Despite recent setbacks, coffee looks to remain a major player in Vietnam

Vietnam has become the world’s second-largest coffee exporter and producer, behind Brazil, with beans grown on around 500,000 predominantly small holdings of 0.8 ha to 1.2 ha each. The country is the largest producer of robusta, a low-cost, high-yield family of coffee plants that is normally used in espresso blends or instant coffee powders.

Coffee was first introduced into Vietnam in 1857 by French missionaries; some three decades later the first plantations went under cultivation in the northern plains. By 1950 a processing plant making instant coffee was set up, and by the early 1980s the government saw it as a potential cash crop and started on plans to make the country a major exporter.

Traditionally, the industry has focused on processing more profitable instant coffee; however, in recent years the country has seen a marked increase in the sale of processed coffee beans. Though still mostly produced for export, domestic consumption is also seeing a boost, with a string of coffee shops opening nationwide and drive local demand.

Despite its success, overcoming product quality challenges will be necessary for the country to fully realise its potential. To address this, the government plans on further investing in research, harvest technology and processing facilities. Furthermore, public-private partnerships are increasingly focusing on coffee, among other products. Companies are working with farmers and local government to raise income for workers, produce better quality goods and reduce the carbon footprint of the industry.

Location, Location, Location

Vietnam’s natural surroundings are ideal for coffee production, especially in the central highlands which enjoy rich soil and high amounts of sunshine. The country’s hot and wet tropical climate at the equator is also suitable for the robusta coffee plant, which grows in the highland area. The colder climates of the northern regions are more suitable for growing arabica coffee.

Constituting less than 5% of Vietnam’s total coffee crops, arabica beans are used in high-end cafés and coffee shops such as Starbucks, whereas Vietnam predominantly grows the robusta bean that is used to make Vietnamese-style instant coffee.

On average Vietnam exports around 90% of its production at an annual volume of some 1.3m tonnes. After a difficult year in 2015, owing to strong competition and depressed global prices, Vietnamese coffee exports regained ground in 2016 on the back of a stronger-than-expected harvest and the release of stock-piled beans. Vietnam’s stored supply had almost tripled in the 2014/15 season, from 2.13m to 5.83m bags, according to the US Department of Agriculture (USDA). For the first 11 months of 2016, coffee exports hit 1.6m tonnes or $3bn, up 36.1% in volume and 24% in value, according to the Ministry of Agriculture and Rural Development.

Emerging Markets

The main export markets for Vietnamese coffee have traditionally been Germany and the US. Belgium is becoming a potential key market with coffee exports increasing 2.5-fold in volume and 2.4 times in value, year-on-year (y-o-y) in the first half of 2014. In 2015 the UK imported about 32,000 tonnes of coffee worth $65m. Asia is now also emerging as a major market for coffee imports, with demand growing 4% in the region over the past 10 years, compared to only 1.1% in developed countries, according to the International Coffee Organisation (ICO). Indeed, coffee has seen a notable increase in popularity in countries such as India, Indonesia, South Korea and Thailand; and despite being an overwhelmingly tea-drinking nation, China also offers significant promise for Vietnamese exports. According to ICO statistics, total coffee imports by China amounted to 1.4m bags in 2014, compared to about 418,000 in 2005, growing approximately 15% per year.

In an historic turn of events, Brazil approved the import of 1m bags of robusta coffee from Vietnam in February 2017. The major coffee producing country, which experienced a 25% decline in output in its robusta crops, plans to import 250,000 bags every month through to May 2017 in order to meet increasing demand for instant coffee.

Production

Throughout 2016 total production forecasts varied due to inclement weather patterns exacerbated by the strongest El Niño in decades, severe drought and a salinity crisis. However, adequate water supply both through good water management practices by farmers and rainfall during some critical stages during the coffee-growing season seemed to bode well for the sector. Total production in the 2015/16 season saw Vietnam producing some 27m bags, a 3.8% increase on output in the previous year, in line with ICO predictions.

However, the sector is not in the clear just yet. According to USDA predictions for the 2016/17 season, output in Vietnam is expected to decrease by 3m bags to 24m in total, mirroring the projected worldwide decline from top global producers – Brazil, Vietnam, Indonesia, India and Uganda.

Forecasts for FY 2016/17 have worldwide supply falling to a five-year low of 61.6m, down 5.4m in total from the previous year. For the month of January 2017, the country’s exporters shipped approximately 127,000 tonnes, or 2.1m bags, of coffee globally, for a total value of $287m in revenue, down 26.5% y-o-y by volume and 3.6% by value.

Domestic Consumption

There are concerns, however, about an over-reliance on exports as it leaves the industry vulnerable to external factors such as global price swings and inclement weather. Like other industries such as aquaculture or farming, coffee makers are more keen on producing for export than for domestic consumption, according to the Vietnam Trade Promotion Agency. But with Vietnamese young people acquiring a taste for instant coffee, local coffee producers have been encouraged to start investing more in the production of ground and instant coffee to meet domestic demand, though this is still limited. Producing instant coffee requires a large amount of start-up capital, which is difficult for small and medium-sized enterprises (SMEs). Consequently, the main focus for SMEs remains producing and exporting coffee beans or ground coffee and passing over the domestic market. Nevertheless, according to the Vietnam Coffee and Cocoa Association, domestic consumption is forecast to increase on the back of expanding retail coffee shops and the strong growth of other retail food service subsectors that serve coffee. Producers have also started distributing directly through big supermarkets and retail shops or opening their own coffee bars.

Chain Reaction

Ho Chi Minh City hosts one of Asia’s most dynamic café scenes, and is home to a number of independent cafés and domestic chains. The most well-known coffee brands available include Vinacafé, Trung Nguyen, Thu Ha, Bao Loc, Buon and Ma Thuot. Trung Nguyen is the most widely known chain in the country with 10,000 stores across Vietnam, producing its own coffee and opening its fifth plant in 2016. Another brand, Highlands Coffee originated as a coffee-packaging company in 2000, but now operates a chain of stores. The company has since spread to the Philippines to meet demands of the growing number of regional coffee drinkers.

The market share is still skewed sharply to domestic firms at 85% local and 15% international, but foreign competition is slowly entering the market. The American coffee giant, Starbucks, has opened 20 stores in three years, mostly around Saigon and Hanoi. However, as more foreign coffee chains like Starbucks arrive, local players like Trung Nguyen say they are confident in their loyal customer base as they see themselves as different from international retailers. Chains, like Starbucks, target high-end customers and their prices are too expensive for many locals.

Prospects

The coffee industry is playing a significant role in the country’s development, and the segment is key in reaching the government’s planned growth target of 1.2% for the agriculture sector in 2016. The industry also employs a good portion of the population. According to the General Statistics Office, the Vietnamese coffee industry employs more than 600,000 labourers year round, with figures reaching upward of 800,000 in the three months around harvest season. This represents some 1.8% of total labours nationwide and 2.9% of the agriculture sector. As a result, hundreds of thousands of Vietnamese from the lowlands have moved to the central highlands to grow and harvest coffee.

As the industry expands, environmental concerns remain over the high rates of deforestation in coffee-growing areas, as well as the rapid exhaustion of land. An ongoing restructuring programme is expected to mitigate some concerns as land allocated to coffee is planned to remain stable at approximately 60,000 ha, and the focus shifts to cultivating newer plants with greater productivity and quality.