Demystifying Supply Strategy for Coconut Water

www.beroeinc.com

Demystifying Supply Strategy for Coconut Water

Copyright © Beroe Inc, 2013. All Rights Reserved

Authors: Samyuktha S.R

Copyright © Beroe Inc, 2012. All Rights Reserved 2Copyright © Beroe Inc, 2013. All Rights Reserved 2

Introduction

The coconut tree has many versatile applications derived out of its various parts. Major end products derived from the coconut tree are coconut oil, desiccated coconut, coconut milk, and coir. Currently, there is insignificant growth in the end-use segments for coconut products such as coconut water and virgin coconut oil. Nonetheless, the focus is primarily with respect to coconut water which has currently gained popularity due to its potential health benefits and as a best possible energy drink replacement.

Growing Health Awareness:Coconut water is in its burgeoning phase and has become a part of the sports beverage market. The trend exists due to its nutritional benefits and natural rehydrating qualities. The global sports beverage market, which encompasses the coconut water segment as well, is witnessing phenomenal growth mainly due to rising health and fitness consciousness across the general population. Earlier, athletes and body builders were the major consumers of the sports beverage market. However, the trend has, currently, shifted to the general population which in turn affects the supply demand dynamics of the sports beverage to a great extent. Therefore, the sports beverage market is expected to grow at a CAGR of 17% and hit a global value of USD 48 billion in 2015. The global coconut water market is worth more than USD 450 million in 2011, and sales are growing at USD 40 to 60 million range,Y-o-Y, and is expected to reach USD 750 million. The growth is evident from the recent mergers and acquisitions, such as:

• In 2009, Pepsi acquiring Amacoco (Brazil’s largest coconut water company),

• In 2009, Coke invested in Zico and holds a minority stake in the # 2 brand in the US.

By investing in these companies, soft drink giants have not only tapped into high growth geographical areas, however, have also asserted their commitment towards expanding into the health and wellness portfolio.

Existing and Emerging Trends:There are three main players in the US market for coconut water, namely Vita Coco, O.N.E, and Zico. Vita coco held a major stake of 60% in USD 350 million coconut water market in 2011. Initially the product was targeted at yogis, sports athletes, and health conscious consumers. However, strategic investment (by major players across the industry namely Pepsi and Coca-Cola) and distribution coupled with product positioning as natural product helped coconut water to enter into the mainstream.

Current Trends:• Increasing demand from developed regions mainly from

the US and Europe.

• More flavors introduced.

• International partnerships.

• Increasing health consciousness.

• Improved processing methods – CWC (coconut water concentrate).

• Exponential growth of coconut water exports from the Philippines.

• Naturality – The biggest trend in the food industry.

Changing consumer taste and preference

validate the fact that brand awareness will no longer be

the only lever for companies to achieve sustainable

competitive advantage.


Paradigm Shift in the Coconut Water Market2012 è è è 2020

Concentrated demand: The demand for coconut water is mainly from the developed countries, especially from the US. There is an increasing demand from EU and Australia as well.

Demand Focus

Demand across the globe: Increasing per capita income, and disposable income across the developing regions will attract more demand for coconut water.

Level of Shift

Price premium: At present, coconut water is priced roughly double of other mass market sports drinks.

Price Equivalence

Price parity: It is essential to bring the prices of coconut water to similar price points of other existing product category to sustain in the market.

Level of Shift

Expansion of product portfolio: The major beverage manufacturers are currently expanding their product portfolio comprising more naturally healthy drinks such as coconut water and RTD Tea.

Consumer Preference

Market cannibalization: There is potential threat from naturally healthy drinks category that can cannibalize the existing traditional soft drinks. This might be eating soft drink manufacturer’s original market leading to an overall decline in sales.

Level of Shift

Lower product differentiation: There is currently few variations introduced coconut water. Until now, it has come in standard flavors, primarily, fruit derivatives Degree of Product

Variation

Higher product differentiation: There are high possibilities of introducing multiple flavors and product enhancements, in terms of introducing newer/innovative product line derived from coconut water, namely, low calorie smoothies.

