The Canadian Coffee Industry
Statistics Canada data for the Canadian tea and coffee industry is aggregated under the North American Industrial Classification System (NAICS) 31192 and consists of establishments primarily engaged in roasting coffee, manufacturing coffee and tea extracts and concentrates, including instant and freeze dried, blending tea, and manufacturing herbal tea.
Establishments primarily engaged in manufacturing coffee and tea substitutes are also included (e.g., coffee substitutes and instant coffee manufacturing, extracts, essence and preparation for both coffee and tea manufacturing, roasting coffee, tea blending and herbal tea manufacturing).
Not included in this category are establishments that bottle or can iced tea or coffee. These establishments are included under NAICS 31211 Soft Drink and Ice Manufacturing.
Statistics Canada data under NAICS 31192 is aggregated for tea and coffee manufacturing.
Although Canada does not have the appropriate climate for growing coffee, Canadian-based firms do import raw materials for processing and resale into domestic and export markets. Coffee manufactured for retail and foodservice markets has been an important component of food and beverage processing in the country for many years.
Coffee is believed to have arrived in North America in 1607 and has been enjoyed by North Americans for centuries. However the first reference to coffee being drunk in North America was in 1668. With 14 billion cups consumed in Canada every year, coffee is the most popular hot beverage and the number-one foodservice beverage in Canada Footnote 1.
The tea and coffee industry represented 1.1% of the total value of food and beverage sales of goods manufactured and 0.9% of manufacturing employment in the sector in 2008.
In 2008, 112 establishments Footnote 2 (plants) in the tea and coffee industry shipped $917 million worth of product and employed 2240 people. Canadian tea and coffee exports totalled $251.2 million in 2008 (Figure 1). The Canadian market absorbed the remaining $666 million in domestic shipments and a volume of imports worth $785.2 million. This industry continues to be a net importer.
Coffee competes with a variety of other non-alcoholic beverages including tea, soft drinks, energy drinks, milk and dairy beverages, fruit juices, bottled water, sports drinks, vegetable juices, soya beverages, hot chocolate, and low alcohol wine coolers and ciders.
Measured by volume (hectolitres), sales of coffee accounted for about 16% of all non-alcoholic beverage sales in 2008, according to Beverage Marketing Corporation (Figure 2).
The majority of tea and coffee processing takes place in Ontario (41 establishments), Quebec (34 establishments) and British Columbia (26 establishments), followed by Alberta (9 establishments), Nova Scotia (3 establishments), Manitoba (2 establishments), and New Brunswick (2 establishments). Statistics Canada's Business Patterns Database indicates that in 2008 production facilities ranged in size from small one- or two-person operations to large plants employing up to 500 people. Four of the six major coffee and tea manufacturers (sales over $100 million) are foreign-owned.
There is a strong multinational presence in the coffee industry with some firms offering both tea and coffee products. Multinational enterprises (MNEs) have contributed to the growth of both imports and exports as their Canadian plants have focussed on areas where they have competitive advantages on a regional basis in both the U.S. and Canadian markets or in production flexibility. Canadian plants produce commonly known brands for the Canadian or North American markets, while benefitting from the marketing strengths of their parent MNE firms. They often have product mandates for
"mainstream" products, as well as for value-added short-run production of less popular lines. Such mandates can build exports. At the same time, the need to fill product offerings in the Canadian market can increase imports.
Similarly, many small and medium-sized enterprises (SMEs) have rationalized and focussed their operations to remain competitive. These strategies involve the development of specialty products for market niches, such as organic or fairly traded products. In some cases SMEs also co-pack brand name products for MNEs, produce private-label products, or make products for use by foodservice operations such as coffee-themed restaurants.
Domestic Market Performance
From 1998 to 2008, sales of goods manufactured by the tea and coffee industry decreased 27.4% from a value of $1263.1 million to a value of $917 million.
From 2000 to 2008, per capita consumption of coffee (adjusted for losses) increased slightly from 85.71 litres to 86.88 litres. Footnote 3
Statistics Canada data show that the Canadian market for tea and coffee totalled almost $1.5 billion in 2008. ACNielsen reports that domestic market retail sales of coffee totalled $647 million in 2008, an increase of 23.2% over 2007 when retail sales totalled $534.4 million Footnote 4. Higher sales figures for coffee reflect increased prices for traded coffee. Nielsen data includes all reported channels, ie grocery, drug, mass merchandisers, warehouse clubs and general merchandisers.
