| Coffee
brews a future in China?
- 13 Sep 2004
Author: Hope Lee
Coffee
marketers are working on transforming China – the homeland
of tea – to a coffee drinking nation. Coffee remains
a statement of fashion although consumption is growing rapidly.
Starbucks
is suing a rival local Chinese chain (Shanghai Xingbake Co)
whose name in Chinese characters is virtually identical to
that of the U.S. giant that introduced coffee culture to a
nation of tea lovers. The global spread of coffee-houses is
touching down in China, with coffee consumption increasing
year after year. Euromonitor, the world’s leading market
intelligence provider, reports on the latest trends in coffee
consumption in the homeland of tea.
Domestic
production expands
Total
volume sales of coffee in China grew by nearly 90% between
1998 and 2003, to 6,504.5 tonnes. Domestic production of coffee
beans also expanded rapidly. China Agriculture Yearbook reports
that China produced a modest figure of 3,573 tonnes of coffee
beans in 1997, but by 2000 this had risen to 11,568 tonnes.
The United States Department of Agriculture (USDA) estimated
that this figure had risen to 13,000 tonnes by 2001.
The
expanded local production of coffee beans coupled with the
low price of green coffee in international markets has contributed
to the reduction of the retail price of coffee in China. This
situation encouraged investment in coffee, which in turn resulted
in a higher visibility in the retail market, particularly
in large cities. The level of publicity and media interest
in coffee also notably increased.
Coffee
consumption - a cosmopolitan lifestyle
Coffee
is a Western concept to most Chinese consumers, who associate
it with Western lifestyles. Unsurprisingly, coffee consumption
in China is highly concentrated in large cities such as Beijing,
Shanghai and Guangzhou. Coffee appeals to adventurous, open-minded,
young, affluent, urban consumers. These consumers are more
exposed to Western influences and tend to look up to Western
lifestyles. Manufacturers have targeted Westernised young
professionals as the main target market for coffee. The key
issue is how to convince these consumers that coffee is a
beverage to be drunk regularly rather than just a passing
fad.
Another
large consumer group, which influences the coffee consumption,
is returnees. China has seen an influx of returnees (mainland
Chinese students returning from Western countries) over the
last five years. Many of these returnees have lived in Western
countries for a decade and they have become accustomed to
the coffee culture. Upon their return to China they have carried
on living in this fashion. Visiting cafés and drinking
coffee at breakfast is not a novelty for these consumers.
Their strong earnings mean that they can afford to pay a premium
price for a lifestyle to which they aspire.
Foreign
ex-pats also comprise a large proportion of coffee consumers
in China. China’s high growth economy and improved investment
has attracted substantial foreign direct investments, which
has led to rapid increases in the number of ex-pats. Shanghai’s
official statistics show that the number of Taiwanese living
in Shanghai for short periods (at least three months) is estimated
at 230,000. The figure is expected to increase each year.
Ex-pats are at the high-end of coffee consumption and are
also regular patrons of cafés. It is reported that
Westerners and businessmen from Hong Kong and Taiwan represent
30% of customers at chained cafés such as Starbucks.
Instant
coffee leads the way
In
terms of market composition, instant coffee dominates the
Chinese coffee market. In this tea-drinking nation, coffee
culture is just starting to touch down. Most Chinese do not
fully appreciate the taste of coffee and they are content
with the taste of instant coffee.
The
popularity of instant coffee can also be attributable to its
convenient preparation. This appeals particularly to white-collar
workers who have busy lifestyles and cannot afford the time
to prepare fresh coffee. Price-wise, fresh coffee is expensive
when compared with instant coffee. Additionally, the availability
of fresh coffee is highly limited. It is found only in select
stores and expensive foodservice establishments and hotels.
The
convenience of 3-in-1 instant mixes (coffee, milk powder and
sugar) has resulted in robust growth in volume sales. However,
coffee mixes do not contribute much to overall value growth
due to their low price.
Starbucks:
a representative of on-trade channel
China
doubled its on-trade coffee consumption between 1998-2003.
This is a mostly urban phenomenon with most rural areas largely
untapped. On-trade sales of coffee mainly go through three
types of establishments: coffee shops/cafés (independent
and chained), Internet cafés and fast food restaurants.
