|
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 | 
