An exclusive “experience store” will soon open in downtown Zagreb using digital to engage with young customers
The pandemic caused by the coronavirus has changed coffee consumption habits and consumer preferences overnight, especially among young customers, and only the most innovative and quality-focused manufacturers are able to keep up. The market leader Franck was agile in responding to the rising popularity of coffee-to-go, the kind of coffee consumed when out or on the go, and opened a network of modern self-service Snogoo machines using digital technologies, Bluetooth, telemetry and cashless payment, that will be deployed to over 2000 locations by the middle of the year and in downtown Zagreb an exclusive full-digital “experience store” will soon open its doors allowing coffee lovers to enjoy their cup of coffee 24/7, 365 days of the year. As a member of all leading associations dedicated to sustainable manufacturing and preservation of the environment affected by climate change, these days the company that has been around for 130 years and the Croatian Beekeepers Federation presented Franck Beestro, a project aimed at raising awareness of the importance of bees for life on Earth and inciting consumers and people in general to contribute to the preservation of natural resources and protection of these important pollinators.
To find out more about what is happening in Franck, its response to the COVID-19 market outcomes, potential acquisitions, operations, further plans etc., we are talking to Mr. Ivan Artuković, the managing director of Franck and, as of recently, the new vice-chair of the Council of Members of the Croatian Employers’ Association (CEA).
What exactly is your role in the Beestro project?
At Franck we are guided by the principles of sustainability and responsibility which we apply in our day-to-day work, which also includes this type of projects that enable us to take advantage of our leading position in the tea category in the best possible way to raise awareness and educate about the importance of sustainable approach to the environment. In brief, Franck Beestro has been created having in mind the importance of collective action and contribution of all of us to the common goal of conservation of natural resources. We have enabled consumers to plant honeybee flowers using the flower seeds from the Franck Beestro container, which also includes two packages of tea, and directly help honeybees find food. It is a fact that the world’s population of bees is significantly declining and one of the ways we can show our appreciation and help them is to ensure they have enough food. Without bees there would be no flowers, no plants, and also no Franck tea. I believe this mirrors Franck’s dedication to operational sustainability and how we integrate it into brand activities by including consumers in a positive story with a common goal.
How is Franck dealing with the challenges brought by the corona crisis? To what extent will it reflect on the last year’s revenue and sales?
The pandemic and the epidemiological measures introduced in the spring of 2020 called for a prompt reaction and adjustment of business processes. During the first lockdown in April 2020 the demand for products for use at home on average increased by 25-30% compared to the same period last year. As expected, in that period most challenging was the logistics and it was of key importance to ensure undisturbed and safe supply of goods to Croatia and abroad. The year-over-year sales volume recorded by Franck Group dropped by 5.8%, which was caused by a strong decline in sales in the HoReCa channel caused by the lockdown, while at the same time in the retail channel the growth in value was 1.2%, with 2.7% growth recorded on the Croatian market and the fastest growing foreign market, with 39%, was Northern Macedonia. The activities implemented in 2019 have significantly improved our operational efficiency and, finally, our key performance indicators. We have ensured further optimization of our manufacturing facilities and increased the capacity and flexibility of our coffee processing factory, which is important to us in terms of current production and future development projects. Aiming to achieve that goal, despite the difficult last year, we have accomplished and financed our HRK 31 million investment, the biggest one being the investment in the mill and the silo system in the coffee production facility.
How do you comment on the growth of in-home tea and coffee consumption?
People stayed at home and worked from home as well and that changed some of their habits and food and drink consumption patterns, possibly forever. In-home consumption has grown noticeably, which especially applies to the, so-called, single-serve espresso. Moreover, this segment has been recording the highest growth rate for some time now (50% compared to the last year) and new consumer habits and circumstances have increased the speed of that growth. We enable consumers to enjoy coffee at home by offering our capsule coffee machines and we have just presented our Easy Serve Espresso coffee machine using pods with freshly ground coffee packed in filter paper in a protective atmosphere. The system has been developed in cooperation with the leading Italian manufacturer of professional espresso machines and, owing to technology, it makes the process of making espresso easier and the quality of the espresso is equal to the one made in your favorite cafe. Also, we are seeing that the popularity of on-the-go consumption has soared and we were ready to respond by presenting our network of self-service machines, including the innovative Franck Snogoo concept. Naturally, from the very start we have implemented fiscalization and welcomed the initiative of the Tax Authority of the Ministry of Finance and regulation of the vending machine market in Croatia with over 10,000 coffee-to-go machines, which is constantly growing, especially now during the pandemic.
