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Coffee industry in China to exceed US$ 7B by 2025

The practice of drinking tea originated in China about 2000 years ago and it is deeply integrated into their lifestyle and culture. But, in the last 2 decades, western companies are targeting China with a close substitute product- coffee. Since then, Starbucks and Costa coffee have already opened 3,400 and 405 coffee shops in China.

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Definition / Scope

Coffee is a drink (normally a hot drink) made from seeds of berries of coffea plant. Coffee is generally referred to as a bean because of its appearance, but it is actually a seed. The process and timing of the separation of the coffee seeds from its plant vary the taste and flavor of coffee.

There are more than 100 species of coffee. Among them, Coffee Arabica and Coffee Robusta are the two species which are most commonly produced and consumed. The taste of these two species is also different.

Arabica comprises about 1.5% of caffeine content in comparison to the 2.7% caffeine content present in Robusta. This is the reason why Robusta tastes rubbery or like a burnt tire. Also, Arabica coffee comprises more lipid and sugar content than the Robusta making its taste more preferable to many than that of Robusta. Starbucks, an American coffee house chain company, claims to use the high standard Arabica seeds to address their customers’ want of good tasting coffee. Thus, to ensure the seeds they use are of high standards, they collect coffee that is harvested at places of high altitudes and with cold nights and warm days. These conditions create denser beans which help in creating deeper flavors.

Newly planted coffee plants bear fruits in about 3 to 4 years. These fruits are called coffee cherry. After the seeds are separated from the cherry, they are dried to approximately 11% moisture. Then those beans are milled, followed by roasting in temperatures of about 550 degrees Fahrenheit. Finally, those coffees are grinned so that a cup of coffee gets the most of flavor.

Market Overview

History of worldwide Coffee consumption

The beginning of consumption of coffee is still a myth and many stories have evolved about its origin, but all we know is that it has been used since a long time ago.

According to a popular story, around 850 AD, Kaldi once noticed that whenever his goat ate a certain type of berry, it seemed to be highly energetic resulting in a sleepless night for the goat. Amazed by this behavior, Kaldi shared his experience with the local monastery. The local monastery experienced similar changes and shared it in the locality. Soon, the knowledge of the ‘energizing’ beans began to spread around.

By 15th century, coffee cultivation and trade had begun in Arabian Peninsula. And by 16th century, coffee was not only enjoyed at homes, but in many public gatherings, giving rise to the concept of coffeehouse. Then, through travelers and traders, by 17th century, coffee was already introduced in Europe. Soon, it was so popular in Europe that, by mid-17th century, there were around 300 coffee houses in London.

After coffee came to America, the market of coffee started to flourish around the world and with its high demand, the plantation of coffee also began to spread worldwide. The closest substitute product for coffee is tea, which has even further ancient evidence mainly on eastern societies, namely China.

Tea consumption in China

Legend says that in 2737 BC, the Chinese emperor Shen Nung was sitting beneath a tree while his servant was boiling drinking water. Accidentally some leaves from the tree blew into the water. Shen Nung, a renowned herbalist, decided to try the infusion. The tree was a Camellia sinensis, and the resulting drink was what we now call tea.

Through a Japanese Buddhist monk who visited China to study, Chinese tea got its introduction to Japan. And through traders and mercenaries, by 16th century, tea consumption in Europe began from Portugal. Then Dutch were the first commercial importers of Chinese tea. It was via Java that in 1606 the first consignment of tea was shipped from China to Holland.

Catherine of Braganza, Portuguese princess, after getting married to Charles II is said to have become a tea addict. Her love for tea introduced this drink among the English people. Soon, the East India Company began importing Chinese Tea and they also started tea farming and consumption in India to challenge the monopoly of Chinese Tea. Today, Britain is a nation of tea drinkers.

Thus, while the west began to commercialize coffee after it was being explored in Ethiopia, China has a firm history of consuming tea prior to many hundred years ago. But, in recent times, the country which discovered this magnificent drink has turned to become one of the biggest coffee consumers around the world.

Coffee Market in China

According to coffee market analysis reported by Chinabgao, in 2017 AD, the growth rate of coffee consumption in China was around 20% per year. The world growth rate of global coffee consumption was 18% per annum. With China’s population of 1.409 billion in 2017 AD, this growth rate has attracted many coffee suppliers around the world.

