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Argayoso, Melissa Tamara Aquino, Sarah Baguio, Jedidiah Bautista, Samantha Lau, Sydney The Coffee Industry of the

Philippines I. Scope and Limitation

EC111-I

This study will be focused on the Philippines' coffee industry, both from the point of view of its producers, the local farmers, and consumers. While the industry has grown from just instant, RTD, and the consumer good segment into being a large presence in the services sector with cafes, the paper will be mostly limited to the former. Particularly, this paper aims to view the coffee industry under the lens of economics and provide answers as to why something so highly demanded in the country has a supply that rarely fails to meet it. Following this, the group will provide recommendations from both the business and economic perspectives to bolster growth in the segment, which has been something the government has been desiring for a while now. II. Introduction As a commodity, coffee plays an important role in the world commodity with its position as the second most consumed beverage in the world after water. It is actually the second most traded commodity in the world after petroleum, and contributes to the economies of over 70 countries through its production and export. This also makes coffee the most valuable and widely traded tropical agricultural product. Internationally, the biggest coffee producer is Brazil, which provides for roughly 15% of the entire global coffee market. It is important to note that most major players in the coffee scene are developing countries, which Vietnam, Indonesia, Colombia, Ethiopia, India, and Mexico following Brazil. (NICCEP, 2012)

Figure 1. Largest Global Producers and Importers of Coffee

Source: Fairtrade Foundation. (2012) Fairtrade and Coffee: Commodity Briefing. The total size of the industry itself is worth over 100 billion dollars, putting it ahead of commodities like natural gas, gold, sugar, and corn. This translates to 500 billion cups of coffee a year and the livelihood of over 25 million people all over the world. (Goldschein, 2011). Exports alone amount to $23.5 billion (translated to 5.8 million tonnes) in 2011 to the GDP of developing countries. It is

important to note that the largest consumers and importers of coffee are traditional markets like Western Europe, Japan and the US, while the emerging markets of Eastern Europe and Asia are showing the most growth year on year amounting to roughly 46%. In relation to this, global consumption growth, which has grown by almost double in the past 40 years shows no signs of stopping, forecasted to reach 9.09 million tonnes by 2019 (Fairtrade Foundation, 2012). Two decades ago, the Philippines used to be among the developing countries that contributed a significant percentage to the global production of coffee. Unfortunately, today it produces less than 1% of the world’s total coffee exports. This is especially distressing as coffee production continues to fail to meet country demand. "Data shows that present consumption stands at 65,000 metric tons a year, while production only stands at 25,000". This implies almost P4 billion in imports that could be going into the hands of our local farmers (Keith, 2012). Realizing this lost opportunity, the country is taking measures to revive a redevelop its coffee industry through an allotment of P192 million for its Cacao Agribusiness Zone Development (Despuez, 2012), a Public Private Partnership (PPP) Program to learn from the best practices of Vietnam – 2nd in world production (Cahiles-Magkilat, 2012), and partnerships with corporations like Nestle for them to buy more coffee berries from the Philippines and less from foreign sources (GMA News, 2011). The question of whether these are the best courses of action for the country still stands, and will hopefully be answered in the latter parts of the paper. A. Coffee Production in the Philippines The Philippines actually grows less than 2% of the world’s coffee production, which hardly maximizes the country’s potential in the industry as considering it geographically lies in the narrow coffee belt of the world, making it one of the few countries that can grow all kinds of coffee: Arabica, Excelsa, Liberica and Robusta. However, decades prior paint a different picture as the Philippines actually used to be a major producer and exporter of coffee products, peaking at 4 th worldwide in during the Spanish era. It was also a relatively major player in the 1980s, among the many developing countries in the coffee belt to produce for exports. However, the industry took a major dip in the 1990s where it no longer could compete globally with other coffee manufacturers (Austria, 2002). Figure 2. Relative comparative advantage of Philippine Coffee Production Industry to International Counterparts 1977-1999

Source: Austria, M. (2002) The Philippines in the Global Trading Environment: Looking Back and the Road Ahead. Currently the Philippines has a modest coffee industry that fails to maximize its potentials. Census data reveals that there are roughly 410,000 farms covering ~123,000 ha, of which all commercial varieties of coffee are grown: Robusta accounting for 70%, Arabica for 5-10%, and Excelsa and Liberica for 15-20%.

2012). excessive weather conditions in the area caused by El Nino and El Nina phenomena. This price vulnerability makes those who depend on coffee as their livelihood especially vulnerable as it would become difficult for them to predict their incomes and budget for their household and business needs. (2009) Philippine Coffee Annual.02%(Ang. disease and other factors”.Unfortunately. (2011) The Coffee Industry. Congressional Oversight Committee on Agricultural and Fisheries Modernization. 2000). 2012) as production has even declined slightly from 2008 to 2009 in a downturn of 1. . 2000). This is especially true for the poor farmers of the Philippines. It doesn’t help that coffee is a product whose price traditionally fluctuates from year on year according to “weather conditions. In addition to this. this amount has not been growing along with the increasing global and local coffee demand (NICCEP. especially when they end up struggling to make ends meet when the coffee market is down (Fairtrade Foundation. Below is the price fluctuations of the Robusta type of coffee. Figure 3: Coffee Production in the Philippines (2007-2009) Source: Ang. Figure 4: Share of Areas for Coffee Plantation in the Philippines Source: COCAFM. which barely incentivizes them to continue coffee production. and it can be observed that it went from as low as to 17 cents in 2001 a pound to as high as 120 cents in 2011. Declines in production are often attributed to the peace and order situation of Mindanao that grows approximately 60% of the country’s coffee beans. farmers also face the low-buying price of coffee in Caraga provinces as well as the continuous neglect of coffee farms in Cavite and Davao del Norte (COCAFM. P. who have a hard time finding the incentive or the resources “to invest in good maintenance and growth of their farms”. which is the majority of the Philippines’ production.

