Suhani Adilabadkar
In a country full of tea lovers, CCL Products is the largest exporter and manufacturer of instant coffee. The company is in the business of manufacturing and selling soluble instant coffee, commonly referred to as instant coffee for more than 28 years. Known for its popular brand, Continental Coffee in India, worldwide CCL Products is well known as one of the largest private label instant coffee manufacturers. The company has four manufacturing units, two in India and one each in Vietnam and Switzerland. CCL Products has been growing its revenue and net profit at a CAGR of 29% and 11% respectively over the past five years. And the stock price has trebled over the same period.
High Coffee Prices Impact Margins, Interest Costs Increase
If you know these words, Arabica and Robusta, you are a coffee lover. These are the two main varieties of green coffee beans from which coffee is sourced. Thus the raw material for CCL is Arabica and Robusta coffee beans processed and blended in varying proportions to create distinct tastes of instant coffee. Brazil and Vietnam are two major coffee producing nations accounting for nearly 60% of total coffee production globally. Brazil leads with about 35-40% share followed by Vietnam which accounts for nearly 15%. Prices of Arabica and Robusta coffee beans have been on the boil over the past 3 years. Adverse weather conditions such as droughts have impacted coffee plantations in Brazil and Vietnam leading to soaring prices. And this has been accentuated by geopolitical uncertainties and supply chain disruptions.
Though CCL operates on a cost basis model where raw material requirement is booked only after clients place coffee orders, operating margins have been impacted as green coffee bean prices have been volatile since 2022. With rising raw material cost, CCL Products operating margins have fallen by 590 basis points (bps) over the past two years.
In the past one year coffee bean prices have jumped 30-50%. In addition to high raw material costs which impact operating margins, short term debt also rises as working capital needs increase due to higher coffee bean prices. CCL Products interest costs have quadrupled over the past two years.
Higher interest cost has led to lower profitability with net profit CAGR at a lower rate of 11% compared to a 29% growth in revenue over the past three years. Net profit margins have also fallen 460 bps over the past three years.
So how is the company going to manage its margins and maintain its profitability amid volatile coffee bean prices?
Freeze Dried Coffee Capacity Expansion To Aid Margin Improvement
Margins and profitability can be improved with the expansion of freeze dried coffee capacity. Instant coffee is brewed and processed through two main methods, spray dried and freeze dried. And freeze dried coffee margins are 30-40% higher than spray dried coffee. Currently, CCL Products has a total capacity of 71,000 MTPA, of which 60,000 MTPA is spray dried and 11,000 MTPA is freeze dried. In FY25, 6,000 MTPA of freeze dried capacity is being added in the Vietnam plant. Even after that, freeze dried capacity will be 22% of total capacity. According to the management, freeze dried capacity can be increased only in accordance with demand. While that is not in the control of the CCL management, other avenues of profitability improvement and better margin structure are being pursued. The company is trying to increase volume contribution of value added or specialty coffee, small packs and augment B2C or branded business for margin accretion and higher profitability.
B2C Business Breaks Even, Café Format Being Tested
Primarily, based on the B2B business model, CCL Products forayed into the B2C segment launching its Continental Coffee brand. Currently, Continental Coffee is the third most popular brand in India after Nescafe and Bru. The B2B segment constitutes more than 90% of CCL’s total revenue basket. In June Quarter 2024, revenue stood at Rs 773 crore of which B2C segment revenue was Rs 65 crore, 8% of total revenues.
Amid volatile green coffee prices and supply disruptions, CCL is focusing its energies on the high margin B2C segment. The company has achieved break-even in B2C or branded business and aims to achieve 7-8% EBITDA margins this year. The company has a strong presence in South India and is expanding to other parts of the country as well.
Speaking on CCL Product’s plan on driving both distribution and generating demand, Praveen Jaipuriar, Chief Executive Officer at CCL Products said, “In South India, the penetrations are much higher. So, we are looking to penetrate first the 5 lakh-plus population towns. And those towns where we feel that the coffee consumption is higher than the others.” The company is already covering approximately 1,000-1,200 outlets in metro towns like Delhi, Mumbai and 500-600 outlets in the second-tier towns like Lucknow, Chandigarh, Indore, Pune, aiming for a pan-India presence. According to the Coffee Board of India, there has been a consumption shift from traditional roast and ground (R&G) coffee to instant coffee over the past few years. Nearly 65% of total coffee consumption is in the form of instant coffee in India. Easy to make and higher affordability has made instant coffee popular. In addition to this café culture is also catching up with the youth. Starbucks, Café Coffee Day chains are doing well and in the same format, CCL Products is also going ahead with a full-fledged café. Speaking on café format, Jaipuriar said, “We just opened a couple of them in the last month at Hyderabad. We will do a proof of concept. If we feel that that concept is working for us, then we will kind of look forward to expanding it.”
The management is also focusing on increasing specialty coffee and small pack proportion in its overall portfolio to augment its margin profile. Small pack contribution to total volumes has increased to 20% presently from being 5-10%, 4-5 years ago. Specialty coffee has improved to 5% of total portfolio in FY24, from just 1%, 3-4 years earlier. Speaking in this regard, Jaipuriar said, “A combination of specialty coffee being packed in a small pack is the sweetest spot for us because that gives you the best margin.” Amid volatile coffee prices, CCL Products is striving for higher margins, profitability and increased capacity. Whether coffee bean prices will soften in the near future and make it a favourable blend of growth and profitability, next few quarters will give a better picture.