Starbucks, the largest coffeehouse chain worldwide, generated revenue of 22.39 billion US dollars in 2017. It has over 27,000 stores in 68 countries. To address the huge Chinese market, Starbucks opened its first outlet in China in January of 1999. Today, it has 3,400 stores in 141 cities of China. By the end of fiscal 2022, company has set an objective of opening more than 6,000 stores in China, which the company sees as achievable. While many other giant companies like Google, E-bay, Home Depot, and Mattel have thus far failed in China, Starbucks is transforming the ancient tea drinkers of China to coffee consumers.

With the rise in middle class population and the Chinese youth getting increasingly attracted to Western lifestyle, coffee business seems to boom in China.

Key Metrics

Metrics Value Explanation
Base Year 2018 Researched through internet


Market Risks

Apart from 3,400 Starbucks stores in China, Costa Coffee, a British coffee chain has over 440 stores already since it entered the Chinese market in 2013. Another close competitor, UBC coffee which originated in Taiwan in 1968, serves a similar product with the addition to some Chinese and Western dishes. It has more than 1,300 coffee shops in China. Similarly, American based McDonald, Taiwan based 85 Degrees, and HongKong based Pacific Coffee provide similar coffee products in the Chinese market.

Apart from them, local brands like Luckin coffee, Korean based brands like Caffe Bene, Maan Coffee, and Zoo Coffee are fighting for obtaining significant market shares. Thus, a fierce and unhealthy competition in the market from the three forces- European and American suppliers, Korean and Japanese suppliers, and domestic Chinese suppliers itself is a risk this industry is going through.

Although often they claim to have a healthy competition, the coffee chain industry in China is actually moving through a fierce and aggressive competition.

Top Market Opportunities

Every key player of the coffee shop industry in China is planning for further investment and expansion. This illustrates that this industry possesses plenty of opportunities for the suppliers. With the market size of coffee shop continuing to expand to new landmarks, it seems that a huge unexplored market is still waiting for these companies.

Market Drivers

With an average growth rate of 10% per annum in the last 30 years, China has been the world’s fastest growing major economy. Thanks to its strong economy, large geography and a huge population, China is also the world’s fastest growing consumer market.

With the rise of middle class and upper middle class population in urban and semi urban areas of China and their enthusiasm for imitating the western lifestyle, many global companies from different industries are trying to get a foothold in China. Obviously, the coffee shop industry is also looking to make its fortune in the Chinese market.

If not politically, the Chinese government is at least opening up economically. With this, the foreign investment has been raining in China. This allowed global coffee shops chain headquartered in Europe, US, Korea and Japan to enter China with aggressive investment policies.

Few decades back, several global companies entered China and failed. One of the main reasons behind those failures was the stance taken by those companies in trying to impose their home country culture and practice in China. But, those who survived were generously welcomed by the Chinese customers. So, today any foreign company entering China is sensitive to the Chinese culture and is willing to accept their differences. This also has served as a market driver in the recent success stories of foreign companies operating in China.

Industry Challenges

Scandinavian countries are the top consumers of coffee in terms of per capita. Averagely 1,451 cups of coffee are consumed per capita per year in Finland. Table 2 below shows the per capita per year consumption of coffee of different countries.

The differences in the consumption of coffee per capita can be easily noticed from the above table. The huge population of China and the growth rate of market for every consumer goods have made most of the analysts optimistic. But, retail sales of tea still outweigh coffee by 10 to 1. This makes tea still the main drink in China by quite a mile.

Chinese people have been drinking tea for more than the last 2,000 years. So, to convert the majority of them into coffee drinkers will be a huge challenge for every player in this market. It will not be inappropriate to define the coffee shop market of China as a niche market. With fierce competition already being observed among existent suppliers and other global coffee shop chains also planning to enter this market, there seems little room left for each participants until they can make more Chinese drink coffee.

Screenshot 2018-08-24 13.38.21.png

Pricing Trends

When Starbucks brought their coffee to China as a substitute for tea, it charged high prices as if to indicate that the former is a premium product compared to its alternative. Following the footsteps of Starbucks, other foreign coffee shop chains also started charging high prices for coffee. The chains seemed to exploit the general perception of the Chinese people- higher the price, higher the quality of product.

In China, a cup of coffee may cost between 20 to 30 Yuan ($2.93 to $4.40). The picture below illustrates the price of a cup of coffee in typical coffee shops around the world.

