it now lays claim to the half the Ukrainian instant coffee market by volume. Ukrainian restaurants and other establishments selling coffee serve customers many Italian brands, like Ionia, Lavazza, Kimbo, Illy, as well as the Swedish company Blaser.
To be considered a coffee producer in Ukraine, a firm must either roast, ground, pack or make coffee products out of beans. In the past, Ukrainian producers in three cities - L'viv Dnipropetrovsk and Odesa - roasted coffee for the whole former USSR. These cities are still the centers of Ukrainian coffee production. The Ukrainian-English joint venture "Galka" (once the Lviv coffee factory) and Ukrainian-Austrian JV "Vienna coffee" operate in L'viv . "Galka" specializes in coffee reprocessing and producing coffee substitutes from grass cultures. In 1993, the company became a closed joint-stock company, and in 1994, it subsequently entered into a joint-venture with Å.D. and F. Man Coffee Limited, one of the biggest European coffee producers. The two venture participants then teamed up with "Dnipropetrovskiy Industrial Complex of Concentrated Products", to create the "Odessa Catering Combine" joint-stock venture. The venture produces the "Odessa" and "Golden Djuk" coffee brands and accounts for 20 % of the Ukrainian market.
Firms producing less than several tons of coffee a month and roasting and packing up less than $150 thousand worth of coffee products represent the second group of producers. These include "Roastmighter"(brand "Nordcafe"), "Unicaf" (brand "Unicaf"), and "Corada" (brand "Rata"). Producing such small quantities, these brands are consequently unable to launch any major advertising campaigns. However, as of this article, these firms are profitable because, thanks to a Presidential edict, they are not excised when importing goods.
One of the defining aspects of the Ukrainian coffee market is the continuing dominance of instant coffee (accounting for 80% of the market a few years ago and still accounting for 60% according to some sources). The two top reasons for this are probably historical precedence and the fact that few Ukrainian families have percolators. Coffee beans and ground coffee are almost equally popular in Ukraine, while in Europe, the proportion of instant coffee's on the market continues to decline. Instant coffee has picked up a reputation there for nasty taste.
QUOTING QUOTAS
In 2002 coffee, imports to Ukraine reached 6,079 tons, in 2003, 6429 tons. Yet both these numbers reflect a dramatic fall from the 2001 figure of over 10,000 tones. What accounts for this dramatic fall?
In 2001, the Ukrainian market was the recipient of 2.5 times more foreign coffee than during the previous year, Ukrainian consumers enjoyed a price drop of nearly 72% on coffee, of which83% was produced in Germany, GB, Poland and Brazil. The Ukrainian producer Galka forecasted that it would be forced into bankruptcy if the situation did not change.
That year, according to Verkhovna Rada edict, the import duty of instant coffee was 5-10% of duty value instead of 3 Euro per kilogram. As a result, representatives of Galka appealed to the Cabinet to "balance coffee imports and conduct a special investigation of instant coffee imports. They pointed to figures showing that between September of 2001 and June of 2002, instant coffee imports increased by 153% and prices decreased by 72%. This resulted in a 7% drop in Galka's sales and a 6% fall in its market share. The company claimed the current 10% import duty on the value of the coffee was too liberal and asked the Cabinet to fix a quota that would restrict imports ten times to only 1,000 tons a year. In doing so, it pointed to a similar situation in Russia where the country limited coffee imports with a quota.
Galka experts argued that importers were breaking the norms of fair competition: first, by selling in Ukraine at dumping prices (they pointed out, for example, that Polish instant coffee was 20% more expensive in Poland than in Ukraine); second, that the value of imported coffee had fallen from $0.70 / kilogram to $0.60 per kilo for the cheapest Brazil beans. They also hinted that the price might reflect bad-quality coffee: attractive foreign packages containing coffee substitutes like coffee bean husks and grounded acorns. In October of 2002, the Ukrainian International Trade Joint Committee investigated the whether or not to reduce the amount of imported coffee. In their opinion, the quota did not correspond to such mid-sized imports, and would result in a fall in legal imports relative to illegal ones. They reached this conclusion with reference to the basic economic situation whereby a high import duty results in a high unmet demand for goods. As a result, the strict quotas Galka asked for were never fixed.
