the coffee market in China

Has China’s coffee market already reached its full potential?

In a country culturally and historically attached to tea, the consumption of coffee in China is a relatively recent phenomenon. Developing similarly to the Japanese coffee market, the Chinese coffee market only started to develop in the late 80’s and early 90’s with foreign imports. Notably, Nestlé entered the Chinese coffee market in 1989 and Starbucks opened their first store in China ten years later. Since then, Chinese coffee consumption has risen spectacularly with a 500% increase between 2006 and 2018. However, since 2015 coffee consumption growth has slowed down to a 3% CAGR from 2015 to 2018, down from a 24% CAGR from 2007 to 2014.

Furthermore, China’s consumption of coffee per capita remains relatively low at around 7 cups a year. Indeed, studies show that Chinese prefer to drink tea, despite Chinese urbanites growing appetite for freshly brewed coffee. The tendency of Chinese consumers to prefer tea over coffee ranks the Chinese coffee market only at the 6th largest coffee market in the world despite an ever-growing middle class. This however does not mean that the Coffee market in China does not have potential: with slow but steady growth and new tastes forming in a maturing industry, what are the trends developing in the China’s coffee market?  

Although it has a large potential market size, China coffee market is only the 6th largest in the world.

Source: Statista. Although it has a large potential market size, China’s coffee market is only the 6th largest in the world.

Despite high domestic production, China is importing most of its’ coffee from abroad

Since coffee has been introduced in Yunnan in the 19th century, the province has become the main producer of coffee in China, producing 99% of Chinese coffee. According to Index Mundi, Chinese production of green coffee beans have been on the rise until it plateaued in 2014 with an average of around two million 60kg bags produced yearly from then on. According to Yilianzhong Finance, most of the coffee produced in Yunnan is then exported to Germany, the US and neighboring Japan. Chinese coffee bean imports have significantly increased over the years, reaching a volume of 103.3 thousand tons in 2020 for a value of 3.1 billion RMB according to Alibaba. The principal exporters of Coffee in China are Vietnam, Indonesia and Malaysia. According to Qianzhan, higher-end instant coffee brands tend to import their products while cheaper brands produce domestically.

Chinese coffee imports mainly come from neighboring East-Asian countries and South America.

Source: ICO. Chinese coffee beans imports mainly come from neighboring East-Asian countries and South America.

As China coffee market grows, so are Chinese consumers’ expectations

Although the growth of the Chinese coffee market has considerably slowed down since 2015, new trends have developed. Coffee in China is mostly consumed by middle-to-high class urbanites aged 20-30. As Chinese urban centers and middle class are steadily expanding, so does the Chinese coffee consumer base, which explains the steady growth of the industry. As the coffee market in China matured, consumer expectations have gradually increased. According to Xianji China, quality is now the main buying determinant for Chinese consumers. Therefore, they are willing to pay on average 16 to 35 Yuan for a cup of quality coffee. High-end coffee brands already dominate the Chinese coffee market and are expected to continue to maintain their position as preferred products.

Instant coffee is the main type of coffee consumed in China, in 2018 it represented 72% of market share. Imported brands such as Nescafé, Lim’s and G7 dominate the market as Chinese coffee brands are less popular. As coffee in China becomes more popular and the consumer base elevates its’ standards, coffee machine sales are on the rise in households and coffee shops alike. For the same reason, franchised coffee shops are growing faster than cafés as Chinese coffee enthusiasts increasingly prefer to drink in specialized shops.

Instant coffee is the preferred type of coffee in the Middle kingdom

Source: Qianzhan. Instant coffee is the preferred type of coffee in China.

China’s coffee shops industry has been cornered by foreign players

Starbucks is dominating the Chinese coffee shop industry

Starbucks Coffee (星巴克) opened their first store in China 1999 in Beijing. The American coffee chain is largely credited as one of the main contributors to opening China’s tea culture toward coffee alongside Nestlé. The American company reigns supreme on the Chinese coffee shop industry with little competition. By effectively serving one of the best coffees in the country and offering quality customer service, Starbucks has managed to secure a very positive brand image among Chinese consumers.  Thus, they have stayed ahead of the competition which is mostly composed of other foreign franchises such as Costa and McCafé. Starbucks had 4,123 stores in China in 2019 and plans to reach 6000 by 2022. This aggressive expansion strategy they adopted since 2018 have sustained their position as market leader despite some attempts from local players.

As the first foreign coffee shop implemented there, Starbucks is a pioneer in China’s coffee market.

Luckin Coffee: rise and fall of a Chinese coffee giant

Luckin Coffee is a Chinese coffee shop company founded in Beijing in 2017. The company business model consists of selling and delivering coffee cups on their online platform. Unlike Starbucks, Luckin Coffee stores are mainly pick-up stations rather than lounge cafés where people come to drink their coffee.

From 2017 to 2020, the company has known an impressive growth thanks to heavy investments, even overtaking Starbucks in the number of Chinese stores they had at 4,507 stores in January. The same month, a report was published accusing Luckin Coffee of faking their accounts was published and later confirmed by the company in April. The company then filed for bankruptcy in the US in February 2021, and recently reached a settlement with the SEC and a restructuring agreement with its investors. While the profitability and the future of the company remain uncertain, the restructuring agreement kept all Luckin Coffee stores open for business while the company is looking for new investors.  

As demand for coffee stalls, business models like Luckin Coffee's might not be profitable.

Source: ICO 2018. As Chinese demand for coffee stalls, business models like Luckin Coffee’s might not be profitable.

What the future holds for the China’s coffee market

The coffee market in China is at an interesting stage of development. While the industry as known at first a similar expansion to the Japanese market, it has lost the initial growth momentum it benefited from for over 20 years. Although consumption is still on the rise thanks to the ever-increasing Chinese urban middle class, Coffee in China does not boast double digits growth like it did before 2015.

Unlike Japan, China has kept its’ preference for tea as figures from the Chinese tea industry are showing.  This however does not mean that there is no potential in China’s coffee market. Indeed, the industry has shown a great resilience against the COVID-19 pandemic as China’s economy is kicking back into gears. Furthermore, online platforms seem to have strong potential for Chinese coffee sales despite Luckin Coffee’s early demise. As Chinese coffee enthusiasts are looking more and more for premium product, the average price of coffee in China is expected to rise as well. Combining the increase in price and volume, Qianzhan predicts that the Chinese coffee market should go over 330 billion RMB in size by 2024.

Author: Camille Gaujacq

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