GCR linkedin Logo

Coffee finds a home in China

From the April 2019 issue.

Rising incomes and an expanding population of increasingly aspirational and digital consumers are helping a vibrant coffee culture flourish in a country that still largely prefers tea.

While coffee growing in the Yunnan Province in southwestern China is experiencing quite the renaissance, coffee consumption on the other side of the country is also seeing significant action. The predominantly tea-drinking country has developed a strong appetite for coffee, with both consumption and the number of offerings increasing at rapid rates.

According to a 2015 report (latest data available) from the International Coffee Organization (ICO), coffee consumption in China increased an estimated 16 per cent per year on average in the 10 years to 2015. While the growth is significant, China’s massive population of 1.4 billion people brings down the country’s global ranking of coffee consumption at the per capita level.

Although the vast majority of that consumption has been instant, according to ICO, “the rising popularity of coffee shops and coffee culture in general is promoting growth in fresh roast and ground coffee”.

Coffee’s third wave has been taking a greater hold in recent years, with Chinese coffee consumers increasingly interested in high-quality coffee and exceptional café experiences. As China’s consumers have been turning their attention toward third wave coffee, investors and foreign coffee brands have been turning their attention toward China.

Starbucks was first to open shop in China back in 1999. Today, it has 3600 stores and nearly 50,000 employees in more than 150 cities. While the company has steadily expanded there despite skepticism over entering a tea-drinking country, Starbucks has recently ramped up growth plans in line with growing consumer appetite. China is now the company’s fastest-growing market, with a new store opening every 15 hours, according to the Seattle-based company.

Chinese consumer market analyst Joel Bacall attributes some of China’s coffee boom to Starbucks itself. “It’s such a strong success story here in that it really did drive the category,” says the Associate Director at The Silk Initiative in Shanghai, a brand strategy consulting firm specialising in food and beverage. “They have done really well not only with their product mix, but also with selling the experience and the lifestyle, which is really driving the emotional bond with the consumers here.”

With Starbucks and Peet’s Coffee responsible for introducing the high-quality coffee movement to the United States in coffee’s second wave decades ago, the progression has been happening similarly in China, albeit delayed. Starbucks is now a household name in the country, while independent artisanal shops open as the third wave gains steam.

“The Starbucks and Nestlés gained dominant positions in the China market first, but now Chinese consumers [and] a growing crop of local purveyors are entering the market at a time when the global coffee industry en masse is shifting to specialty beans and higher quality,” reports Damian Ma, Director of MacroPolo, a think tank focused on the Chinese economy.

To continue progressing with consumer preferences, Starbucks has opened a number of stores in China that put a stronger focus on the third wave market, including its Reserve Roastery in Shanghai. The 2800-square-metre Roastery is Starbucks’ second Roastery and its largest store in the world.

Meanwhile, other household coffee chains from around the world have also been tapping into China’s booming consumer market. The United Kingdom’s Costa Coffee, China’s second-largest foreign coffee chain, first entered in 2009. By 2017, it had more than 400 stores. Ramping up activity, Costa plans to triple that number by 2022.

In February, Canadian chain Tim Hortons opened its first Chinese location in central Shanghai. “China’s population and vibrant economy represent an excellent growth opportunity for Tim Hortons,” President Alex Macedo tells Global Coffee Report. “We have already seen Canada’s Chinese community embrace Tim Hortons and now have the opportunity to bring the best of our Canadian brand to China with established partners that have expertise in the industry and the country.”

In July 2018, the company entered an exclusive franchise joint venture agreement with Cartesian Capital Group to open more than 1500 Tim Hortons cafés throughout China over the next decade.

“With more than 20 years of experience in building businesses in China and around the world, we could not think of a better partner than Cartesian to help us bring Tim Hortons to China,” Macedo says. “As we expand [in China], its expertise in the local markets will be a tremendous asset in ensuring we stay connected to guests’ local tastes and preferences.”

Those aforementioned local purveyors include both independent and popular local chains, like Seesaw and Luckin Coffee, the latter making a significant effort to rival foreign chains in the past two years since launching. In that time, Luckin has opened 2000 outlets across China, which largely consist of small booths that support the startup’s app-based delivery service.

Right out of the gates, Luckin has invested significantly in technology, another driver of China’s consumer market, particularly among young consumers. Customers order and pay strictly through the Luckin app, as well as earn bonuses and engage socially.

“The other factor helping China’s coffee culture would be the rise of tech and, in particular, the selfie culture,” adds Bacall, pointing to both Luckin and independent shops. “Tech probably plays more of a role in China than in other countries, so some of the better players in Shanghai play up to that selfie culture.”

In addition to the massive growth opportunity, the tech aspect has caught the interest of digital giant Tencent Holdings. In September 2018, Tencent announced a partnership with Luckin that will support expansion of 4500 outlets by the end of 2019. The announcement came only two months after Luckin’s previous funding round of US$200 million and one month after Starbucks and partner Alibaba announced plans to start coffee delivery service across China.

Starbucks has also put a greater emphasis on technology in its Chinese business, boosting its app offerings and activity, and launching a virtual store.

Supporting the dynamic Chinese consumer’s increasing interest in quality experiences and products that leverage technology and seamlessly fit into their lifestyles is an expanding population and strengthening incomes, particularly in the urban centres, where coffee consumption and the number of coffee shops is significantly higher.

“As the economy of China continues to grow, the pool of consumers with disposable income expands and demand for coffee rises accordingly,” reports the ICO. “As disposable incomes rise, consumers tend to ‘trade up’ to a more premium product.”

MacroPolo’s Ma also points out future demand potential for coffee with the “Chinese middle class projected to become bigger than the entire US population”.

That expanding consumer base is on top of the fact that tea is still China’s hot beverage of choice. “When it comes to domestic consumption, tea still overwhelmingly dominates,” he writes in MacroPolo’s latest report on the industry. “But its low base also means that coffee is far from a saturated market in China.”

Altogether, this equates significant future growth potential and plenty of room for competition, experts say.

“China is a big place and there are so many other consumers out there with so many other needs, flavour preferences and more,” Bacall tells GCR. “As such, I think coffee will become more segmented to cater to those different consumers, different needs, different regions.”

He also sees technology continuing to play a significant role in helping coffee fit into the Chinese consumer’s lifestyle. “Who knows where tech will take coffee with delivery, production, maybe even sourcing and ingredients?” he says. “People’s lives are changing quickly and they’re earning more money. China is a very fast-growing market, so it’s a pretty exciting place to be for coffee.”

  • Sign up to our newsletter

© Copyright 2019 Prime Creative Media Pty Ltd. All rights reserved.

ABN: 51 127 239 212

X