Excise Swingers
In June 2003, prime-minister Viktor Yanukovych introduced a motion in the Verkhovna Rada that would widen the number of different goods that can be excised to include coffee: coffee beans and ground coffee at 0.2 Euro per kilogram, instant coffee at 0.8 Euro per kilogram. He justified this measure by stating that it would increase budget profits. However, a large number of participants in the Ukrainian coffee market believed this excise tax would be deadly for the market. These participants also had a ready piece of evidence to support their opinion: in 1993 the government introduced such excise duties only to remove them again in 1997 because of their negative effect on market conditions. In that time period, noisy Galka only escaped collapse thanks to partners that provided it with loans in the form of green coffee.
Companies opposing the excise tax also point out that coffee is not excisable in the EU, it is only subject to value-added tax. This state of affairs arose out of troubles in the late 1990's. At the beginning of 1998, the EU increased its excise tax on coffee to 3 Euro per kilogram. In addition to the excise tax, companies needed to spend money certifying the coffee and providing labels. Faced with these kinds of expenditures, companies raised an outcry. They claimed that the costs meant legal goods could not compete with smuggled ones, and the flow of the latter was unabated. Home producers said they would be driven to bankruptcy by smugglers - they accused the government of filling the treasury at the expense of legal home producers.
The protesting companies were right to fear smuggled coffee, for coffee is an ideal smuggling good: it is a liquid economic asset, it is very easy to transport and store, and sells at a significant profit. Back home in Ukraine, experts estimated that smuggled coffee accounted for 80% of the instant coffee market in 1998. In Poland, many small factories on the Ukrainian border repack different brands of coffee from many European countries, changing labels from expired to fresh. This repacked coffee is then made available even on wholesale markets and at kiosks. Smuggling also thrives thanks to low consumption standards of Ukrainians and their small purchasing power. Today, according to certain data, approximately 70% of coffee is imported illegally - the government does not get a hryvna from it. According to newspaper "Izvesteiya," every fifth can of coffee is a counterfeit made in Russia. Falsifiers mix barley, chicory, corn and even medical caffeine into coffee. "That is why", say opponents of the 2003 excise tax, "we must make our custom-houses impenetrable to smuggling before we begin excising goods".
Imposing an excise tax might increase the cost per can of Galka coffee by 50 kopeks. Galka management claims this puts them in an untenable situation: they can't bear current prices without being forced into bankruptcy, but raising prices in such a competitive market (with other companies charging what Galka calls "dumping prices") would lose the company its remaining customers. The company had little hopes for attempting to appeal to customers based on quality, in their opinion Ukrainian customers are much more cost-conscious than quality-seeking.
For this reason, the directors of the biggest Ukrainian chocolate and coffee producers sent a letter to the head of the Parliamentary Committee on Finance and Banking, Sergiy Biruak, arguing that they have developed dynamically since the excise on chocolate and coffee was cancelled in 1997. Since that time, coffee production has increased 7 times. From 1997 to 2002 instant coffee output increased from 0.16 thousand tones to 1.25 thousand tones. About $250 million has been invested in coffee and chocolate production. It was feared that imposing an excise tax would narrow the seller's market, decrease investment, enlarge the gap between Ukrainian tax legislation and EU legislation, increase illegal import, and ultimately reduce money flowing into the budget. The Cabinet apparently took their arguments to heart - they turned down the motion.
FOR WHOM
THE BILL TOLLS
Today, in the Ukrainian parliament, a bill is under consideration that would increase the duty on ground and bean coffee by 50 times - from 0.1 to 5 Euro per kilogram. Deputies Victor Veretennikov, Victor Gorbachiev and Volodymyr Fialkovskyi introduced the motion. Fialkovskyi claims that these changes are aimed at reducing roasted coffee imports and, consequently, promoting Ukrainian production. If the motion is accepted, the price per kilogram of foreign roasted coffee will increase by an astronomical 32 hryven a kilogram. Opponents of this bill argue that increasing the duty 50 times will increase the price of foreign coffee by 30-35%, but even these extreme measures will not mean home coffee manufacturers will prosper in the nearest future.
The first problem is that, as a result of the relatively free trade with Russia, this program would give an advantage not only to Ukrainian but also to Russian producers at the expense of more competitive western ones. Russian-based companies already produce 4 times more coffee than the Russian market demands. The duties in Russia amount to 15% on coffee products but only 5% on coffee that will be packed in Russia. Raw coffee is subject to no custom duty at all. Russian production serves both the home market and the market in the western and southern regions of Ukraine.