With a market of almost $1.5 billion for tea and coffee combined, and retail sales of only $647 million for coffee in 2008, it is evident that foodservice has evolved into the dominant distribution channel for Canada's coffee industry. Coffee-themed restaurants and vending machines have been a major factor in driving coffee sales since the mid- to late-1990s and continue to thrive today. Coffee foodservice has also merged with other retail and service outlets such as bookstores and gas stations.
Value-added is a measure of the value of an establishment's outputs minus the cost of inputs. Value-added in the tea and coffee industry fluctuated between 1998 and 2008, from a peak of $341.8 in 2002 to a low of $301 million in 2005, and reached a value of $323 million in 2008. The proportion of value-added to sales of goods manufactured was 35.2% in 2008. This figure is similar to the Canadian food and beverage industry as a whole for which the proportion of value-added to the total value of sales of goods manufactured in 2008 was 36%.
Employment in the tea and coffee manufacturing industry decreased 35.2% from 3,459 people in 1998 to 2,240 people in 2008 Footnote 5 (Figure 3). Since 2006, with several plant closures and consolidation in the coffee industry and a tightening economy overall, employment has declined.
The recent decline in employment was accompanied by an improvement in labour productivity during the later part of the millennium as measured in output per production worker. Since 2005, the value of output per worker increased from $550,000 to about $710,000 in 2008. In making these improvements, the industry better positioned itself to compete in the domestic market against other beverages and in foreign markets such as the U.S.
While there is no data available on new investment in this industry, new investment in plant buildings, equipment and automated production systems has occurred to meet the increase in production and consumption of coffee products.
Profitability is affected by the prices firms have to pay for inputs to production. For the coffee manufacturing industry, fluctuating prices for green coffee beans affect production costs.
In New York, price discovery, or the negotiation of the current best price on raw coffee, occurs through the Coffee, Sugar and Cocoa Exchange, Inc. (CSCE), a commodity exchange through the New York Board of Trade. Coffee processors may participate as hedgers in the coffee futures market of the CSCE. They can purchase coffee futures contracts in order to lock in prices for future purchases or sales assisting in business planning and smoothing operations. Hedgers are primarily firms that trade futures and options to reduce the risk to unfavourable price movements.
In order to maintain profits, manufacturers are under increased pressure to improve productivity and cut costs. Recent increased prices for both Arabica and Robusta coffee beans as well as increased energy costs have been a significant factor for the coffee manufacturing industry which requires energy for its roasting and grinding operations. Manufacturers may pass these costs on to consumers. For the coffee and tea industry, the value-added per production worker has increased by 31.5% from 1998 to 2008. The value-added per production worker provides some indication of profitability. For the tea and coffee industry, profitability has remained fairly stable between 2000 and 2005 and has improved moderately since 2005 (Figure 4).
Coffee roasters and foodservice operators have developed blending recipes for their coffee brands which could combine lower priced Robusta beans with higher priced Arabica beans to off-set recent higher coffee prices. Some companies also blend similar varietal coffee beans from different countries of origin to create special flavour or aroma profiles.
Some consolidation in the industry has also improved production capacity at processing facilities across Canada.
Canadian exports of tea and coffee, combined, increased from $278.3 million in 1999 to $324.4 million in 2009 (see Figure 5), with the bulk of exports ($316.2 million in 2009 or 97.5%) destined to the U.S. The U.S. is the world's largest market consuming one-fifth of the world's coffee.
Imports of tea and coffee increased significantly from $487.9 million in 1999 to $845.3 million in 2009 (of which 71.5% or $604.1 million was imported from the U.S.). This figure includes imports of coffee, tea, maté and spices, instant coffee, tea extracts, maté extracts, essences and concentrates.
In 2008, Canadian exports of tea and coffee accounted for 27.4% of sales of goods manufactured. This portion is an improvement over the past five years but is lower than the peak in 2001 when Canadian exports accounted for 29.3% of sales of goods manufactured. Between 1998 and 2008 imports of tea and coffee have also greatly increased their share of the Canadian market, accounting for 32.6% of the domestic market in 1998 and 54% in 2008.