Is it a global trend?
Certainly. We are witnessing a major rise in e-commerce and double-digit online sales growth which has been going on for a while and the pandemic only gave it a boost. Today anyone planning their business in the long run knows that without an e-commerce solution that business will not have a future. We reacted fast by launching the Franck webshop during the first lockdown and the steady growth of this channel justified the investment in its further development. As for trends, there has been a change in how the consumer thinks and people are more concerned about what they consume and give more attention to products with added value looking to boost their immune system and improve their health, which is definitely a global trend we are responding to with functional tea and coffee.
Has the pandemic affected the global coffee market, prices, demand, production, distribution, etc.? Should we expect price increases?
The pandemic has had an impact on the global coffee market, but that impact has been reduced. The raw coffee beans supply on the global market in 2020 was significant and that lowered the price, while in 2021 we have seen trend reversal. From the start of the year the price of green coffee beans surged because of the poor harvest in Brazil, the world’s biggest coffee producer, decreasing the supply when there was an increase in demand, which is gradually returning to its pre-pandemic level.
Managing logistics included more planning ahead than usual, primarily due to the global shipping container shortage, and it took longer to arrange for the supply of goods. However, owing to our timely planning and proactive approach we have had no issues with supply and our production continued without interruption. Major global exporters of raw coffee beans ensured the supply throughout that time period and there were practically no disruptions in the supply chain, except in maritime shipping, but our timely reaction prevented any delays.
Should we in Croatia perceive coffee as a luxury good?
The excise tax on coffee destimulates its consumption and that is a remnant of earlier times when this food item was perceived a luxury good. This type of tax does not exist in any other EU member in our surroundings and, as they apply lower VAT rate on coffee (about 9%), the total tax burden on coffee in Croatia is higher up to 30% compared to our neighbors. That stimulates cross-border shopping and deprives the state budget not only of special tax, but also of VAT.
How big are Franck’s market shares by category?
Due to changes in consumer habits, in 2020 the category of hot beverages grew like no other year before. According to Nielsen data, the coffee category grew 3.1% in volume and 4.6% in value, and the tea category soared 8.2% in volume and 10.5% in value. We are the market leader in the ground coffee category holding almost 50% share of the Croatian market and our market share in instant cappuccino is 47%, while our share in tea sales is 52%.
Looking to expand into new markets, which markets do you find to be most interesting? Where are you present?
We think regionally and believe that the strength of our brands and consumer trust we enjoy in our strongest markets can be achieved with equal success in other parts of the region. In addition to Croatia, where we are leaders in both sales channels, Slovenia is an important market for us as we are leading in the instant cappuccino category with a 28% share and also in the cereal and chicory beverages and holding second position with a 10% market share in the ground coffee segment recording growth with the Loka brand. We are especially happy with the results of the blind tasting of Turkish coffee, because Slovenian consumers have voted our Loka Special brand Taste No. 1.
We are also focusing on the Bosnia and Herzegovina market where we doubled our revenue in the past five years. We are the leader in the tea category with 33% of the market, as well as in the instant cappuccino category with a 27% market share. If we look at the both our sales channels in Bosnia and Herzegovina, we are leading in the coffee category as well. In addition to production in Bosnia and Herzegovina, this year we additionally strengthened our independent distribution network. We are present in other regional markets as well and recording growth across all categories. In Monte Negro and Serbia, the markets we came back to in 2017, we are seeing a steady growth (14.4%, i.e., 17.6% year-over-year) and we are continuously working on boosting growth in the instant cappuccino serving packets category. We are operating in Kosovo and Albania and have companies in Slovakia and Austria in the HoReCA channel, and our new export markets are Poland and Denmark. We are very pleased with good results recorded in the U.S., Canada, Australia, Ireland, the Netherlands, Sweden and Germany, where we are seeing great potential and we have ongoing negotiations with partners from South Africa and Cyprus. We are planning to expand our distribution in the U.S., especially in Walmart stores that have been offering our products since 2017.
How important are sustainable supply and International Coffee Partners membership?