Level of Shift


Leveraging on Coconut Water:There are three main players in the US market for coconut water, namely Vita Coco, O.N.E, and Zico.Vita coco held a major stake of 60% in USD 350 million coconut water market in 2011. Initially the product was targeted at yogis, sports athletes, and health conscious consumers. However, strategic investment (by the major players across the industry namely Pepsi and Coca-Cola) and distribution coupled with product positioning as natural product helped coconut water to enter into the mainstream. With outstanding health benefits such as muscle performance, weight loss, kidney cleansing, stress reduction, heart health, diabetes control, hypo allergenic etc. the drink is expected to be tremendous success across the older population segment as well. With global population growing old, it is essential to satisfy their needs with right product portfolio and coconut water has a potential market to address the same.

Regional Insights – Coconut Water:

Factors US Europe Southeast Asia

Market Share

Consolidated Consolidated Fragmented

Vita Coco is the largest player in the US which holds roughly 60% of the share. In the EU, Green coco is the leading player, but in Southeast Asia the market is highly fragmented.

Coconut Availability

Low Low High

Southeast Asian countries are the largest coconut producing countries. Large quantities of coconut are available in these regions for extracting coconut water.

Consumer Awareness

Low Low High

The natural beverage has a locational advantage in tropical belts in terms of widespread consumer awareness about its health and nutritional benefits due to centuries-long use unlike other regions namely the US and EU.

Health Consciousness

High High Low-Medium

Increasing health awareness across the EU and US have resulted in growing demand for health focused drinks. This has paved way for the demand for coconut water in the recent past.


Industry Structure & Promotional Strategies – Coconut Water:The global coconut water market is fragmented with too many small players across various regions; however in the US the market is dominated by very few players, there are emerging players such as Green Coco, ICoco in Europe, and Coconut Water in Australia. Traditionally, coconut water is sold fresh across the tropical countries by setting road side stalls. However, presently there are many small domestic players who sell packaged coconut water which is relatively new across these regions. The natural beverage has a locational advantage in tropical belts in terms of widespread consumer awareness about its health and nutritional benefits due to centuries-long use unlike other regions namely the US and EU. Despite optimistic supposition that the natural drink would replace other existing alternate sports beverages in the future, it still has a major hurdle to overcome: widespread lack of consumer awareness.

The coconut water market outlook is expected to traverse from many fragmented players to few consolidated players; this is mainly due to increased M&A’s of many smaller players across various regions by larger ones. Therefore, the market value of few large players is expected to increase, thereby holding a significant market share in the industry.

Market ConsolidationThe US market is dominated by Vita Coco, which is estimated to hold a 60% share in the lucrative US market, while in the European market Green Coco is the leading brand, although it has yet to make a big dent in the market. The product is promoted as a low calorie natural beverage that has 5 naturally occurring electrolytes: calcium, potassium, phosphorus, magnesium, and sodium. The latest promotional strategy being, host of celebrities endorsing the product and investing as well, has enhanced the product image.

Changing consumer taste and preference is persuading companies to think of new product concepts and ideas to sustain in the market. Current trends validate the fact that brand awareness will no longer be the only lever for the companies to achieve sustainable competitive advantage. With outstanding health benefits such as muscle performance, weight loss, kidney cleansing, stress reduction, heart health, diabetic control, and hypo allergenic the drink is expected to be tremendous success across the older population segment. With global population growing old, it is essential to satisfy their needs with the right product portfolio and coconut water has the potential market to address it.

Supply Scenario:Coconut water which was once considered a waste is currently in huge demand. The product is well established across the US and in parts of Americas, including Brazil, where it originated. Both the domestic and export demands for the beverage soon exceeded the supply capacity of Brazil. This created a need for global partnerships, wherein major players such as Vita Coco and O.N.E have entered into partnerships with Philippines and Indonesian coconut water manufacturers. This is evident from the increasing exports of coconut water from the Philippines where the exports saw a 315% surge in the first half of 2011 to 7.5 million litres compared to 1.8 million litres in 2010.