Euromonitor’s
figures show that chained coffee shops, such as Starbucks
and Manabe (Japanese style café), saw spectacular growth
in unit sales, up by 814% between 1999 and 2003. Starbucks
stands as a statement of modern lifestyles and affluence in
today’s China. The company has opened over 90 outlets
in the country.
However,
Starbucks faces increasing competition from other foreign
players. China’s accession to the WTO has led to the
gradual relaxation of the policy governing foreign owned retail
outlets, and will lead to more foreign investment and new
market entrants. The reduction of import tariffs on coffee
will also encourage foreign investment in coffee. Canadian
chain Blenz Coffee for example, plans to open 50 outlets by
the end of 2004 in China, where consumers can smoke on the
premises. China, reportedly, has at least 200 million smokers.
Blenz Coffee’s move obviously serves to differentiate
itself from Starbucks.
Local
coffee shops seem unable to compete with Starbucks directly.
While the local players are busy cashing in on the café
trend, some imitate Starbucks’ operations, which has
caused uneasy experience. This is highlighted in the high
profile lawsuit between Starbucks and Shanghai Xingbake Co.
Starbucks is suing Xingbake (whose name in Chinese characters
is virtually identical) for trademark infringement after the
two sides failed to settle out of court. The court has yet
to make a ruling. Starbucks cannot afford to lose the lawsuit,
as Shanghai is the core market for its mainland Chinese operation.
To gain a firm management control in China, Starbucks increased
its stake in President Coffee Co. (a joint venture between
Starbucks and the Taiwan based company Uni-President) from
5% to 50% in the middle of July 2004.
Nescafé
has the first mover advantage
The
Chinese coffee market is highly consolidated, with multinationals
controlling the market. Nestlé was the first multinational
to establish a coffee processing plant in China. Nestlé’s
Nescafé brand is a long-running favourite in the instant
coffee sector in China and Nescafé has now become a
generic name for coffee. In 2002, Nestlé accounted
for 46% of retail value sales. The company runs continuous
above-the-line and below-the-line marketing and promotional
campaigns in the country. Kraft is trailing Nestlé
considerably, holding a 20% share in 2002.
Multinationals
have made a positive contribution to the development of the
Chinese coffee industry with both Nestlé and Kraft
utilising domestically grown coffee to supply the local market.
Nestlé also sent technical staff to the Yunnan province
(one of the major coffee-producing provinces in China) to
help growers produce coffee beans which meet their own production
requirements.
Exciting
potential but a lengthy transformation period ahead
The
Chinese coffee market is expected to grow by 70% in total
volume sales between 2003 and 2008 to reach 11,073 tonnes.
Euromonitor findings show that, within Asian countries, affluent
consumers with a high degree of Western influence are more
likely to accept a coffee culture.
Coffee
consumption in Japan (1.4 kg per capita) and Singapore (1.9
kg per capita) are far higher than that in the UK (1.2 kg
per capita). In the Greater China area, Hong Kong stood at
0.8 kg per capita, higher than the world’s average at
0.7 kg. This is positive news for the Chinese coffee industry
and coffee marketers are now working on persuading Chinese
consumers to increase their coffee consumption significantly
in the next two decades.
Concerted
efforts have been made to promote coffee consumption within
China. In 2001 the International Coffee Organisation organised
coffee festivals in both Beijing and Shanghai. Some coffee
marketers believe they can eventually persuade every Chinese
citizen to drink a cup of coffee a year. If they succeed,
this would translate into substantial market demand for coffee,
thus benefiting local and international coffee manufacturers.
Despite
the potential of a 1.3 billion population base, coffee marketers
are wary of the difficulty in transforming a tea-drinking
nation into a coffee-drinking nation. Tea is the Chinese national
drink and will continue to be an integral part of Chinese
daily life in the next two or three decades. Further to this,
tea is seen as a drink, which has health benefits, while coffee
is marketed as no more than a lifestyle drink. The price of
coffee is still out of reach for the average Chinese consumer,
while tea is a cheap indigenous product. Most Chinese consumers
still have little or no knowledge about coffee. Therefore,
the transformation hoped for by coffee marketers is not impossible,
but it will not be easy and will not be rapid despite the
recent growth |
