China has always been known as a tea-drinking nation, and coffee has until recently not been on most menus in the nation. However, the influx of foreign investment and expatriates from around the word coupled with a growingly affluent and western-oriented youth culture burgeoning in its increasingly prosperous cities, demand and availability of coffee has seen tremendous growth over the past few years.

Most experts believe coffee's penetration in China, currently confined to a few developed coastal regions and consumed by between 0.1% to 0.5% of the population, will increase significantly over the next 5 to 10 years, and domestic and international players are queuing up to take advantage of the expected boom. But not everyone is expected to survive the growing pains of China's coffee culture, and those who do will face some tough challenges.

Instant success

Ask any coffee person doing business in China, and they will tell you that Nescafe is responsible for introducing coffee to the Chinese. "We have invested considerably in our plants in the North of the country," says Reinhold Jakobi, Nestle China's director of foodservices business unit. "We have done lots of work with dairy farming, introducing new techniques and technologies, and we are currently working on upgrading the Chinese green bean production in projects in coffee growing areas of the country,"

Supermarkets, those ever-so-western icons of consumerism, have sprung up in many parts of the country, and it is usual to see the ubiquitous Nescafe brand sitting on the shelves. While purists may not accept that a widespread penetration of instant coffee into a hitherto virgin market is indicative of a nascent coffee culture, the fact remains that Nestle has pretty much single-handedly introduced many, if not most, Chinese coffee drinkers to the pleasures of a cup of hot java with its highly successful marketing and placement of Nescafe.

Nestle currently enjoys an estimated 85 to 90% share of the instant coffee market, but this hasn't prevented other companies from trying to muscle in. Sara Lee plans to introduce instant coffee into China shortly, and supermarket shelves currently display an increasingly wide selection of other brands, both international and local.

The starbucks revolution

While Nestle may get the credit for introducing coffee to China in a meaningful way, Starbucks, which entered the market in 1999, is universally singled out as the company that brought "real" coffee to the masses.

"Starbucks brought specialty coffee to China," says Edward Keller's product development manager Eddie Chew. "Thanks to Starbucks, many more people have learned about coffee."

Edward Keller has been serving the Chinese market for over 50 years, and can therefore be said to have a good grasp of the realities of the market, and as agents for Melita coffee and filters are encouraged by the signs. "Young people and office workers represent a growing market for our products," says Chew, while noting that the increasing influx of foreigners into cities like Shanghai provides a solid base of customers who are familiar with quality international brands. Chew believes that the comparatively modest consumption figures in China will grow to "maybe 10% (of the population) over the next 10 years as more tea drinkers switch to coffee."

Guiseppe Ventura of Italian roasters Moak agrees. "China will be the greatest market. If Satrbucks opens, I trust it will work," he says. Moak has established itself in Japan, Taiwan, the Philippines and Malaysia, and is now looking to China to cement its market position.

"Maybe in five years, there will be a coffee culture established in China," says Ventura. "If you look at Germany 20 years ago, they drank only regular coffee. Now they want espresso, and look for good quality. China tends to progress quickly, so what took Germany 20 years could take only five in China." However, Ventura accepts that pricing will remain an issue. "The price of espresso and good quality coffee is high throughout Asia. This restricts the market from growing. Once the price becomes more reasonable, we can expect to see a surge in the coffee culture," he says. "China is the greatest market in the world: once they understand and embrace coffee, we will all be rich!" he believes.

Quality the key to survival

Redella Liu of Coffex Coffee, agents of the Australian company of the same name, believes that, "Compared to Australia, the market is still very small, but who will survive will be based on quality and service. In 10 to 20 years, I think price will be less important than quality."

Together with a growing number of entrepreneurs, Liu's company services coffee shops and hotels throughout China, supplying espresso and coffee machines as well as a highly regarded after-sales service maintenance as well as training for f&b outlets.

Liu sees that together with the high quality imported coffee it supplies there are important elements in the growth of her company. "We employ seven technicians in Shanghai, and they visit our key clients weekly for maintenance," she says. "We maintain a 24-hour call-out service and reach our clients within two hours of a call in Shanghai."

In 2004, Coffex Coffee, which currently imports only roasted coffees, will introduce their own roaster to China, a bold move in a market that sees tremendous competition flooding into it.

Consumption patterns

The young are certainly taking to coffee as a lifestyle statement, as the ever-increasing number of coffee shops opening up in Shanghai, Beijing and Guangzhou bear testament. Alongside the Starbucks and local clones, traditional Chinese coffee shops, offering both tea and coffee as well as set menus of Chinese and Western food, and Hong Kong style bistros serve growing numbers of coffee lovers.

"Latte and cappuccino are the hottest sellers in the coffee shops around China," according to Richard Mak of Hong Kong based starpoint H.K. Development Ltd., agents and exclusive distributors for Daiiesi, Belera, Davisa and Unic espresso machines, "but espresso is not particularly poplar; perhaps the taste is too strong."

