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The Italian coffee giant Lavazza has announced it is building a coffee plant in India in order to capitalize on cheaper materials, the country's growing middle class, and to make it a hub for Asia Pacific expansion. With coffee consumption still low in the region, Datamonitor views this as a strong statement of intent for the company, which currently generates 60% of revenues from its home market.

Lavazza, the Italian coffee producer, has announced plans to establish a new manufacturing plant in India. At present, Asia contributes a mere 5% of Lavazza's revenues, so this move looks promising for the company to capitalize on a market where consumption is low - average consumption per capita of coffee in Europe is 1.9kg, compared to 0.1kg per capita in the Asia Pacific region.

Consumers in the region predominantly drink tea, but as tastes change with growing prosperity, coffee is increasing in popularity. In India, sales of tea were $1,440m in 2008, nearly 10 times the amount of coffee, at $145m. Despite this, sales of coffee are forecast nearly twice the growth through 2013 - a projected 5.4%, compared to 2.9% for tea.

Consumers in developing markets are also becoming more experimental and are trading up in their product choices. Datamonitor's 2009 consumer survey found that 45% of Indian consumers buy higher quality food or drinks as a treat or reward, compared to just 23% globally, while 24% are experimenting by trying new food and drinks, either most or all of the time. This is good news for Lavazza, which is planning to open a range of designer cafes, such as Lavazza Espresso, where deco and service make an exciting proposition to premium coffee consumers.

Finally, the move will save Lavazza a great deal of money. At present import duties are close to 110%, demonstrating the sheer amount of capital the company will free up by manufacturing in India. A spokesman for Lavazza said that approximately 70% of the retail price of coffee is due to the cost of raw materials, so the company will make significant savings once manufacturing is under way.

In conclusion, Lavazza is sending out strong signals by making this capital investment in India. In a region that is experiencing phenomenal growth in incomes and development, the company is well positioned to target a new generation of consumers who are increasingly purchasing coffee instead of tea. The cost savings made by investing in an Indian plant will also enable the company to pass on savings to consumers, make India its regional hub and drive expansion into China.

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