Second, home manufacturers are unlikely to answer rising demand for coffee on their own, because only powerful companies can afford to purchase expensive roasting equipment. The equipment for producing instant coffee is also very expensive, amounting to millions dollars a unit. Opponents say this means the bill "may be beneficial for large Ukrainian and Russian coffee companies, and, if adopted, may lead to the monopolization of the market". Experts say the bill might double coffee prices, and most consumers will have no choice but to switch to Galka. They say the force behind the bill is lobbying by small uncompetitive businesses in the Kyiv region seeking to limit foreign competition. During the first reading, before the summer holidays, the Verkhovna Rada reviewed this issue. However, they have not made a final decision.
What is likely to happen to the Ukrainian coffee market in the days to come? What taste will Ukrainian coffee have? What will Ukrainians consume? Alas, Ukrainians' choice depends not only on their tastes and means, but also on government policy, which is often conducted not in their interest but in the interests of certain categories of producers and importers.
The average Ukrainian consumes only 600-800 grams of coffee a year.
Small packages (cans or packets with a capacity of 50 or 100 grams) are the most widely demanded type of coffee packages.
The natural coffee market is the most forward-looking one.
The quantity of coffee beans and ground coffee has decreased from 36.7% to 33.3% on the market.
The Future Enterpr³ses PTE company has almost doubled its share of coffee on the market: from 1.1% in 2002 to 2.1% in 2003.
In 2003, of the German coffee brand "Tch³bo" weakened slightly.
The Regal and Monsignor coffee brands are considerably cheaper (15-20%) than other analogous coffee brands in Ukraine, and much less than the cost of similar European brands.
A few Ukrainian coffee producers have appeared on the middle-price segment of the coffee market. They include "Dobrynia-Dar" (instant coffee marketed under the "Dobrynia" brand) and "Monomah" (ground coffee marketed under the "Kife" brand).
Future Enterpr³ses ÐÒÅ Ltd ("MacCoffee") and Russian "Ecoproect" ("Petrovskaia Sloboda"), were among the first low price coffee bean producers.
The percentage of the market taken up by non-coffee mixes decreased from 10,1% to 8,6% in 2003.
In 2003, the average cost of instant coffee has increased 31.0%.
Approximately 600 vending machines that sell Nestle S.A. coffee have already been installed in Ukraine.
Nestle S.À has been selling Nescafe to MacDonald's, the biggest Ukrainian fast-food chain, for six years now.
In 2003, the capacity of the coffee market increased by 15%.
In a rough estimate, that overall cost of consumed coffee on Ukrainian market is 150-180% per year.
85% of coffee, costing 440 million Hryvnyas, is sold through retail establishments. 90% of this coffee is instant and 10% is natural.
In 2003, there were more than 36,000 establishments that sold coffee as accompanying product.
More than 1,500 establishments sell coffee as a menu product, and about 40% of them specialize in "Espresso" coffee.
COFFEE WITH A CONSCIENCE
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In 1996 Maria Cristina de Gonzalez was about to shut down her Guatemalan coffee plantation, sinking under the weight of bank debt and the strain of raising teenage sons.
The owner of the 116-acre El Valle finca in Antigua could no longer survive on the prices that bargain-hunting exporters were paying for her beans.
That was when David Griswold, the president of Portland, Oregon-based green coffee importers Sustainable Harvest, came along and made her a novel offer.
He said he would buy all of her high-altitude, strictly hard bean shade-grown coffee. He asked her what she needed to harvest the beans properly and maintain the quality of coffees he had cupped, or tasted, at her farm. "I began by asking for money," De Gonzalez told Reuters during a meeting of coffee industry players in Mexico last week. "And with no questions asked, he sent us an advance payment, with no interest." For people like Griswold, who is also the president of the trade group Specialty Coffee Association of America (SCAA), the deal with Gonzalez was not charity. It was a business proposition that involved paying her enough so she could cater to the increasingly sophisticated tastes of today's coffee drinker.
Preserving prices
Fair Trade certified coffee guarantees growers minimum prices of $1.26 per lb. for regular coffee and $1.41 a lb. for organic coffee, about double the international market price, as well as advanced credit from importers and some technical assistance.