Most of the growth in the coffee industry has come from the imports of roasted coffee beans. In 1999 imports of roasted coffee beans were valued at $282.1 million then decreased to a low of $213.6 million in 2001. However, since 2002 the imports of roasted coffee beans increased significantly to reach a value of $461.6 million in 2009. The volume of imported roasted coffee beans has grown from 48.0 million kilograms in 1999 to 67.7 million kilograms in 2009, marking a 41% growth over this time period. The volume of imported instant coffee has also more than doubled during this period, growing from 3.6 million kilograms in 1999 to 7.8 million kilograms in 2009.
In 2009, Canadian exports of coffee made a significant contribution to Canada's exports of value-added products. Exports of processed coffee (including roasted, but not decaffeinated, roasted and decaffeinated, not roasted but decaffeinated, instant coffee, and extracts and preparations) represented 1.1% of Canada's $19 billion worth of exported processed food and beverage products.
Since the early 1990s, Canadian exports of processed coffee experienced spectacular growth. Exports of roasted coffee were valued at only $8.3 million in 1990, but by year 2000, these exports grew to $136.1 million. Between 1999 and 2009, exports of roasted coffee beans fell to a low of $105.2 million in 2003, but then almost doubled to reach a value of $200.7 million in 2009.
The trend to an increasing share of processed versus raw coffee imports has been occurring as early as 1990 when processed coffee made up 22.4% (or $62.1 million) of total coffee imports valued at $277.7 million. By 2001, the share of imported processed coffee had more than doubled to 46.7% (or $286.7 million) of a total value of coffee imports of $614.1 million. Of this amount, roasted coffee (including decaffeinated and non-decaffeinated) accounted for the largest portion with a value of $213.5 million. In 1999, processed coffee accounted for 47.4% of total coffee imports, but by 2009 the share of processed coffee grew to 59.6% of total coffee imports. Canadian coffee processors are increasingly yielding domestic market share to imported processed products. (See Figure 6.)
The United States, Italy and Switzerland were the top suppliers of roasted coffee to Canada in 2009. The top three countries supplying raw coffee to Canada in 2009 were Colombia, Brazil and Guatemala Footnote 9.
The world price of raw coffee, which affects profits for processors, has rebounded after a period of decline due to oversupply in the late 1990s. The Food and Agriculture Organization of the United Nations (FAO) and the International Coffee Association (ICO) project world coffee production to grow at an annual rate of 0.5% from 2000 to 2010. By 2010, global coffee output is expected to reach 7.0 million tonnes (117 million bags).
The FAO projects world coffee consumption to grow by 0.4% annually to reach 6.9 million tonnes (117 million bags) by 2010. These projections, although subject to possible changes in output because of bad weather, indicate an equilibrium of coffee supply and demand in the world market by 2010 which will mean raw coffee prices over the short term should remain stable. The FAO has not yet completed projections beyond 2010, however indications are that consumption in producer countries is increasing while major producer markets have reduced their use of fertilizer due to higher fertilizer costs which could negatively affect coffee production. These factors may increase pressure on coffee prices beyond 2010.
Food and Drugs Act
Health Canada is responsible for establishing standards for the safety and nutritional quality of all foods sold in Canada. The department exercises this mandate under the authority of the Food and Drugs Act and pursues its regulatory mandate under the Food and Drug Regulations.
All health and safety standards under the Food and Drug Regulations are enforced by the Canadian Food Inspection Agency (CFIA). The CFIA is also responsible for the administration of non-health and safety regulations concerning food packaging, labelling and advertising.
The Food and Drug Regulations set out conditions regarding health, quality, composition and labelling requirements that would apply to coffee manufacturers just as they would to other food and beverage manufacturers so that consumers will have confidence in the safety of the products they purchase.
Consumer Packaging and Labelling Act
The Consumer Packaging and Labelling Act, also enforced by the CFIA, requires that prepackaged foods either imported or made in Canada, must not bear any false or misleading information regarding its origin, quality, performance, net weight or quantity.
Mandatory Nutrition Labelling
On December 12, 2007, nutrition labelling became mandatory on most pre-packaged products. Exemptions can be found in section [B.01.401(2)] of the Food And Drug Regulations. Products lose their exemption status if a health claim or nutrient content claim is made.
