Coffee makers compete with price and quality

Half a dozen people stand in the entranceway waiting for a spot to sit and sample his coffees.
Lewandowski says: "You don't just drink it, you taste it."
The café tasting room is Lewandowski's most recent addition to his retail strategy. He opened the café last January after wooing coffee drinkers for over a year with more than 40 different kinds of coffees, sold in his coffee shop right next door. The café and coffee store combo, called Pozegnanie z Afryka (Out of Africa), is located in the heart of Warsaw's Old Town. Since December 1993, Lewandowski and his wife Elzbieta have invested zl. 40,000 ($16,000) in their business, a franchise licensed from the Krak-w-based parent company by the same name.
Lewandowski's point-of-sale marketing technique reflects the trend in Poland's $500 million coffee market, where competitors are muscling for market share with high-quality products.
"Everybody is fighting," says Jerzy Gizinski, a 20-year veteran in Poland's coffee business and director of the commodities division at trading company Agros.

Market leaders in the coffee sector are German company Tchibo, at an average 21.6% market share, followed by Israeli-based Elite (11.8%), German-based Jacobs (11.5%), and domestic companies Prima (10.4%), Astra (8.4%) and Posti (2.4%), according to an AmerNielsen survey of volume market share from April last year to January this year.
Among these firms "quality" is a buzz word, a striking contrast to the marketplace that only seven years ago was characterized by hard-to-come by, more generic varieties.
Before 1989, the state controlled coffee production, distribution and sales. Agros, the state trading company, was the main importer Posti, which was also the state tea company, processed and packaged the beans. And the state-distribution system PHS shipped coffee to state-run stores.
Posti controlled 80% of the market. Samopomoc Chlopska serviced the remaining 20%, and its products were sold throughout the countryside. Pewex, the state-run hard-currency store, sold high-quality and international brands of coffee like Jacobs and Maxwell House.
"It was a clear, transparent situation," says Krzysztof Bielawski, director of Posti. "After the transition, there was competition, (the coffee market) was a mess."

The bean boom

As the marketplace decentralized after 1990, Posti saw its market share slip almost overnight. Small producers scooped up local markets and large international firms moved in aggressively marketing their products, setting up their own roasting plants and shoveling coffee beans across the land.
Bielawski estimates that in the early years of the economic transition, 160 small coffee producers sprouted on the Polish market. If only one small company had pushed into the market, it wouldn't have been a problem, Bielawski says, but when grouped together those small firms became a significant opponent.
Lower operating costs allowed small producers to undercut by up to 50% the retail prices of the former state giant, Bielawski says. You could even find wholesalers operating out of garages, he says.
The demise of the state distribution system also has led to Posti's loss of market share, despite a doubling in the size of the overall coffee market in Poland to around 60,000 tons.
Last year, coffee consumption dropped 1.5%. Many experts say the slowdown does not reflect the overall growth trend in the coffee market, which they say could double during the next decade and reach consumption levels in Italy and France. The slight drop last year resulted from the sudden retail price rise in response to the doubling of international coffee prices in 1994, experts say. But a significant question remains as to how much Polish drinking habits can change. Per capita coffee consumption in Poland of 2.5 kilograms approaches that of in Great Britain, also a traditionally tea-drinking society. In Poland, almost everyone drinks tea, whereas one out of every four has never taken up the caffeine-bean habit.

Testing the market

Given the slowdown, or possibly leveling, of the market, producers and retailers are using a variety of strategies to keep costs down and gain market share. The first step has been to set up roasting plants in Poland, thereby avoiding a 23% import tax on processed coffee products. Most international companies present on the Polish market have their own production plants or joint ventures with Polish companies.
Producers also are pursuing aggressive marketing schemes, stressing brand identification to target growing consumer sophistication.
Tchibo this year will spend $5 million on marketing, a figure comparable to last year's marketing budget, says Philip Price, managing director of Tchibo in Poland.
That marketing effort appears to be winning over customers. In a brand-awareness study by SMG/KRC Poland in autumn 1995, 63.9% of 1,000 people polled said they knew the brand name Tchibo, which had no brand awareness here four years ago. Jacobs, which was on the market during the socialist era, came a close second with a 62.6% score. And 31% of those polled responded they most often consumed Tchibo. Jacobs came in second with a 28.1% popularity rating, followed by Prima (15.9%) and Elite (12.1%).
Since 1992, Germany-based Tchibo has invested
DM 70 million ($47 million) in fixed assets and in 1994 started roasting at its own plant which has a 20,000-ton capacity. Price declined to detail revenue and production figures. Production in 1995 was up 30% from the previous year, and the company is profitable despite losses in the early stages of investment here, he says.
In addition to its marketing campaign, Tchibo is keeping price increases below inflation. Last year the company's retail prices rose 5% in nominal terms, compared with a 22% inflation level nationwide, according to government statistics. Retail prices for major brands currently range from $1-2 per 100 grams of coffee.

The big squeeze

As consumers switch to higher quality coffee products, smaller companies will start feeling the squeeze, Price says. The arrival of supermarket chains will also force many small producers out of the market, Price says. "There already has been a weeding out."
Since the boom days, the number of coffee companies has dropped more than 80%, according to industry experts. Presently, there are 15-20 large and medium-sized coffee companies producing more than 3,000 tons annually on the Polish market with about 50 small domestic roasters.
Price says he expects three coffee companies to lead the market with no more than 10 firms to remain active in the next few years. Wolfgang Florschutz, Elite's marketing director, estimates that only six or seven companies will last on the Polish market.
Elite is battling with a host of small producers each holding 2%-3% market share but comprising about 30% of total market. "If we can take away market share from the local brands, it would be a fine thing," he says.
Through a recent DM 1.5 million ($1 million) advertising campaign mainly targeting television, Elite is trying to build awareness of its Pedro brand name as well the Elite company name. The Israeli-based firm came to Poland in 1990 through its Union Coffee company, which set up a roasting plant in Poznan. Last year, the firm officially launched the Elite name onto its Polish-made Pedro, Sahara and Fort coffee products.

Small may be beautiful

Not all industry insiders agree that the days are numbered for smaller producers.
Despite the sharp increase in coffee prices two years ago, small coffee makers and wholesalers are still alive in the market, says Maciej Mierzwinski, president of the Polish Coffee Company, a coffee importer.
That's certainly true for the Krak-w-based franchiser Pozegnanie z Afryka. Owner Krzysztof Drohomirecki says he invested zl. 5,000 (about $3,500) to start his one-shop Krak-w operation in 1992. Today, he has 11 franchises across Poland. Drohomirecki would not reveal company sales figures.
The idea behind the franchise came after completing studies in Hungary, Drohomirecki says. There he observed a coffee-drinking culture and decided to promote quality coffee, albeit on a small scale, in Poland.
"Demand for such coffee is very little," he notes.
While demand for high-quality and specially roasted coffees still may be limited, Poland's coffee-drinking habits appear open to change.
On a recent Saturday, Pawel Derentowicz walks home with his young son up a sidestreet in the old town. He had bought 100 grams of whiskey-flavored Irlandzka coffee and 50 grams of a medium-roasted Kenya coffee from the Pozegnanie z Afryka shop in Warsaw.
Derentowicz does not buy coffee from the supermarket shelves, he says, but goes to the specialty shop for the flavored coffee.
"I'm not a real coffee drinker," he explains. But about the more traditional-style Kenya coffee he picked that day, he adds: "I've never tasted it. I just bought it out of interest."