coffee is considered to be a staple to a Filipino household (Ang. B.Ps bn 60 40 20 0 18. .7 49.2 31. demand rose from 75. The graph below details the industry’s historic retail value growth (2007 to 2012) and its expected future growth (2013 to 2017).5 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Source: Euromonitor Furthermore. In particular.5 34.3 27. according to the Philippine Coffee Board Inc. volume sales increased by 7% and is projected to have a 5% CAGR in the coming years (Euromonitor.000 metric tons in 2012 (Olchondra. 2012). It is usually served to accompany breakfast.8 38. PCBI.4 24.9 45. In 2011. In fact. especially in the Visayas which is yet to grow coffee.000 metric tons of coffee per year in two years” (De la Fuente. Retail Value RSP .Figure 5.000 tons in 2010 to 100.9 21. (2012) Fairtrade and Coffee: Commodity Briefing. In recent years however. Apo and Mt. The increasing popularity and consumption of coffee can be attributed to the wide range of its captive market segments. they also want to increase the area of coffee production in Davao. Coffee Demand in the Philippines The demand for coffee has been increasing across the years.2 30. and the Cordillera’s Ifugao and Mountain Province. especially in the areas of Mt. 2012). they are looking at new areas to put farms and increase capacity. Matutum. 2012). Price Fluctuations of Robusta Coffee (1989-2011) Source: Fairtrade Foundation. government has been very adamant to boost up coffee production. 2009).. They are particularly looking at Negros Occidental. This is looking to add roughly “7.3 41.

the market expanded to include younger consumers as well. As such.may it be pan de sal or rice meals. most of the coffee companies continue to innovate and introduce new variants. in 2008 the 15-24 age group took up a 26% share in the country’s total coffee consumption (Research and Markets. Inc. “Coffee is now th beverage of choice amongst young people. They prefer fresh coffee and more sophisticated flavors that are available only in chained supermarkets.6%) and Blend 45 (0. According to Andrew Ward. It did. however. Nescafé’s worldwide account director. with its brand.9%).7% market share. it accounts for 88. typically found in the country’s key cities (eg Manila).com. Demand for fresh coffee is not so high. . 60% and 30% of the population.. Major Players & Competition The chart below shows the major competitors in the industry. instant coffee (eg 3-in-1. 2001) III. James 2012). However. Universal Robina Corp. for the past years has dominated the coffee industry. The other players in the industry account for the remaining 1.2%). Their main considerations aside from taste are convenience and value for money (Euromonitor.8%). Aside from the socioeconomic profile of coffee drinkers. D (average Filipino or masa) and E comprise 9%. San Miguel Super Coffee Mix Co. The second major player lags very far behind with a 3. Nestlé Philippines. In 2011.6% of value shares with its Nescafé brands. such as pre-mixed. 5-in-1) and single-serve packaging. On the opposite end.” (PhilStar. high-income and some middle-income consumers are willing to pay extra for a “better coffee experience” (Euromonitor. Inc. Capturing these segments can certainly increase a company’s market share. and Krafts Foods Phils. respectively (NSCB and SWS data. In fact. 4-in-1.7% market share. 2008). 2012). Although it is a rather niche market. to encourage consumption from this segment. The average Filipino consumer an average of 2 cups of coffee per day (Avillanosa. This market positioning strategy is motivated by the fact that classes C. The lower to middle income consumers hugely account for coffee demand in the country. 2012). slightly lower than instant coffee’s 7% rise. (1.1%). namely Great Taste (3. companies should be willing to set modest prices as they are catering to buyers who are very price conscious and sensitive. Maxwell House (1. record a 4% increase in volume sales in 2011. has two brands. It is then followed by Mayora Indah’s Kopiko (2. there is also a market that prioritizes premium quality coffee variants over price. 2011). hypermarkets or specialty stores. accounting for only 10% of total volume sales. 2012). Industry Environment A. The age bracket for Filipino coffee drinkers go as young as 15 years old to as old as 65 years old (Avillanosa.

