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The new coffee brand stirring up demand in China

From the September 2017 issue.

China’s Cephei Coffee taps an entirely new market with its hot-and-cold double brew coffee.

David Yang

When David Yang refocused his Shanghai-based coffee company last year, he was well aware that he was entering a market that had never been tapped before.

He was confident China’s coffee industry needed his unique product, an instant coffee that is soluble in all temperatures of water. What he didn’t predict, however, were the expansive and niche consumer groups that would end up embracing his innovation.

The untapped market Cephei Coffee would be serving was a specific segment of China’s multibillion-dollar instant coffee market. Unlike other instant coffees, his freeze-dried coffee can dissolve in hot or cold water – and every temperature in between.

This innovation would make coffee much more accessible to China’s population of nearly 1.4 billion people who have largely been tea drinkers. Cephei Coffee makes it possible for people without access to hot water to drink coffee at any time of the day.

According to research from the International Coffee Organization (ICO), instant coffee makes up about 99 per cent of retail sales by volume in China and 98 per cent by value.

Initially Yang targeted his coffee at white collar workers who had the incomes to afford what has long been considered a discretionary purchase, but then saw his customer base expand as hospital workers, taxi drivers, high school students, athletes and more fell in love with his convenient, accessible beverage.

“White collar consumers have largely been the coffee drinkers, mainly drinking it in the office,” Yang tells Global Coffee Report, “but China’s coffee drinkers are changing their habits. Taste and quality are becoming more important and coffee drinkers are no longer satisfied with lower-quality Robusta.”

In the early days, Cephei sourced coffee from Malaysia, making its instant coffee out of an Arabica-Robusta blend. Yang describes it as “sweet and smoky” – a light flavour profile that was traditional among Chinese coffee drinkers whose palates were not accustomed to the strong roasts found in more prominent coffee-drinking countries.

But in tandem with the innovation of Cephei’s “hot-and-cold double brew”, Yang switched to 100 per cent Colombian Arabica with help from the Colombian Coffee Growers Federation (FNC).

He had met Jia-Hang Wu, FNC’s chief representative for Greater China, at a coffee show years earlier, but it wasn’t until he decided to shift directions that Cephei and FNC partnered up. Since then, Cephei’s orders for Colombian coffee have skyrocketed.

“We want to keep expanding quickly with FNC as we try our best to take over the Chinese instant coffee market,” says Yang. “FNC has been a very important partner for this goal.”

According to the ICO, the majority of China’s coffee imports are of Robusta, which reflects the preference for soluble coffee. More than 80 per cent of those imports come from just five countries: Vietnam, Indonesia, Malaysia, Brazil and the United States (as re-exports). Since 2010, however, Arabica imports from Central America and particularly Colombia have been climbing nearly 25 per cent per year as China’s overall coffee consumption increases and its taste buds and wallets welcome the higher-quality roasts.

“This higher demand is the response of an upgraded soluble coffee market in China,” says Wu.

“We have seen China’s coffee market growing and diversifying as greater incomes have allowed its people to drink better-quality coffee and, thus, demand more Arabica.”

Both of Cephei’s shifts meant higher production costs and ultimately higher product prices for consumers.

“In the beginning I had doubts that the  coffee market in China would accept the high price of Colombian coffee,” Yang says of the eventual move away from the more traditional and lower-priced Malaysian blend. But in the end, “I decided the market needed the innovation.”

Today, Cephei Coffee is the most expensive instant coffee in China at double the price of Nestlé’s Nescafé, which currently dominates the instant coffee market, according to Yang, “but we’ve found a way to reach the market, particularly youngsters.”

He’s referring to the high school students who have become one of the brand’s largest consumer groups: “This has been a huge market for us because students are in school up to 14 hours per day, so not only do they need something to help them stay focused, but they also don’t have access to hot water.”

What’s more, they have a lot of pocket money, Yang says, “so even though our price is double, they can afford it.”

According to research from the World Economic Forum, people born between 1980 and 2010, known as the “young generation,” are helping drive overall consumption growth in China with their greater disposable incomes (or access to their parents’), desire for experiences and preference for online shopping.

Through 2020, the World Economic Forum estimates that consumers 35 and younger will contribute 65 per cent of the economy’s growth, at 14 per cent per year on average.

“Cephei’s target market of young consumers are the future coffee consumers, so we must educate this segment with the best coffee in the world,” explains Wu.

These shifts in spending are a welcome change for Cephei Coffee, which has seen demand increase drastically as a result. Not only does the young generation have the spending power for its high-quality coffee, but they are also active on social media and ultimately more likely to spread the word about the brand.

“They end up sharing the coffee around the entire class and so then all of them are drinking Cephei,” Yang tells GCR. “Students are also more willing to share about it on social media.” He sees Cephei’s focus on this demographic and their preference for digital communication channels as a strong competitive advantage over other major players.

“Nestlé primarily focuses on older consumers, where we’re dedicating resources to the young generation,” he says.

“Companies like Nestlé and Maxwell House are focused on hypermarkets and using offline channels, but we’re using the online channels.”

Cephei Coffee has been penetrating online, social media and mobile channels (especially via the WeChat app) and is largely sold via e-commerce.

“Cephei’s [strategy has been] the use of e-commerce, which is currently the most dynamic distribution channel in China,” Wu tells GCR. “And so for Café de Colombia, having a direct presence in this distribution channel is of utmost importance.”

Because of the unanticipated success with high school students, Yang plans to target university and even middle school students next.

“We’ve made huge steps with this young consumer group, so we’re confident it can spread among other student groups,” he says.

Cephei coffee is popular among middle school-aged children

In October, Cephei’s coffee product targeted at middle school students will hit the market. It combines coffee and milk for a lighter version better suited for this market.

Next year, Cephei will enter the RTD coffee market, a booming albeit small coffee category in China. It also has a line of functional coffee with protein, that is it popular in the fitness market.

Regarding Cephei’s diversification, Yang re-emphasises the changes in coffee consumption.

“The market is changing very fast. Consumers used to be most concerned about price, but now they’re more concerned about the quality, experience and health benefits. They are more inclined to try things they’ve never experienced before, so we just keep innovating to keep up.”

As such, he’s been able to grow his brand at a record pace.

“In this new era, it takes less time to build up a brand,” Yang explains. “Whereas it may have taken 10 years in the past to build up a successful brand, it may only take a couple years now.”

He hopes to keep up this momentum for the foreseeable future, with lofty goals of becoming one of the top coffee brands in China and the first coffee IPO in China. GCR

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