For more information on food regulatory issues visit the following internet address: http://www.agr.gc.ca/food-regulatory-issues-division.
With respect to the environment, coffee manufacturers, like all food and beverage processing firms, must meet all federal laws (e.g., the Canadian Environmental Protection Act, the Canadian Environmental Assessment Act and each province's legislation and regulations.
Under the Pest Control Products Act and regulations pursuant to this Act, Health Canada determines which pesticide sprays are approved for use and how they are to be used. Firms check pesticide residue levels in their products to ensure that they are within regulation levels. Consumer awareness of pesticide residues and their impacts on human health and the environment is increasing.
One environmental issue that food processors in general have faced is waste remaining from packaging. Reductions in container weight can result in reductions in fuel used by large trucks as well as wear and tear on tractor trailers when hauling product to market, with the added environmental benefits of reducing the amounts of wasted materials as well as emissions of greenhouse gases and other air pollutants.
Waste reduction is important everywhere and particularly for large urban centres that are rapidly using their landfill capacity and are experiencing difficulty and expense in finding and using acceptable new landfill sites. Reduction of materials in packing cartons can potentially provide both financial and environmental benefits. There are some difficulties with reducing bulky packaging. Plastics and cardboard can help protect foods during transportation. There is a trade-off between the volume of packaging materials (complete with graphics, etc.) needed to identify brands and increase the attractiveness of a product on the one hand, while minimizing packaging requirements from an environmental and cost control point of view, on the other hand.
Similarly, reductions in waste go hand-in-hand with cost savings as food processors and other manufacturers make increasing use of plastic, rather than wooden, pallets. Although more expensive to buy, plastic pallets, which can be made from recycled plastic, can be used many more times than wooden pallets which tend to be mangled fairly quickly by fork lifts and then sent to landfill.
Prior to plant construction, food processors must meet municipal zoning requirements. A proposal to build a new state-of-the-art plant or to substantially enlarge an existing facility could result in hearings to assess environmental impacts before construction may proceed. Provinces and municipalities have to be satisfied that systems will be put in place for waste water treatment. Some processors take a pro-active approach by developing
"best practices" with respect to the environment, for example reducing their energy and water usage as well as their creation of both solid and water waste.
Overall, there is a trend to internationalize regulations through general trade treaties, and the industry will face the challenge of looking at regulations that could be harmonized, either bilaterally with the U.S. or multilaterally through the World Trade Organization and Codex Alimentarius.
Fairly Traded Products
While coffee was the first agricultural product to be certified fair trade in 1988 Footnote 10, many other products, including tea, are among the wide variety of agricultural and handcrafted goods produced within a system of exchange that seeks to create greater equity and partnership among its members.
Farmers and workers within the fair trade system are guaranteed a minimum price for their products and work under safe conditions. Challenges to further growth include lack of infrastructure, capacity and financing at the cooperative level, limited consumer demand in North America, and quality issues. In 2008, more than 5.0 million kilograms of labelled fairly traded coffee were sold in Canada. Footnote 11
Fairly traded coffee is available at retail and, in the case of foodservice, in cafés in Canada. There is a small but growing specialty market among consumers who are concerned about the ethics of traditional coffee production and harvesting practices in developing countries. In Canada and in other developed countries, these consumers are willing to pay a premium for fairly traded products.
Organic coffee represents an emerging market that is showing potential for growth. Capitalizing on Canadian consumers' growing desire for organic foods and beverages that are environmentally friendly, a number of Canadian coffee companies have extended the organic food movement to coffee products which are marketed as high-quality products produced in a way that encourages sustainable agriculture.
As producers and retailers continue to raise awareness about organic beverages to gain market share, the coming years will see more coffee manufacturers tap into this niche market as the trend toward organic and green products continues to expand in Canada and abroad. Product offerings such as organic coffee, shade-grown coffee, and fairly traded coffee products will satisfy those consumers with interests in sustainability and ethical issues.
The Organic Products Regulations came into force on June 30, 2009. These regulations aim to protect consumers against false or misleading organic claims and to support the continued growth of the Canadian organic industry. Certification to the Organic Production System standards is mandatory for products in interprovincial and international trade and for products bearing the
"Canada organic" logo. Products represented as organic must be certified by a Canadian Food Inspection Agency (CFIA)- accredited certification body and must bear the name of the certification body.
