What Makes SE Asia An Emerging Coffee Market?

November 07, 2016

A few days ago I posted an article to my Twitter feed about growth opportunities in South East Asia, where I’m currently based.

'there are exciting growth opportunities for #coffee chains in markets such as Indonesia and Malaysia' https://t.co/cUJ4YF4pnn pic.twitter.com/VSDNdBHJF3

— Michael Wright (@OilSlickCoffee) November 4, 2016

What is driving the development of third-wave coffee in SE Asia? It’s a combination of things; an expanding middle class, across all countries in SE Asia, a strong tourist industry that helps with exposure, and also close proximity to producing countries shortens the supply chain.

Burgeoning Middle Class

Economies in SE Asia are growing, often at a fast clip (think Singapore, Vietnam, Indonesia, etc). As these economies grow, so too is the middle class, which for SE Asia, is expected to double in size by 2020¹. As discretionary incomes grow, so too does the demand for luxury goods (third-wave coffee is most-definitely a luxury).

Urbanization

Related to a growing middle class is urbanization. As people move not only from blue collar to white collar employment but also from countryside or rural living to urban living, they get exposed to greater levels and greater diversity in consumerism. This includes exposure to third wave coffee shops. Coffee graduates from a simple vehicle to deliver caffeine to something that can be enjoyed as a seasonal, artisanal product.

Tourism

The tourist industry plays a big part in the economies of many ASEAN member states and tourism brings with it Western influence, including the third-wave of coffee. As third-wave shops pop up to cater to tourists, the locals get exposed as well. With their increased discretionary funds they are able to explore more expensive, higher quality coffee—and get hooked on the experience. Just as coffee farms were spread globally alongside European expansion, the third-wave cafes follow the spread of Western pop-culture. Starbucks is slowly muscling out the kopitiam.

Increased Trade Relations

In 2015, the ten member states of the ASEAN formed the ASEAN economic community, or the AEC with the goal of creating a single, unified market among the member states. To accomplish this, the AEC aims to improve supply chains, attract investment, encourage economies of scale, and improve the management of labor. Think of ASEAN as the EU of the East, in an infant state. As the AEC grows and becomes effective over the next five to ten years, many industries stand to benefit, not least of which the coffee industry, which in SE Asia includes all aspects of the chain, from supply to demand. This means improvements in green coffee exports out of SE Asia as well as among ASEAN countries. It means easier expansion into other ASEAN countries for existing cafe chains. It means easier access to cheap labor from other ASEAN countries. The implications are broad, to say the least.

There is also work on creating a unified definition of various coffee qualities. As I’ve noted before, quality is subjective—concensus is required and ASEAN states are already aware of this and working in the right direction².

Coffee Producing Countries

A majority of the ASEAN member-states are coffee-producing countries. Vietnam is the second largest producing region in the world and Indonesia is the fourth³. Other producing countries in ASEAN include Laos, Myanmar, Philippines, Papua New Guinea, and Thailand. There is a broad spectrum of coffee quality represented by those seven countries. As the AEC improves trade conditions among ASEAN countries, supply chains will shorten tremendously, which will encourage growth in the coffee industry. For a great example of what can happen in a country that controls the entire supply chain, read this short post about a cafe in Vietnam that has the capabilities of a dry mill, a distributor, a roaster, and finally a cafe, all under one roof.

See also: Increasing Local Consumption

SE Asia is an emerging coffee market and the conditions exist to propel it forward very fast. The combination of favorable trade conditions, control of the entire supply chain, exposure to Western trends, and most importantly; a growing middle class bodes well for the coffee industry.

All of this has great potential for the farmers as well, who are often at the poorest end of the supply chain. Given the fact that the cafe owner, the roaster, and the coffee farmer all may be located within a few hours’ drive from one another means they can come together easily and agree on product quality and how to achieve it. The farmer can have a better understanding of what the third-wave cafe looks like, feels like, and tastes like. It is something that is sorely missing in other parts of the world and it is amazing to see. In the picture below is a cafe owner on the left, an award-winning coffee farmer in the middle, and the owner of a coffee mill on the right*:

See also: In Defense of Tastemakers