chocolate. 2012). The brand’s long history and stretched presence in the industry is a superior advantage.8% 1. Nescafé. Type of Consumer Middle to Lower Class Middle to High Class Product Flavor Pre-mixed coffee (3-in-1) . Nestlé Philippines Inc.6% Source: Euromonitor Comparing the brand volume shares across the years. They continue to nurture brand equity and brand loyalty through aggressive advertising.7% in 2007 to 88.2 million fans. Nescafé has a lot of variants as well. etc. including the high-income buyers. It also explores non-traditional marketing as well. Nescafé occupies the largest shelf-space in supermarkets. it is worth noting that although Nescafé’s volume shares declined. etc. It has placements on traditional avenues such as television. Premium Coffee – Gold Dolce Gusto – Italian coffee flavors (peach. or what taste you prefer. this brand clearly dominates the market with 88. have gradually increased its product following by 5. This is aligned with its strategy to cater as many market segments.3% and 0. such as the use of social media (Facebook. 2011). Among all the players. convenience stores and even in neighborhood. have lost 2. (San Mig Coffee & San Miguel) Kraft Foods Phils. creamy latte.” Product differentiation is in terms of flavors. This is because (1) Nescafé’s instant coffee is still priced slightly higher than of other brands and. vanilla latte macchiato. sari-sari stores. In the Philippines. coffee is almost always associated with Nescafé. won the ARAW Advertiser of the Year Award in 2011—the most prestigious award in the Philippine advertising industry (Nestle. strong ‘n rich. It is summarized in the table below. groceries. Inc (Maxwell House) 88. Kopiko and San Mig Coffee.2% 1. Aside from an extensive advertising.com. Also. (2) Nescafé has a lot of product variants differentiated that cater to several market segments. (Nescafé & Nescafé Taster's Choice) Universal Robina Corp.6%. Nestlé allocates the biggest budget for marketing and invests and capitalizes on almost all channels.classic.5% of its shares. viral Youtube videos) and interactive marketing (Bayani. Nescafé and Great Taste. 2012). Nescafé’s digital campaigns were so effective that a double digit growth in sales was recorded in 2012 (PANA. respectively. on the other hand. grande intenso. Inc.Company Value Shares (2011) 2. Nestlé has been around since 1895. Nestlé also leverages on a comprehensive distribution network in supermarkets. radio and print media (Avillanosa. brown ‘n creamy.1% and 2. Nescafe has a coffee specially roasted for you. decaf.6% of the market share. “No matter who you are.5% in 2011. it still continued to register an increase in value shares from 86. packaging and price points offered.9% 3. In fact. and Nescafé was first introduced in 1938. However. Its Facebook fan page currently tops all brand pages in the country with over 2.ph. As already mentioned. As phrased in their Facebook page. respectively. the top two brands.7% 1. mocha. (Great Taste & Blend 45) Mayora Indah Tbk PT (Kopiko) San Miguel Super Coffee Mix Co.) Packaging Single-serve sachets Single-serve sticks Doy Packs Doy Packs Boxes (with single serve sachets) .7% Nestlé Philippines. original. 2012).

given the thriving market of ready-to-drink teas. Canada. its main size variant is the single-serve sachet. chococino). This growing popularity is attributed to the distinct taste of its instant coffee products.10% inn 2007. It’s market share gr ew from 1. It mainly operates in the middle to low income consumers. In 2008.6% market share in 2011.ph). 3in1 sugar free Mocha. like supermarkets. other drinks. Its milder and creamier taste suited Filipino taste. The 29 research development and technology facilities it has worldwide are all aimed towards providing and assuring its consumer base with high quality and safe food solutions. it has 16 product variants: super packs (super. Now. San Mig Coffee utilizes an exhaustive distribution network as well. it strategically priced its products lower than Nescafé. Among its other variants are: Kopiko Astig and Kopiko Kopiccino (Mayora. It appointed Tridharma Marketing Corporation (TMC) to be the exclusive national distributor in the Philippines in 2005 (TriDharma). including New Zealand. Kopiko is the coffee brand of Mayorah Indah TBK Pt.9% share it had in 2007. This variant is mainly differentiated by having no cholesterol and 50% less calories. etc. Like Kopiko.ph). etc (Mayora. market shares began to decline as URC continued to expand its product lines to include chips. 2012). 2012). which was initially introduced in 2005 (San Miguel Corp). URC’s main coffee brand is Great Taste. Great Taste Premium (doy packs) and Great Taste Decaf (doy packs).2% in 2007 to 1. Latte Jars Doy Packs Single-serve sachets Ready-to-Drink Cans Nestlé’s Research and Development arm is another key competitive advantage of the firm. UK. its main product form would be the pre-mixed (3-in-1) packed in single-serve sachets. Kopiko’s market share has greatly improved from 1. It gained so much popularity that it even became the largest -selling brand in the market. URC offers a variety of Great Taste products to capture different market segments. This is partly due to URC’s current focues on strengthening the position of C2. Although Blend 45 still exists today. Fit. Japan. even surpassing the sales of Nescafé (URC. It is locally owned by John Gokungwei’s Universal Robina Corporation. Great Taste is the secoond largest coffee brand in the country. It was the first to introduce the Brown Coffee variant that makes use of brown sugar instead of white. to compete with Nescafé. that would be known as the “Pinoy coffee”. an Indonesian company. Great Taste 3-in-1 White coffee was a very successful product innovation in 2011. URC also offers a ready-to-drink variant. convenience stores. white.com.4% in 2011. 3in1 Decaf.com. chocolates. to 6. Relax. San Mig Coffee is San Miguel Corporation’s main coffee brand. effectively capturing a part of this price sensitive market. This focus on bulding consumer trust strengthens brand loyalty for Nescafé (Nestle. Because of the success of this product. It is very wellestablished that it imports to over 50 countries. 2012). Great taste Granules (doy packs). Similar to Nestlé’s strategy. Its first product offering was the Blend 45. Like Nescafé. It has a 3.7% in 2011 (Euromonitor. it even offers a pro-fiber variant. poultry. This has declined from the 5. and has acquired good reviews (Euromonitor. Coffee Twist. Lingzhi) Decaf. As such. It targets middle and lower income consumers. brown. Although they have available largersized doy packs.. This makes the coffee creamier with a caramel flavoring. Nescafé and Great Taste have introduced their own version of brown coffee (Euromonitor.Health Conscious Younger Market Body Partner (Protect. Currently. These include 3-in-1 instant flavored mixes (sachets). sari-sari stores and market stalls. as well.com). 3-in-1 regular coffee . However. its most successful product offering was the San Mig Coffee Sugar Free mix. This rides on the health and wellness trend. 2012). groceries.