Quality roasters are willing to pay the Fair Trade price and more to their suppliers, even if the coffee is not Fair Trade certified, because they want to guarantee supplies of top quality beans.
Fowler says he pays between $1.30 and $1.50 per of green coffee, compared to the going market price of about 60 cents a , and that one of his favorite coffees is from a Panama farm that is not certified Fair Trade. Lindsey Bolger, coffee manager at Green Mountain, says organic and Fair Trade coffees are leading the company's growth, and that they will likely make up about 25 percent of the 20 million lbs. of green coffee it expects to roast this year. "One of the things we know is that the world coffee stage has changed dramatically with the advent of these large producer countries," she said, referring to a country like Vietnam which burst onto the global coffee scene as a major producer in the late 90s. Indeed, in recent years Vietnam has jockeyed with Colombia for the second-place spot after No. 1 Brazil. Currently, Vietnam is behind Colombia.
For Bolger, that means the fluctuations of supply and demand will become a thing of the past as lower-quality beans are traded as a commodity, and higher-quality beans are sold between partners who have formed a buyer-seller relationship.
By all accounts, that is already happening and Fair Trade and other relationship coffees are leading the way.
"The hope is that if this works now, when times are hard, then that loyalty will be returned when things turn around," said Larry Challain of Olympia, Washington-based Batdorf Bronson Coffee Roasters.
A fringe trend grows
Once a fringe fashion drink for aging hippies sipping java in tiny specialty cafes, so-called "Fair Trade" and "relationship" coffees are today the fastest growing part of many roasters' businesses.
That's encouraging for coffee growers around the world who are in the fourth year of what they say is the worst coffee crisis in history. The crisis, caused by a sudden influx of mostly lower-quality producers onto global coffee markets, has plunged coffee prices to historic lows.
Bean prices remain below production costs and growers are either being driven out of the business altogether or are having problems keeping their plantations healthy.
Griswold's coffee buying model, called the relationship coffee model because it involves maintaining direct and ongoing relationships with producers, is a variation on the Fair Trade version of coffee that demands importers buy from cooperatives and pay a fair price for their beans. "All of our Fair Trade coffees are also relationship coffees," said Griswold.
Major roasters of Fair Trade coffees include such household names as Seattle's Starbucks Corp., the world's largest coffee shop chain, and Vermont-based Green Mountain Coffee Roasters Inc., among many others. "This is not just about charity," Ward Fowler, a partner with Milwaukee-based Alterra Coffee Roasters, said during the meeting between coffee roasters and growers from across Latin America in Oaxaca City, near Mexico's Pacific coast. "Fair Trade is an incredible marketing tool."
Coffee seeds without caffeine
Brazilian scientists have discovered a new type of coffee, which lacks the main component - caffeine and that does not hamper sleep at night.
"We found a sort of Arabica without caffeine", said Paulo Matssafera from the "Universidade Estadual de Campinas" in Brazil.
Decaffeinated coffee constitutes 10 percent of the world consumption of this beverage, but during the process of decaffeinating the main aromas also evaporate away. Arabica is the most widely cultivated and used type, accounting for almost to 70% of the world coffee production. According to Matssafera, scientists tried to cross arabica with wild varieties of non-caffeine herbs from Madagascar, but obtained a bad quality beverage.
Non-caffeine arabica herb, which grows in Ethiopia was never grown for commercial purposes, for that reason, neither Matssafera nor his colleagues know its real productivity.
But they plan to test its productivity, by harvesting the first yield, as well as by trying to introduce its low caffeine content to other highly productive commercial brands of arabica by cross fertilization. "We believe that using traditional methods of reproduction, this quality will easily be instilled," he noted.
The level of caffeine content depends on the type of coffee and the way it is prepared. For example, robusta contains two times more caffeine that arabica.
Last year, Japanese scientists informed that they discovered a genetically modified coffee type with low caffeine content, but Matssafera's opinion is that it is not arabica.
Should commercial production of non-caffeine arabica become possible, naturally decaffeinated coffee will appear on store shelves in 5-6 years. If not, then waiting for cross fertilization with other types of arabica in order to obtain naturally decaffeinated coffee will take another 15 years.
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