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China Coffee Industry Briefing

2019-09-09

In 1999 Starbucks opened the first brewed chain coffee shop in Beijing. In previous years powdered coffee mixes dominated China’s coffee market. As of this writing there are over 3,500 of the company’s shops throughout China. The popular coffee shops offered a glimpse and taste of western culture. Much like rap music, Hollywood films, and American television series, Starbucks offered a youth new lifestyle oasis in the middle of a culture steeped in tradition.

 

Other international coffee chains were quick to come into the scene. Costa Coffee from the UK, now owned by Coca Cola is now in several locations and the US crafted coffee brand of Peet’s Coffee, Ocean Grinds of San Diego, as well as Tim Horton’s of Canada and Japan’s Doutor are all operating on the same basis of Starbucks proving ample comfortable seating with WIFI becoming social centers.

 

The major Chinese player, Luckin Coffee, entered the market in late 2017 with a different model. Luckin stores are essentially kiosks offering convenient pickup and delivery services at lesser pricing than the international brands. Their rapid popularity can be largely attributed to their mobile apps for ordering and deliveries. They became listed on NASDAQ in May of this year and had opened 3,000 stores by July with plans to surpass Starbucks by the end of the year. They have also just launched Luckin Tea to be sold online in parallel with their coffee.

  

Recently, more prevalent than the chains, is the rapid growth of small specialty coffee shops providing ever changing flavored mixes of hot and iced coffees.  As of March in 2019 there were 7,384 coffee shops in Shanghai. As a comparison, Starbucks had opened 155 stores and closed 5.   The smaller shops offer more affordable pricing than the large international chains along with baristas that practice more customer engagement. Although the chains will continue to grow with good street traffic and commercial complex locations, the small kiosks appear to be gathering popularity throughout China’s urban centers.

 

Other recent entries into China’s coffee market are Macdonald’s with the MacCafés and convenience stores such as the ubiquitous Family Marts with Par Café providing less expensive coffees mostly for pickup and go customers. This is much like Japan’s 7-11 store offerings that started in 2013.

 

Although China has had a rapid increase in retail coffee shops, China’s coffee consumption per capita is still at a low level compared to the US and Japan. With China’s large population and booming economy, it is expected that there is still huge room for growth for coffee in China. The US being the largest coffee consumer in the world has daily coffee green bean consumption of 4.73kg and 388.3 cups of coffee per capita annually. Japan being the largest coffee consumer in Asia albeit has a tea drinking culture, also has daily coffee green bean consumption of 3.96kg per and 279 cups of coffee per capita annually, while China is only at 0.53kg of daily green bean and 19.9 cups of coffee per capita annually, even without considering its large rural population.

 

The growth of brewed coffee in China is impressive, but China’s coffee consumption is still dominated by instant coffee, which is the opposite of the situation in the more developed countries where fresh coffee has become the mainstream. According to public statistics, instant coffee takes up about 71.8% of China’s total coffee market, and dominated by giants Nestle and Maxwell in the mid to low end range. Meanwhile freshly ground coffee only takes up 18.1% and coffee drinks takes up the remaining 10.1%. This market structure is recognized as a signal that China’s coffee industry is far from matured and is headed towards larger proportion of fresh coffee.

 

The number of coffee shops in China has reached over a hundred thousand. Geographically speaking, Shanghai of all cities, without doubt, had the most coffee shops, followed by Beijing, Chengdu and Guangzhou. These four cities together took up 15.7% of all coffee shops nationwide.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

According to a recent survey for coffee shop customers, the most popular coffee drink was Latte in 15 of the above 16 surveyed cities except in Xiamen where people preferred Black Tea Macchiato. Generally, the Chinese coffee consumers prefer coffee with milk and sugar, placing Mocha, Caramel Macchiato and Cappuccino’s popularity after the top seller Latte, while the bitter Americano ranked only No. 9 and at the bottom of the popularity chart. As to customer profiling, it is revealed from the survey that 75.3% of the coffee consumption came from young people aged between 20 to 35, and 70.8% of the customers were female. Thus, the primary targets for growth in the coffee shops are young females who tend to gather in the shops as a part of their social lives.

 

The online platform initiated by Luckin is now being adopted by the giants such as Starbucks and Costa and by several interned start-ups seeking investment in recent years attracting nearly 400 million RMB involving 30 VC/PE firms according to incomplete statistics. Several companies featuring coffee deliveries and coffee ATMs/ vending machines have received funding as shown below in an incomplete list of investment projects in 2017 to 2019:

In conclusion, with China’s increasing urban populations, it is easily assumed that its coffee industry will continue to thrive. However, there is the danger with competitive players coming on stage that it may not mature with sustainable profitability. With the entries of Luckin, the popularity small coffee shop entrepreneurs, and online sellers, pricing that has enabled the expansion Starbucks’ and Costa’s growth may not withstand lower pricing pressures. In order to maintain their market positions they will need to continue offering comfortable sit-down social environments and creative coffee flavorings.

 

For more detailed information on China’s coffee industry write to: tomward@pimchina.com