Inc. pro-slim coffeemix with L-carnatine) and 100% premium instant coffee (San Miguel Purefoods).mixes (original. But after the the company’s split in 2012. Decaf and sugar-free). more adventurous demographics. especially for specialist coffee shops. Here is a table summarizing the prices of the 5 brands.30 0. Trends Health and Wellness Trend. extra strong). 2012). 2004). This market also has an increasing appreciation for more sophisticated flavors. Its market share declined from 3. As previously mentioned. 2012). There are around 650 specialty coffee shops in the country (2011). Malls.27 0. such as coffee dependency. Due to the fast paced lifestyle of Filipinos. strong. 2012). 2012). 3-in-1 sugar-free coffee mixes (original. Convenience. France. sugar-free and rich (Mondelez International. 2012). UK and the US. could be a threat to the coffee industry (Euromonitor. Maxwell House is a coffee brand from Tennessee.75 3. extra strong). It is sold globally in markets such as Canada. mild.33 0.08 g/sachet 14 20 25 14 9 cost/gram 0. etc (Harvard Health Publications. They can market and develop healthier variants (eg. Taiwan. This will positevly affect the coffee industry. Maxwell House now falls under Mondelez International (Egan. on the other hand. Ireland. supermarkets are the largest retail distributor for fresh and instant coffee. Germany. . to be sold in ready-to-drink sachet mixes. Higher income and health conscious consumers are its main target. increased heart rate and blood pressure.65 6. Breaks in coffee shops becomes a part of their lifestyle.23 0. This is a huge potential for specialty coffee shops. more and more Filipinos are looking for products that require a limited preparation time. especially those who live in urban areas. which is increasingly gaining popularity as a healthy beverage. provide a perfect avenue for specialty coffee shops to open. Currently. It is manufactured by Kraft Foods. Russia.. The available variants include regular. The increasing number of supermarkets and malls. This is based on Rustan’s prices: Nescafé Original 3-in-1 Great Taste 3-in-1 Kopiko Brown 3-in-1 San Mig Coffee 3-in-1 Maxwell House price/sachet 4. are seen to postively influence higher demand. Potential of younger. 2012). more of the health conscious consumers would prefer to switch from coffee to tea. 57% of volume sales (Euromonitor. this trend coupled with the inceasing education of consumers regarding the bad effects of coffee consumption. China. This explains the growing demand for instant pre-mixed coffee served in single-serve sachets.75 5. This can be an opportunity for firms. The growth of the BPO industry in the Philippines means that there are more middle-aged buyers with higher disposable income (Euromonitor. mild. strong. given that the nature of their work. Thus.8% in 2011 (Euromonitor. as this market segment usually value ambiance and flavor variety over price. pro-health coffee (pro-fiber coffeemix with inulin fiber.56 B. These negative effects usually manifest much later in life. coffee has gradually become the choice beverage for younger individuals. Poland. 2012). as coffee shops become a venue for study and socialization.00 5. like Starbucks and Coffee Bean & Tea Leaf. It was brought into the Philippines on April 2002. that consists of long working hours and graveyard shifts. the Middle East.1% in 2007 to 1. On the other hand. which can stimulate demand fro fresh coffee (Euromonitor.

it has a lot of work to do. long hours. there are two ways by which the government asserts its role in the coffee industry in the Philippines. the local government has taken steps to revitalize the local coffee industry in order to take advantage of the present opportunities. the Philippines only produced coffee that constitutes less then one percent of total global production. She mentions that the Philippines is now determined to once again regain our position as a prime producer of coffee.import/taxes. of our total gross domestic product. . This development offers incentive to those countries with a strong coffee industry. 2010) Second. which can be seen much especially in the past few years.). it regulates trade through timely directives and republic acts that aim to improve the health of the local industry. In the country. most especially in China. By 2020. which is the biggest producer of coffee worldwide. The foreseen increase in per capita income is also due to the fact that. the Philippines was one of the top coffee producers in the world which began when the Spanish brought the beans with them into the new colonial world. which has led to the increase in the consumption of coffee due to the nature of the business (graveyard shifts. if the country wants to regain its position. as Agence France-Presse remembers in an article for ABS-CBN News.C. it is expected that “each citizen in the mainland are expected to consume a cup of coffee a day or sipping $50 billion-worth of coffee. the local increase in demand is due to the various trends discussed in the previous section and is and will be bolstered by the significant increase in the per capita income in the country in the past years as well as in the near future. etc. The second way by which the government exerts its power in the industry is through development programs that are enacted to stimulate the expansion of the local coffee industry. (France-Presse 2010) As of 2010. 2012) On the other hand. legislation Given the huge potential that comes with the production of coffee within a country. Realizing this. the government has become very much involved in the activities surrounding coffee production in the Philippines.” (Ordinario. 2012) D. (Global Agricultural Information Network. The increase in demand for coffee can be seen both within the country as well as in the countries surrounding the Philippines. This is mainly caused by the increased government spending on infrastructure and social services to help those who live along and below the poverty line in the country. Economic drivers The economic drivers of the coffee industry in the Philippines are all about the opportunity that the increased demand poses for the growth of the local industry in the country. First. Demand for coffee abroad has increased. (France-Presse. 2010) Clearly. there has currently been tremendous growth in the business process outsourcing (BPO) industry in the Philippines. local increase in demand is fuelled by two factors. (Remo. the outstanding debt of the Philippine government is now only at 50 percent as opposed to a previous 84 percent. First. which provides the most relevant opportunity there is to the Philippines in terms of its coffee export industry. During the 1880s. Government . like how it helps the economy of Brazil in the present.