A look at how Starbucks price their same product in different countries gives a clear picture of the pricing trend they employ in China. The image below shows the price of tall Starbucks latte in 11 different countries in terms of US dollar.

Price of a cup of Starbuck's coffee worldwide.jpgPrice of tall Starbuck's latte in 11 different countries.jpg

Market Size and Forecast

Statista’s valuation of the market size of coffee shop industry in China from 2013 to 2017 has increased every year as seen in the below table. In the same table, its forecast for the market size until 2023 can also be seen.

Screenshot 2018-08-24 13.39.53.png

Market Outlook

In 2002, about 4% of population fell under middle class in China. A decade later, in 2012, it climbed to 31% constituting over 420 million people. In purchasing power parity terms, back in 2000, only 4% of China’s urban households lied in that group. But, by 2012, it mounted to over 68%.

The wages rate in China also increased to reach its all-time high of 74,318 Yuan per year in 2017. As a result, Disposable Personal Income of the urban population in China also increased from 33,616 Yuan per year in 2016 to 36,396 Yuan per year in 2017. China’s per capita disposable income has also increased by 7.3% in 2017 to reach 25,974 Yuan (about $4,033). To build a moderately prosperous society, by 2020, China aims to double the per capita income of its urban and rural residents from its 2010 level.

All these indicators show how strong the Chinese economy has been growing over the decades. The future growth rates looks even more promising. Under these circumstances, the Chinese demand for foreign consumer goods seems to soar further in the future. The prospect looks ever so lucrative for coffee shop industry in China.

Competitive Factors

Coffee culture in China is a recently introduced and not yet a well-established phenomenon. All foreign coffee shop companies as well as local competitors are focused on converting tea drinkers into coffee drinkers. For this, market players are trying to adapt themselves to the Chinese consumer behavior while serving their drinks.

Coffee shops in China are currently crowded by young people, business people and women. Young people in China generally go to coffee shops to date, business people to have meetings, and women to chat with their friends. The habit of meeting friends after work to enjoy some board games and card games with a drink of coffee is also getting popular among the working class.

Thus, every coffee shop market competitor in China is trying to seize the moment in the market. So, instead of targeting online market and focusing on take away business, coffee shops are increasingly interested in hosting their customers to their shops by creating a favorable environment for them. As a result, many coffee shop chains are attempting to expand themselves and are opening their new shops at crowded and central parts of the city.

Key Market Players

Starbucks: American based, Starbucks Corporation is the world’s largest coffee chain by revenues. Starbucks was founded in 1971 with the objective of selling coffee beans and coffee making equipment. Later, it transformed itself into selling the drinks. In 1996, company opened its first branch outside North America in Tokyo. Later in January, 1999, Starbucks opened its first outlet in China. Today, it has more than 3,400 stores in China and enjoys a share of 54.8% of the Chinese market.

Costa Coffee: British based, Costa coffee is the second largest coffee shop chain in the world and the largest in the United Kingdom. Founded the same year as Starbucks, Costa coffee entered the Chinese market only in 2006. By 2017, it has expanded its stores number to more than 405 in China. By 2020, it is planning to expand to 900 outlets inside China and compete directly with the market share of Starbucks.

Strategic Conclusion

After the gradual introduction of more liberal economic policies in China, many Western companies have moved to exploit its giant market. Many consumer goods sellers have also experienced great success. Although coffee is still a new culture for majority of the Chinese population, especially from rural areas, the people from urban and semi urban areas have seemingly welcomed it with a lot of generosity. The market size of the coffee shops in China is growing rapidly.

Many Chinese however, still have not fully grasped the habit of drinking coffee. Unlike westerners, they are not going to coffee shops for the drink, but to enjoy the lifestyle that coffee shops have provided. A cool place to hang out with friends, have some chat and board games, is what Chinese love about Coffee shops. Noticing this aspect, some local entrepreneurs are investing heavily in Tea shops which provide a similar environment as Starbucks and Costa Coffee. Yi Dian Dian, Heytea, Gong Cha, Yunyang Royal etc. are some of the tea shops chain in China that have enjoyed a great response from market through their innovative products like mango cheese milk tea, salty Mongolian milk tea, Taiwan style bubble tea etc.

Thus, coffee shops in China have to concentrate more on pleasing the Chinese customers with their products if they are to explore the biggest market of the world.

References


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