In China, being seen enjoying a latte is as important as enjoying it. This mostly explains why global coffee chains are thriving in the traditionally tea-drinking country. It is not just coffee chains—the whole market is growing at a brisk pace. Mintel, a global market research firm, expects the US$1.9 billion industry to leap to US$3.1 billion in next four years. Per capita consumption is still relatively low—about five to six cups of coffee a year. But according to the China Coffee Association Beijing, its rate is soaring at 15 per cent annually—seven times faster than the global average.
Since 1999, urban consumers earning up to US$34,000 annually has increased five-fold, explains Philip Hwang, associate strategy director of Brandimage. Coffee has always been a beverage of status. Its relative affordability as a symbol of luxury blends well with China’s rising aspiration to trade up.
“Cafes are valued as places to relax, to be seen and to indulge and feel good about themselves,” says Hwang. “The higher price of cafe brew is [considered] acceptable … consumers are willingly paying for the space, brand, status and emotional gratification.”
This gives instant coffee the jitters. Its convenience and low price has helped it dominate two-thirds of the Chinese market. But these factors may soon lose their shine as prestige takes precedence with coffee drinkers.
International cafe behemoths are already charging in. Starbucks will double its current 1,500 outlets in China by 2019. Its UK competitor, Costa Coffee, is expecting to triple its store count to 900 by 2020. According to Mintel, the share of instant coffee will shrink from 81 per cent in 2009 to 66 per cent in 2019, while fresh coffee is expected to jump from four per cent to 14 per cent.
“Right now, consumers have no problem switching back and forth between instant coffee and fresh coffee according to occasions,” says Hwang, explaining that most drink instant as a quick pick-me-up in the office or at breakfast and fresh brews in cafes when socialising. “But in the long term, the risk is that consumers will not revert to instant,” he adds.
Not all brands feel threatened. Nestlé, the biggest player in the Chinese instant coffee market with its Nescafé brand, actually welcomes it. “The increase in out-of-home consumption is helping us to grow the total market,” says Altug Guven, SVP of the coffee unit at Nestlé Greater China. Nescafé’s strategy is to develop a full-fledge portfolio—from the premium Dolce Gusto to the mainstream 3in1.
As instant coffee steps up its game, cafes will need to improve what it does best—ambience and exclusive brews. “Coffee shops need to be ‘stylish’ enough to attract visitors, but it’s the quality of the coffee and customer service that will make people stay,” says Ruyi Xu, head of research at Mintel China.
Costa is striving to do just that, according to its marketing director in Asia, Esteban Liang. The chain “offers a well-balanced combination between quality handcrafted coffee, trendy environment and the convenience of finding [its] stores”.
Artisanal coffee shops intensify the competition in major cities, though both Hwang and Xu concur that its scale is too limited to shake the industry for now.
Riding the three waves of coffee culture
Samuel Coopersmith, consultant, SmithStreet Solutions
When coffee was first introduced in China, it was through instant/ready-to-drink coffee. Nescafé came on the scene and introduced China to a milky coffee beverage. Recently, they launched a marketing campaign starring popular Chinese racer and blogger Han Han with the tagline ‘Live your audacity,’ targeting those still in an exploratory phase of their coffee experience.
In the second wave of coffee, we were introduced to the cafes à la Starbucks. At the moment, this is how most of China experiences coffee. Consumers flock to coffee shops for the environment and the image it conveys about them. Their first priority is either meeting friends or getting a picture of that Rmb35 cup onto their WeChat Moments. Coffee in itself is a distant second or third.
Therefore, engaging with consumers beyond coffee becomes important. The third wave of coffee is now emerging, primarily in first-tier cities. At this stage, coffee transcends being a status symbol and becoming a way of life. Consumers are more likely to brew coffee at home and also appreciate ‘good’ coffee. One boutique chain of coffee shops that we have seen emerge is Essence Cafe, which specialises in brewing single-origin coffee.
For coffee brands in China, identifying which wave of coffee consumption their target consumers are on should be the driving marketing strategies.