The behavior of imports illustrated above is an effect of government policies enacted to protect and foster the growth of the Philippine coffee industry.1996. it would decline from 100% to 60%. (“Aquino Commits…”. President Aquino mentioned in an interview that. and for Other Purposes. the tarriffs would decline to 45% in 2000 from 50% in 1996. This seems to be in response to the increasing local demand for coffee. it certainly will be a big boost to the economy for us to first be self-sufficient. which is the biggest player in the local coffee industry.5 billion . However.000 tonnes annually. there has been a dramatic spike in the increase of coffee imports beginning in the year 1995. which could not be addressed by local production. Given the huge amount of coffee imported into the country.000 tonnes per year. Nestle. the government decided to change its approach to redulating the coffee industry in the country and decided to remove the ban of coffee imports and replace it with a tiered tarriff system.Green Coffee Imports (1.An Act to Prohibit the Importation of Coffee. the Philippine government has put up the International Coffee Organization Certifying Agency (ICOCA) in order to provide service and support to the local coffee export industry in an attempt to revive local production. Except Rice. which was lifted in 1996 when it released Republic Act 8178 .com) As can be seen in the chart above.000 60kg Bags) (Data sourced from www. President Aquino has included the planting of coffee in his National Greening Program. Within the quota. These two republic acts.indexmundi. while local production has been pegged at only around 25. there is a demand of up to 120. In its effort to regain self-sufficiency and once again become a net exporter of coffee in the future.An Act Replacing Quntitative Import Restrictions on Agricultural Products.000 60kg Bags) 2500 2000 1500 1000 500 0 1960 1963 1966 1969 1972 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008 2011 Green Coffee Imports (1. there was really almost no importation of coffee products at all. sources 80% of its coffee from outside the country. (Olchondra. As a part of the International Coffee Organization (ICO). as illustrated in the chart above. an institution whose member countries collaborate to tackle issues regarding the world coffee industry. 2012) The government relies on the Bureau of Import Services when it comes to the implementation of these directives. dramatically affected coffee trade in the country. This was done in order to stimulate local production of coffee in the country. 2012) In the country alone. which he started in 2011. Towards this goal. The program is essentially a big reforestation program that aims to grow 1. From 1960 . The Philippine government first started to assert itself in the local coffee industry back in 1960 when it released Republic Act 2712 . the government has also place institutions and programs in order to foster the local industry. Outside the quota. with Tariffs. Creating the Agricutural Competitiveness Enhancement Fund. currently.

even in the face of higher than expected inflation. So on the other hand. Department of Agrarian Reform. specifically for coffee mixes (Euromonitor International 2012). has yielded lackluster benefits for two reasons. 2013) IV. (Enhanced DA-DAR-DENR Convergence. “The demand for coffee beans in general is still continuing to grow. and it is mostly local. 2013) With a big effort at planting a huge amount of coffee comes government support in the form of the National Convergence Initiative. Philippine Coffee Board Chairman (de la Fuente 2012). and an increase in input prices of sugar. unfortunately. Because of the more strenuous and prolonged working hours. a bulk of this demand is also attributed to the local cafés that integrate Arabica and Robusta varieties to their beverages.” says Ms. President Aquino revamped the program to create that aims to fill the gaps of the previous program and go for incremental but sustainable and holistic development that aims to integrate the people with the development of their local economies. Despite the inflation rates during the year 2011. . it were those coffee mixes which contained brown sugar (instead of the usual white) which saw an increase in demand from the low-income segment (Euromonitor International 2012). and indigenous groups. We see here how the demand for coffee has been stimulated precisely by the introduction and innovation of coffee variants. a collaboration between the Department of Agriculture. farmers. The initiative was started in 1999 and. offering 3-in-1. tapping the more price-conscious low-income segment of consumers.5 million hectares nationwide within the time period of 2011 to 2016. the major players have still handed down these costs increments to consumers at the lowest possible price as to not hurt demand (Euromonitor International 2012). As you can see. Also. we are really a nation of coffee drinkers. And more particularly. and there are now more people working almost 24/7 who end up drinking coffee. On the one hand. even with the increase of 4% on the unit price of coffee. and also an increased production of coffee. She also stated that this demand for coffee is “increasing in proportion to the growing population.trees in 1. (National Greening Program. an inflation rate of 5% in 2011. you also have the conscious effort of the manufacturers to let the shocks of inflation be absorbed gently by the consumers. And so apart from the coffee mixes. The fragmented delivery of services to the countryside and the fact that the beneficiaries of the program. fisherfold. and the Department of Environment and Natural Resources. Pacita U. coffee has become almost a necessary commodity to the daily life of the Filipino. But in the face of growing demand. Juan. 4-in-1 and even 5-in-1 blends. these innovations include and encourage more people to participate in the demand for coffee. and in turn boosting their consumption (Euromonitor International 2012). all the more did the players in the industry try to innovate with their coffee mixes. Also. remained underdeveloped. more than production” (Keith 2012). supply has not been able to keep up with this growth. The initiative aims to pool the resources and strengths of the three government arms in order to foster sustainable rural development of the Philippines’ countryside. industry players like Kopiko and San Mig Coffee have started to focus on lower-priced brands. Coffee Economics Supply and Demand There is a growing demand for coffee in the Philippines. Seeing this.