For many years we have been cooperating with the world’s biggest coffee trader, making sure we have the best raw material suited to our standards and recipes. Our development experts constantly explore new coffees grown in different countries, which has always been our practice. Further, the advantage of being a member of ICP is ensuring the availability of raw material of the best quality, which is preserved to be enjoyed by our consumers. In the past year ICP projects have had an impact on almost 49,000 small coffee farmers and family farms in six regions worldwide. Owing to these projects their average coffee production went up by 44 percent compared to the year before. These projects are currently being implemented in Indonesia, Ethiopia, Tanzania, Uganda, Brazil and Honduras.
As a domestic business, how oriented are you on CSR?
Nowadays consumers are well-informed and when making purchasing decisions they give great importance to the sustainability criterion and companies are expected to make their position clear. Franck’s Sustainability Strategy is closely connected with our business purpose, which is primarily focused on giving back to and investing in the community. In all operational processes we take account of our impact on employees, society, suppliers, the environment and consumers and accordingly we have defined three priority sustainability objectives we are planning to integrate through product quality and development and sustainable and responsible sourcing. We are proud of our active contribution to ICP development projects in the countries our coffee originates from and our aim is to ensure the sustainability of the global coffee market and competitiveness of small farmers, but also to implement projects directed towards domestic market, and our corporate social responsibility strategy has been presented to the public in our recently published CSR Report.
Do hotels and food service establishments prefer domestic or foreign coffee?
Hotels are primarily choosing quality and diversity of product range including everything from espresso to filtered coffee and in addition they prefer complete solutions we can offer that have been customized to the type of business they are running and services they are offering. Catering businesses have recognized our “all in one” offer. Therefore, we have the capacity to completely meet the needs of the biggest to the smallest customers in terms of assortment, field service, provision of services and staff training with customer support and education available 24/7. We provide services to three leading hotel operators in Croatia and cooperate with a large number of medium and small hotel businesses and private renters.
We start from the position that a product that comes from our factory, such as roasted coffee beans for the espresso machine, is actually a semi-finished product requiring further processes to become a final product. Everything I have already mentioned is only a good base, because without quality staff it would all amount to nothing. Namely, this is where the true market game starts, because without a quality barista who knows how to make the beverage and maintain the machine, we have done nothing. That is specific to our industry, because it is not enough to keep the beverage chilled and serve it. We became aware of this long time ago and about 15 years ago we have come up with a system of training courses for catering staff and perfected the education over the years, so on average our professional baristas work 2000 hours per year giving training courses. Being the leader, we do not only aim to define the market through innovation, but also to raise the quality of beverages served in the hospitality industry. Only in Croatia we hold 40% of the coffee bean market and that requires a smooth-running and efficient system which we have been investing in and developing for years and hospitality professionals recognize and appreciate that. In addition to having a well-defined and effective operating model, we continue being a reliable and loyal partner to the hospitality industry and we are viewing cooperation with our HoReCa partners in the present situation through the prism of solidarity and are translating that into practice.
Are you considering expansion and acquisitions?
Certainly. We are always keeping a close eye on the market and are open to negotiation about potential acquisitions, primarily outside Croatia. We have detected companies that would be a good match for us due to their corporate culture, quality and knowledge. Negotiations are currently underway. I would say that this crisis additionally drew attention to the value of domestic production and it seems to have made citizens aware of the importance of buying domestic products like never before, also stressing the importance of food production self-sufficiency.
At Franck we have already taken initial steps to modernize our production at the existing facilities, but we are considering options to expand to other locations, i.e., to smaller communities and areas losing population that need revival and economic activity. We are counting on good cooperation with the Government and local authorities and also EU funds for development programs available until 2030. Otherwise, those funds will remain unused and we cannot allow that. This is an excellent opportunity for further development and strengthening of domestic production and revitalization of less-developed parts of Croatia and that should be a goal for all of us.
Why have you completely left the crisps and snacks category in Adria Snack?
Because of the situation with Agrokor and our strategic decision to completely focus on our core business. Proceeds from the sale of our snack business and shares in the Fortenova Group following the settlement which we sold in late 2019 were used to deleverage our business. We are always available to Intersnack, the new owner, for any advice and we have continued our cooperation by distributing their products in Bosnia and Herzegovina.