Young Iranians Develop a Taste for Coffee

With the loosening of economic sanctions, and recent elections in which pro-Western reformists won big, Iran has suddenly become a much more attractive market for foreign firms, long scared away by the numerous difficulties of doing business in the Islamic Republic. One product which is set to do particularly well in this new environment is coffee, for which Euromonitor International projects a CAGR of 11% in retail sales over the next five years; the third highest growth rate in the world. For those willing to tolerate a fair amount of risk, Iran is a promising emerging market at a time when many others are starting to lose their shine.

Young Population is the Major Growth Driver

There are several reasons to believe that the future of Iran might be more highly caffeinated. One obvious one is the loosening of sanctions. Although coffee was never specifically targeted, sanctions made doing business for foreign firms complicated, and caused general economic chaos, including major currency devaluations that severely hurt sales (all coffee consumed in the country has to be imported). The next few years should see the return of economic stability to the country, and a resumption of the rapid growth rates in coffee seen from 2009 to 2012.

Iranian Retail Coffee Sales Set to Get Back on Track

Iranian Coffee Sales 2009-2019

Source: Euromonitor International

Even more important than the end of sanctions, however, is Iran’s youth bulge. About one in three Iranians is currently between the ages of 15 and 30; the age range in which people in most parts of the world develop a taste for coffee. Iran is proving to be no exception, and nearly all growth over the next few years will come from consumers under the age of 40. Tired of tea, which is consumed multiple times a day across all social classes, they are turning to coffee as a sophisticated, modern alternative. Tehran now boasts hip modern coffee shops which would not seem out of place in London or New York, were it not for the Farsi signage.

Coffee shops are important places for young Iranians to socialise. One major reason is that they are amongst the few places that people of different genders can mix fairly freely. Although the religious police occasionally raid coffee shops because of their supposed promotion of improper moral values, these raids do not seem to serve as much of a deterrent to most young people, and are probably a sign that the governing authorities recognise the growing popularity of coffee shops more than anything else. At any rate, the religious police will have a hard time stopping the growing taste for coffee that Iranians are developing whilst they are hanging out in these cafés.

The Iranian Youth Bulge

Iranian Age Pyramid

The development of an Iranian café culture should not, however, distract from the fact that instant coffee is by far the dominant form of coffee consumed in Iran. It accounted for 97% of retail sales in 2014. This will not change any time soon. The sachet remains the most popular format, as Iranians prefer the convenience of pouring a mix into boiling water, rather than having to add sugar and creamer themselves (Euromonitor International data shows that 89% of all sales of instant coffee are of 3-in-1 products). Sales of fresh coffee will undoubtedly continue to grow as more Iranians learn to appreciate premium coffee, but they will represent only a fraction of overall volume growth over the next few years.

Iranian Off-Trade Coffee Sales 2014 (by Volume)

Iranian Retail Coffee Sales by Category 2014

Source: Euromonitor International

Considerable Challenges Remain to Entering the Iranian Market

None of this is to say that Iran is a market without complications. The most serious is the threat of smuggling, which is so bad that some in the industry say they worry far more about losing sales to their own smuggled products than they do about their competitors. Smugglers can offer a lower unit price than legitimate importers, and many retailers are willing to look the other way because of the higher margins they can earn. An end to the currency devaluations of the recent past should help keep the unit price of imported products down and undercut the price advantage smuggled products enjoy, but the problem is unlikely to be solved completely any time soon.

Many sanctions are still in place, and the business environment will not resemble that of a normal economy any time soon. Some restrictions on financial transactions remain, particularly on those conducted in dollars, and firms still need to avoid dealing with the Revolutionary Guards Corps (IRGC), who play an extensive and often shadowy role throughout the Iranian economy, to avoid running into US sanctions. New sanctions could also be imposed if Iran fails to meet certain goals in dismantling its nuclear programme (the so-called “snapback”), or if a Republican wins in the US presidential election in November.

Economic recovery should continue, but concerns still exist. The low price of oil in particular will act as a persistent drag on growth, although Iran is less affected by this than its neighbours. The over US$100 billion in recently unfrozen assets unlocked by the nuclear deal should inject enough money into the economy to avoid the fate of countries such as Azerbaijan, where the short term outlook for sales of coffee has notably worsened since oil prices began plunging, weakening the currency and reducing consumers’ disposable incomes.

Forecasted Sales Growth for Selected Regional Coffee Markets

Middle Eastern Coffee Sales

Source: Euromonitor International

Iran represents a country with both tremendous potential and risk. Firms moving in now could gain a large share of an extremely promising emerging market, with millions of young people and coffee consumption rising rapidly, but it will not be easy. Success will depend on a few things. One will be successfully navigating the legal thicket of remaining sanctions. Another will be keeping the unit prices of their products low in order to combat smuggling. The final, and most important, will be selling products which appeal to Iran’s large population under 40, and in particular, their view of coffee as a refined drink of intellectuals and sophisticates. Should they achieve all of these things, they are then in a position to take full advantage of one of the world’s most exciting coffee markets.