On the one hand. despite its dominance in the market. As we have seen earlier. These production figures fall short from the local demand of 75. These other players are still able to significantly able to gain a share of the market and remain competitive because of the market’s size and the leeway for product differentiation afforded by innovating on coffee mixes. and 4) non-price competition. with roughly the same size (except Nestlé) who are competing based on a differentiation of products. the Philippines is importing P9. Also. the industry has a large number of firms.526. Currently. it can also be under an oligopoly. and most importantly. we could conclude that the industry consists of many buyers.01 MT of 2010 (de la Fuente 2012). their color themes. Market Structure The market sturcture of the coffee industry is two prong—it is a combination of monopolistic competition and oligopoly.27 MT of Coffee Arabica (as compared to the prior year’s 19. where we find the different competitors set themselves apart through the size of their packets.978. as well as the variety that the innovations are allowing the industry players to differentiate on. their packaging design. Mayora Indah Tbk PT. But on the other hand.91 MT (de la Fuente 2012) for the year 2011. coffee production only held an average of 25. other manufacturers tried to tap the health conscious segment. because of the supply gaps that it has to fill (Olchondra 2012)..—all hold a share of market that is below 4%.000 MT (Olchondra 2012). the other players—Universal Robina Corp. 3) some influence over the price. Hence. there is a great demand for coffee in the Philippines. Over the past 10 years.002. Maxwell House 3-in-1 Sugar Free and Illy Espresso Decaffeinated (Euromonitor International 2012).09 MT consists mostly of the production of 62.933. and the market for it is huge. Mayora Indah Tbk PT.06 MT) and 19.09 MT. and if we inspect the coffee scene further. Nestlé holds a staggering amount of 87% of the share of the market. Let us then elaborate on product differentiation. Firms have been . San Miguel Super Coffee Mix Co.41 MT of Coffee Robusta (a 7% decrease from the prior year’s 67. consistent throughout the years. coffee production was 88. Monopolistic Competition The characteristics of a monopolistic competition that the Philippine coffee industry encompasses are the following: 1) the existence of a large number of firms.000 to 120. because of the dominance of Nestlé and the good prospects of growth (although currently small now) for the other market players such as Universal Robina Corp. set their own prices.In 2011. leaving the Philippines a supply gap of 31. It is under monopolistic competition because you have other industry players. V.420. 2) differentiated products. a characteristic of a monopolistic competition. a huge dip from the 94. and Kraft Food Phils Inc.536.473. creating blends such as Boncafé Decaffeinated. There are three kinds of product differentiation that the coffee industry is engaged in.000 MT of coffee annually.53 MT) (de la Fuente 2012). and therefore.5-billion for coffee.526. First is physical product differentiation. Taking aside the size of Nestlé. garnering an almost monopolistic status (Euromonitor International 2012). there are a significant number of industry players that are of more or less equal size. although the main takeaway from their products are the same—which is to satisfy the caffeine fix of the consumers. and San Miguel Super Coffee. But at the same time. it does not have full contol over prices. The 88. the tweaking of blends. For instance. as the other players are also able to set prices for themselves because of the different market segments they cater to.

but can influence price. despite its size. because it wins customers over not through price. For instance. as seen in the slight difference of mixes and branding. Short Term and Long Term Graphs for Monopolistic Competition (Source: EconomicsOnline UK) . is marketing differentiation. different from the supplier relationships of other industry players. The last kind of product differentiation is human capital differentiation. but through advertisement costs. Other industry players. It also separates itself by creating online contests and even sponsoring music festivals. but they still differ by small amounts. So instead of just having just around three blends. firms cannot fix price. This is particularly clear for Nestlé wherein it stresses to create quality relationships especially with their coffee farmers. And it is this dynamic that makes the coffee industry on the one hand. firms are now offering blends for every Filipino. does not fix price. Nescafé’s tagline of “Para Kanino Ka Gumigising?” has greatly distinguished it from the rest. That is to say. who are looking for a variety of coffee blends” ( Euromonitor International 2012). Nescafé has long owned the color red for all of its brands. we should not be fooled that it operates almost like a monopoly. Our industry leader. wherein the firm differentiates through the skills and the level of training of its employees. On the contrary. accounted for by product differentiation. This is due to the slight differences of their product offerings. This is exactly why the coffee industry is characterized by non-price competition. Nescafé. because the prices of the different firms are close to each other.trying to consistently widen their lines of instant specialty coffee. while San Miguel is able to capitalize on the quality and consistency that have been proven by its other products. Nestlé does not have complete control. Despite the dominance of Nestlé’s market share. and it is where they try to set their brand apart from the other. “to cater to the different taste buds of customers. under monopolistic competition. although small. This is where firms differentiate based on distinct packaging and promotional strategies. because in a monopolistic competition. are still able to haggle for prices. Next. The industry players also have some influence in price. or even dominant control on the prices released in the market. Most of the firms still do competitive pricing. Also. it is in branding and brand building that most of these firms use to convey a sense of uniqueness.