The Organic Products Regulations allow for the following organic claims:
"organic": organic products with organic content of greater than 95% may be labelled
"organic"and bear the
"% organic ingredients": multi-ingredient products with 70%-95% organic product content may use the claim
"% organic ingredients"but cannot bear the
"Canada organic"logo; or,
"organic"in the list of ingredients: multi-ingredient products with less than 70% organic content may identify organic products in the ingredient list and cannot bear the
The following web sites will provide additional information:
Challenges and opportunities
In a rapidly changing climate, the coffee industry as with other food processing industries must address a number of challenges if it is to continue to grow and prosper.
The concentration of major retail chains has continued to be a challenge to the coffee industry and has resulted in a higher degree of competition for shelf space. For coffee manufacturers, the domestic market will likely continue to be the most important market for the foreseeable future. The Canadian market is small, but sophisticated, and extremely well served which means that competition will continue to be strong.
During the past decade, the growth of warehouse club stores that emphasize value, as well as the increasing concentration of the distribution sector in general, have increased pressure on processors to reduce prices and focus on efficiencies. Furthermore, the introduction and increasing prevalence of private or own-label products by retailers have further pressured processor margins and increased retailer leverage. Although making goods for private label leaves retailers in control of the
"brand equity" resulting from consumer loyalty and leaves lower margins for processors, it has provided real growth opportunities for some small- and medium-sized processors without requiring the expenditures needed to launch their own brands. These market forces will continue to be a challenge in the future.
Although retail concentration has increased over the years, coffee manufacturers enjoy a wider variety of distribution channels than many other processed food products which they must continue to exploit. The industry distributes its products through supermarkets and grocery stores, drug stores, convenience stores, mass merchandisers and warehouse outlets. Restaurants and fast-food chains are also major purchasing points for coffee, with some chains focussing on improving the quality of coffee served. Vending is an important component of distribution for coffee, making it available to consumers at strategic locations. The continued growth of coffee-themed restaurants will offer ongoing private label and branding opportunities to Canadian coffee manufacturers. Exposure to premium coffee products at coffee-themed restaurants has enlightened consumers about coffee quality such that consumers are now seeking these premium products at retail. Products such as iced coffees have captured the interest of the youth market and have introduced these young consumers to coffee, increasing the chance that they will continue to be consumers throughout their lives.
Changing consumer demographics has resulted in changing consumer tastes and increased demand for healthy products. Numerous studies on the health and performance benefits of drinking coffee are emerging.
In a move to create product extensions and greater consumer interest, the coffee industry continues to work hard to add premium items and ready-to-drink formats to their line of products. This pressure will continue to come in the form of both retail and foodservice products. Coffee-themed restaurants are expected to remain an important catalyst in driving both future consumption and product development for the foreseeable future. Single serve formats, premium blends, and flavoured coffees are generating additional consumer interest in the coffee sector.
Like other food and beverage processors, the coffee industry is rapidly moving with the rest of the retail packaged goods industry to using Canada's national electronic product registry/catalogue known as ECCnet, developed by the Electronic Council of Canada. The registry facilitates E-commerce by ensuring the integrity of product data using international standards of data exchange. As part of its E-commerce development, food processors are developing the capability to track and trace their products throughout the food chain to specific batches at processing plants and will eventually be able to trace batches back to their origin.
Premium blends, ethical products, and upscale flavours at foodservice establishments are attracting new consumers to this market. Consumers, both young and old, have rediscovered these beverages and are attracted to the many varieties - hot and cold. Although coffee has historically been identified as a morning beverage, these new consumers will likely contribute to expanding traditional consumption patterns in the future.
Mr. Sandy McAlpine
Coffee Association of Canada
885 Don Mills Road, Suite 301
Don Mills, Ontario M3C 1V9
Internet site: http://www.coffeeassoc.com
Senior Market Development Officer
Food Value Chain Bureau
Agriculture and Agri-Food Canada
Ottawa, Ontario K1A 0C5
Tel: (613) 258-1933
Fax: (613) 258-6768
Email: Monica Treidlinger
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