The present procurement strategy by coconut water manufacturers is obtained by entering into a long-term contract with multiple suppliers across the major coconut producing countries like the Philippines and Indonesia to ensure supply assurance. However, there is a possible shift in the style of long term sourcing strategy in the coming years, to ensure a continuous supply of coconut water, by either becoming a major/minor stake holder in the suppliers firm, or by vertical integration. By vertically integrating, the companies are bound to own coconut plantations which require high investment and trained labor. Nevertheless, the companies can have assured supply through vertical integration excluding unfavorable weather conditions, which has a critical role to play in terms of supply disruptions.

Currently,

the US is dominated by Vita Coco, which is

estimated to hold a 60% share in the lucrative US

market, while in the Europe Green Coco is the leading brand, but yet to make a

big dent in the market.


Procurement Strategy Overview & Outlook:

Sup

ply

Sus

tain

abili

ty

Degree of Integration

Low

High

Low High

Vertical Integration

Shared Ownership

Long Term Contract

Existing Best Practices

Current Strategy

Potential Strategy

Buyer

Regional Strategy Global Strategy

Sourcing Strategy

Engagement Models

Long Term Short Term

Pro

cure

men

t of C

ocon

ut W

ater

Multi Supplier Single Supplier

Vendor Management

Note: If the buyer ensures higher degree of integration with the supplier, higher the supply assurance for the buyer.


Sourcing Constraints – Across Major Producing Countries:India, one among the top 5 coconut producing countries has a huge domestic appetite for the tropical juice. There are domestic players in the country who are marketing the product across major metros targeting the IT industry. The younger population across the service sector has well received coconut water as a result of increased health awareness and consciousness. The major players namely Pepsi and Coca-Cola while they approached the Coconut Development Board (CDB) – India, for the supply of coconut water through partnerships with local players, it failed as the volumes required were too huge to be met. Therefore, it is very important to have foresight on the supply-demand balance. The Philippines and Indonesia, being the key players in the industry, it is important that the government take necessary steps to back the industry as it has huge potential to generate revenue other than traditional products derived from the coconut tree. The current state of affairs in the Philippines signifies that the coconut industry is still the poorest sector of all as it received little attention from the national budget in 2012, around P1.5 billion which is only 5% of the budget allocated for rice. To improve the coconut farmer’s income level it is essential to promote awareness about other emerging products based out of coconut and better revenue prospects. A similar situation prevails in Indonesia as well in terms of improved management of coconut processing industry and synchronizing regulatory policies.

Supply Outlook:

Senile Trees

Supply Constraints

2012 2020

Weather Concerns

Soil Conditions –Nutrient Deficit

Competing Crops

Acreage E xpansion

L ack of GovernmentRegulations


ConclusionGlobal demand for coconut water is around 100 million litres and is expected to reach around 350 million litres by 2020.The impact of certain factors may perhaps have a positive or negative influence over the industry and might decide on the overall growth prospects of the industry.

Disclaimer: Strictly no photocopying or redistribution is allowed without prior written consent from Beroe Inc. The information contained in this publication was derived from carefully selected sources. Any opinions expressed reflect the current judgment of the author and are subject to change without notice. Beroe Inc accepts no responsibility for any liability arising from use of this document or its contents.

For more information, please contact [email protected].

Authors:

Samyuktha S.R | Senior Research Analyst

Population:1. Rising global population2. Global aging population

Low High

Measures taken by the Government to promote the Coconut Industry:1. Replanting activity 2. Increased budget allocation3. Providing tax rebates

Low High

Consumer Preference:1. Growing Health Consciousness2. Consumer preference for packaged

coconut water

Low High

Weather Concerns:1. Rising global temperature – global

warming2. El Nino & La Nina weather

patterns

Low High

Low High

Low High

Scope for training, educating and alleviating the poverty levels of the coconut farmers:1. Forming cartels – Knowledge sharing platform2. Awareness about the market dynamics

Constraints in acreage expansion1. Loss of agricultural land – Urbanization2. Acreage competition – Competing crops

Demystifying Supply Strategy for Coconut Water

Business

Transcript of Demystifying Supply Strategy for Coconut Water