For instance. Even if acquiring the beans is not that difficult (as some independent coffee sellers are able to do this as well). For instance. even have to tie up with international firms (because the supply of coffee here in the Philippines is dominated by Nestlé and URC) hence going into a joint venture with the Singaporean Company. parameters for instant coffee include moisture content. Super Coffee Mix Manufacturing (Euromonitor 2012). it is important in this industry to innovate to differentiate and offer a wider array of coffee mixes to choose from. purchasing 80% of the Philippine’s entire coffee production (The Manila Times 2012). P25 million facility that “serves as a one-stop shop for coffee farmers” (The Manila Times 2012). especially in an industry wherein customers identify themselves with the brand. like San Miguel Corporation. and in fact. Kopiko on the other hand captures the taste buds of middle to lower-income consumers. ash content. Nestlé has just opened its newly completed Nestlé Lipa Integrated Commercial Center in Batangas.Oligopoly After having discussed monopolistic competition. R&D costs. 3) high advertising and selling costs. dictate (Alave 2012). which taps into the market preferences and uses these to come up with new products. . established brand capital etc. brown sugar and cream) served in one package. before it is allowed to go into the major retail channels such as supermarkets. In fact. and it is this innovation that allowed Mayorah Indah to garner the fastest off-trade value sales growth of 26% in coffee in 2011 (Euromonitor International 2012). For instance. Brand equity can also be considered as an obstacle. with their Kopiko Brown (coffee. farmers are trapped in the low prices that Nestlé and Universal Robina Corp. This is again connected to the high advertising and selling costs. Thus. investing some $160 million (Banal 2012). Distribution chains are also considered to be barriers to entry. Nescafé has in fact established itself as synonymous with coffee and coffee mixes in the Philippines. 2) high barriers to entry. along with the high capital investment. because the different industry players go for aggressive advertising as a way to differentiate themselves from other brands. industry players also need a strong research and development arm. because getting a product into these network means having to go through FDA approvals and accreditation. caffeine content. And this is important to note. there are still some characteristics of the coffee industry of the Philippines that belong under an oligopoly: 1) relatively constant prices. Other players. Barriers to entry generally mean the high start-up costs and other hindrances that prevent new players from entering the industry. players in the coffee industry have already invested high amounts of capital and already gained considerable economies of scale throughout the years. Also. Such a dominant players have huge haggling power over its suppliers. Nescafé’s success is attributed mostly to its new line of Italian coffee flavors ( Euromonitor International 2012). as said earlier. it even has plans of expanding its “instant” coffee -making facilities. having the factories and facilities to process the coffee in massive quantities requires a huge amount of capital. Nestlé currently is the largest buyer of coffee in the Philippines. For instance. These include things such as high plant and factory investment. a five-hectare. and pH level (FDA 1985). The most important characteristic that the coffee industry has under oligopoly is its high barriers to entry.

already threatening the long-standing dominance of Nestlé. If there are increases in price. namely Nescafé and Great Taste soon followed suit with this trend. consumers are slowly starting to explore and embrace the different brands. but with features.10% to 6. Porter’s five forces highlights the importance of . Also. it will be just a small amount. This is because of the good outlooks for growth or URC. Nescafe co-existing with other minor players. prices are kept relatively constant. we mentioned a while ago the success of Mayorah Indah’s Kopiko Brown. Minor players still play a role in the industry but are not influential enough to affect market prices. Knowing the economic structure of the coffee industry and the nature of oligopolistic competition. the coffee industry in the Philippines was initially a form of monopolistic competition wherein the industry was dominated by a particularly strong player: Nestle through its coffee brand.40% from 2007 to 2011 (Euromonitor 2012). Among the two market structures. the application of Porter’s five forces may be necessary to gain better insights into the industry. there are hints that the industry has been slowly been tending towards an oligopoly. For instance. Other insant major coffee brands. and usually because of some extra quality feature. For instance. trying to copy in their own way the success of Kopiko by introducing brown coffee variants (Euromonitor 2012). is it even recommended for a minor player to stay or enter into the business? In order to understand the coffee industry further. Firms in the industry don’t battle it out with price. Porter’s five forces is a framework commonly used for business analysis of an industry in order to determine its attractiveness. San Miguel and Mayorah Indah.Also. However. (Source:EconomicsOnline UK) VI. Conclusions and Recommendations From the economic perspective. recent events indicate the rise of competition from companies such as San Miguel which have started increasing its market share of the industry thus changing the field into an oligopolistic competition wherein Nestle dominates the market but whose prices still affected by the growing competition which primarily composed of major players. it seems to be that although it has many facets of a monopolistic competition. Kopiko’s brand volume shares have grown from 1. in the competition in the coffee industry.

