Latin America Specialist Coffee Shops: Forecasts Show New Value for the Taking

After seeing the fastest growth over the review period, Latin America’s specialist coffee shop market is set to record even greater value increases, making it a prime target for local and multinational chains.

Though Latin America is still one of the smaller specialist coffee shop regions, key markets are seeing growing café culture as urban consumers seek out low-priced ways to participate in premium foodservice. The region saw US$960 million in new value over the review period and 2011-2016 growth is expected to add another US$1.1 billion. Furthermore, despite contributing just 6% of global specialist coffee shop value, Latin America will contribute 13% of the total value increase by 2016, a fact which has not gone unnoticed by chains. Starbucks recently announced an aggressive expansion strategy for Latin America, including plans for several hundred Brazilian outlets and 300 additional units across Mexico and Argentina, all within the next five years.

Specialist Coffee Shop Value in Key Latin America Markets

 

Euromonitor International

Mexico, Argentina, Brazil and Colombia to contribute 95% of the forecasted value increase

Mexico’s specialist coffee shop segment has more than doubled since 2006, and the majority of this has been attributable to chains. While Starbucks claims a 37% share, many local players are rapidly gaining ground, including second-ranked Café Punta del Cielo, which has grown from just 4% of the market to 17% in five years. The chain, which pairs gourmet positioning with a mission statement that emphasises the goal of elevating Mexican coffee to compete in quality on a global stage, capitalizes on a hyper-modern décor and premium ambiance to lure relatively affluent urban customers.

Colombia is expected to contribute another US$212 million in new value, effectively doubling in size. Notably, however, Starbucks does not have a share in the market despite sourcing heavily from its local farmers. Instead, McCafé, and local chains Juan Valdez and Oma claim the top spots, with the majority share belonging to independents. The challenge in Colombia lies in the fact that the majority of coffee-drinking is usually done in the home, and as such, local players have been forced to give consumers a reason to venture out for a product they can easily make themselves. The most successful chains have done so by adopting a premium positioning, promoting beverages that can’t easily be replicated in the home, such as blended coffee drinks, and providing a comfortable atmosphere for socializing. With sufficient differentiation, these chains will have a chance to claim additional share from independents as the category evolves.

Brazil is the second major target in Starbucks’ expansion strategy, with “several hundred” new outlets planned by 2015. The market represents a major growth opportunity, but Starbucks is currently ranked fourth with only 35 local outlets. While the company has not released an exact growth target, an addition of at least 250 outlets would place the chain even in size with the largest local chain in the market. But the real question is, will ubiquity alone be enough to draw Brazilian consumers?

An opportunity for growth, or a strategy destined to fail?

At first glance, Starbucks’ plan seems ill-advised: Brazil is the world’s largest coffee producer, and the market has a well-developed coffee culture centred around independent padarias. These café and bakery hybrids serve fresh-baked bread, pastries and coffee to consumers who sometimes visit as much as once or twice per day. Dining-in is common, and customers often socialize over coffee while enjoying their purchases. So what makes Starbucks think it can sell Brazilian coffee back to Brazilians better than all the cafes currently in the market? According to the operator, the keys will be quality, experience and menu variation.

Starbucks and its chained competitors have so far been able to take share by adopting a premium positioning in terms of coffee quality and flavour. While premium coffee is certainly available in the market, especially in the European-influenced São Paolo, the majority of coffee served by cafes competes mainly on convenience and price. Instant coffee is popular, and until recently much of the coffee grown locally was low-grade rather than high-end Arabica beans.

Furthermore, Starbucks and its competitors also offer an atmospheric component, giving young urban consumers a place to relax for a few hours with a book, some friends or a laptop. This kind of “third place” environment was not previously common in Brazil, but the idea jives effectively with local preferences for dining-in.

Finally, specialist coffee shops also offer a diverse range of beverages that go beyond typical café offerings. Third-ranked Café do Ponto, for example, serves a Café Soberano (coffee with brandy, cocoa liqueur, condensed milk and Chantilly), Café Harmonia (coffee with steamed milk and chocolate) and Coffee Shake (coffee blended with ice), all of which appeal to young consumers looking for more exciting foodservice experiences. Starbucks has capitalised on a similar strategy with its wide-range of beverages, and according to the company, its target demographic in Brazil skews younger than in other markets. The brand markets itself as trendy, modern and aspirational, a combination that appeals particularly well to young consumers with rising disposable incomes.

Success is within reach

While each of the major Latin America markets offers a unique set of challenges, they also share one key factor: all have well-developed coffee drinking cultures and middle- to high-income consumers interested in premium foodservice. Thus, the secret to Starbucks’ success in the region will lie not in its ability to convince consumers to drink coffee, but rather in its ability to change the way they think about their daily coffee habit.

Likewise, specialist coffee shops can stand out by positioning themselves as youthful and innovative, offering a wide variety of exciting beverage options. In terms of dining experience, these players need to offer more than just a place to sit, but rather a comfortable atmosphere and the opportunity to socialize, read a book, or surf the internet in a premium environment. With these goals in mind, specialist coffee shops will have the ability to claim significant share in Latin America over the forecast period, even moving beyond the specialist coffee shop niche to take share from cafes. And Starbucks, with a 2011 value share of 20% and plans to open 500 more outlets over the forecast period, stands to reap considerable benefits as this new coffee-drinking culture evolves.