A. energy drinks.these five factors: 1) Threat of new competition. 2) Threat of substitute products. Large players already have economies of scale and there are high capital requirement to enter the industry. . 3) Bargaining power of customers (buyers). There is high product differentiation. Determinants of Supplier Power: Low   Supplier concentration is low Availability of substitute input is high due to foreign competition Supplier input is important to firms but easily sourced Supplier’s product differentiation is low Rivalry amongst Existing Firms: High  5 main players in the industry competing on the basis of price and brand loyalty.   Threat of Substitute Products: High    Substitute products include: tea. Entry cost is high. Relative price is mostly similar or sometimes cheaper than coffee. The industry growth rate is around 3. Porter’s Five Forces Threat of New Entrants: Low      Oligopolistic structure prevents minor players from gaining large market shares.      Determinants of Buyer Power: High High product differentiation Low switching cost for the buyer Multiple product sources available Product is a luxury item High volume of consumption    Most main competition are large companies that are rivals in size.1% Buyers have high switching costs due to similarity in pricing. There is low switching cost for buyers since stiff competition means competitive prices but effect is mitigated by brand loyalty and strong marketing campaigns. Relative quality of substitute also has grades similar to coffee. 4) Bargaining power of suppliers and 5) Intensity of competitive rivalry. soda.

the group has realized that one of the main reasons why major companies still hold dominant market shares is due to the financial resources available to them. subsidies and so on for the macroeconomic side and an exploration of alternatives for the microeconomic side such as micro financing and the creation of cooperatives that could capitalize on the funds gained from micro financing. It is also important for the government to stimulate local coffee production in the country given that the country is currently experiencing high coffee imports to counter the low local production of coffee by giving more incentives to local farmers such as financial grants for coffee seedlings or for equipment that will enable farmers to increase their yield or to sell for a higher prices. on the international front. Given that mainstream marketing has been one of the main distribution channels in the coffee industry. In the coffee industry. At the same time. Finally. Porter’s five forces attempt to explain that the coffee industry is currently unattractive for the minor player to enter into due to the oligopolistic nature of the industry wherein strong players dominate and control the industry through dictation of prices and economies of scale. While initially positioned for the high-end market. there are new emerging markets such as the specialty coffee market and the sustainable coffee market with niche markets such as organic. There are two methods in confronting this challenge of overcoming the status quo. A fair example of a potential niche market in the Philippines is the Cordillera fair trade coffee which reflects the consumer trend of increasing health-consciousness as well as concern as to the origin of their food.(NICCEP.(Alave. fair trade coffee has started to penetrate the low-end market segment as well as the health-consciousness trend spreads. Firstly. any intervention made by the government will have to aim at strengthening the local suppliers through increasing the financial capabilities of minor players in the local scene given that many factors that determine local pricing are in the hands of major players. there is a variety of alternatives available to both minor players as well as local suppliers to ensure financial stability in the face of dominant players which dictate the . There are four ways in which the Philippine government could establish a macroeconomic intervention. This in the end entails that if no major change is attempted by either the minor players. for example roasted coffee sells at a premium compared to green coffee beans. shade grown and fair trade coffee. On the microeconomic side. the government could also aim at reducing local demand for coffee by establishing higher taxes for coffee products given that these would have a stronger effect on consumer surplus due to high demand or by introducing a price floor for coffee higher than current market prices which will still largely impact on consumer surplus. local suppliers or the government then the current situation in the coffee industry will remain at status quo due to the overall unattractiveness of the coffee industry to entering and staying players. Utilizing the information revealed by Porter's five forces. the government should start increasing tariffs in order to inhibit foreign competition such as Vietnam or Taiwan from entering the Philippine coffee market. minor players have little chance of penetrating the coffee market. First is an attempt of product differentiation wherein the minor player has the opportunity of aiming at a niche market instead of the market segments widely targeted by dominant players. 2012) Thirdly. Secondly.Thus in effect. taxes. 2010) Second is to establish macroeconomic as well as microeconomics policies that aim to address the issue of oligopoly in the coffee industry through the creation of tariffs. buyer power is high hence consolidating market share poses a challenge for the minor player who is without the resources of the major players thus unable to compete in mainstream marketing which requires large investments.

transportation and etc. This would entail effort from both fronts as players and suppliers have to assert themselves in the local scene against dominant players which seek to manipulate market prices and in the international scene where foreign competitors are more capable of supplying demand for coffee. . while the Philippine coffee industry is currently oligopolistic with the right government interventions as well as the use of proper economic and business strategies by both minor players and suppliers. another possible niche market would be the Civet coffee. For the minor players and local suppliers. (NICCEP. reducing fixed costs may help local farmers achieve lower average costs through equilibrium. there is still hope of becoming profitable in the future. Hence while the industry is currently seen as unattractive. it is possible to overturn the current economic structure. As mentioned before. government as well as non-government aid can boost finances through grants and partnerships which can go a long way in mitigating high entry costs incurred by participating in the industry. Given that local production is low. a potential niche market in the Philippines is the Cordillera fair trade coffee.market price. differentiated products through different types of coffee beans grown and application for financial aid in order to address expenses such as equipment. profit maximization and cost minimization through economies of scope and scale can increase profit without restoring to drastic measures. the minor players alternatively can prioritize niche marketing over mainstream marketing which will allow them to avoid direct competition with the major players in the industry as well as profit from an untapped market. 2010) In terms of increasing financial capabilities. An option for private aid is also possible through micro financing which is available to companies as well as cooperatives on the part of local farmers. Finally on the business side. same alternatives apply. In conclusion. For the local suppliers.

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