Brands also play a part in Chinese coffee drinkers' consumption patterns. Chinese are sensitive to the status seen in the consumption of "superior" brands. "We have to teach customers how to use the beans," says Mak. "They may have heard of Blue Mountain coffee, but they don't understand it. Even the difference between arabica and robusta they don't understand."

Starpoint offers training on all the espresso machines they sell, mostly automatic, which are preferred by hotel outlets as they are easy to use and produce consistent coffee. Hotels represent a major slice of the fresh coffee market. Until recently, many foreigners staying in or visiting China griped that it was impossible to get a good cup of coffee anywhere. Now they are spoiled for choice, and most hotels have several espresso machines and fresh coffee brewers in the properties.

Eddie Chew of Zhuhai Tsit Wing, a company that was established in 1938 and is a leading supplier of tea and coffee products as well as espresso machines from Pavoni, Mondoz, Saeco Royal and Rex Royal, agrees that there is a long way to go before coffee enters the mainstream, and is aware that the market is becoming saturated with merchants beyond its current demands. "The market is growing slower than the suppliers. It is over-competitive, and only the strongest players will survive over the next 10 years," he believes. "It took 15 years for the market to accept instant coffee. Espresso will most likely take another 5-10 years."

While coffee has made great inroads in China's coastal regions and developed cities such as Shanghai, Beijing, Guangzhou and Xiamen, it remains a relatively exclusive beverage. Young Chinese have taken to it, as noted by most observers. "More and more young people like coffee," according to Penny Tsao of Milan Gold. "Young people think coffee is modern, fashionable." Milan Gold has been in China for eight years, possible longer than many of its competitors, and has outlets in Shanghai and Beijing. Aside from importing roasted coffee, it brings in green beans from Colombia, Brazil and Indonesia and is roasting around 100 tons a year. "Growth is slow," admits Tsao, "but we see great potential as more foreigners come to China. We see latte and cappuccino sales growing, and as more young people that have adopted coffee grow up and raise families, their children will also take up the habit."

Coffee shop conundrum

Perhaps nowhere is the breakneck pace of competition more evident than in the coffee shop scene in Shanghai. Over the last 12 months many new players including Blenz Coffee, Dante Coffee and the Coffee Beanery have set up coffee shops around the city.

"The coffee chain industry is experiencing a rapid expansion in Shanghai" confirms He Yizhao, chairman of the Shanghai Catering Trade Association. "Various players have seen the great potential in the market as there are increasing numbers of people who love the Western lifestyle." Coffee shops are trying to establish unique identities, offering a variety of experiences to their customers, but according to He, "the market is still in a burgeoning state compared with foreign countries. Early comers will benefit the most."

Pricing plays the most important role in strategy, many outlets selling a cup of java for around 20 yuan (US$2.50), while Starbucks sells its brews for an average of 25 yuan a serving. "Our 31 years of providing specialty coffee in Asia Pacific makes us confident of our business," says Pedro Man, Starbuck's Asia-Pacific president. "We not only sell coffee, but also the value of our concept of like, relaxing and inspiring."

Dante coffee's general manager Steven Chang, believes his company, which opened its first two outlets in Shanghai in 2003, has an edge over its competitors by providing good

coffee at lower prices. A cup of coffee at a Dante's outlet costs 15 yuan. "In Taiwan, we face even more competition than in China," admits Chang, "But our coffee has the edge over other brands, with a price most people can afford." Dante's strategy is based on a long term policy of educating the market. "We want to keep a steady pace when entering the domestic market. The form of "Chinese" coffee culture needs time to take shape. Our idea is to cultivate people's habit of drinking coffee every day as is the common practice in Taiwan, where we have 82 outlets," says Chang, adding: "We do not fear our competitors since we cater to different groups of consumers."

Luxury brands

China is not a country normally associated with high-end luxury brands, but a quick walk around cities like Shanghai and Beijing reveals that the truth is somewhat different from common perceptions. Expensive international brands are widely showcased in specialty department stores and in boutiques, and it seems Chinese are no different from other cultures when it comes to aspiring to the luxury end of the market. Recognizing this fact, there are a number of coffee roasters who are seeking to capitalise on this trend.

Italian roasters Illy entered the China market two years ago after several years of research and introduced their coffee to coffee shops and retail outlets. Unlike most of their competitors, Illy produces just one blend, mostly Brazilian arabica, and according to its Hong Kong-based Asia Pacific representative Stefano Tamaro, it was pleasantly surprised to discover that despite misgivings that their darker roast would not be accepted by the Asian palate. "Young consumers share a taste for a darker roast," said Tamaro, "sales are growing slowly in Asia, even in Japan." He notes that in general, Asian consumers tend to avoid stronger tasting blends, "While middle aged men may prefer black espresso, the younger consumers tend to avoid strong tastes. This is exemplified by a boom in the sales of mineral water, even to new products in Japan that dilute fruit juices to accommodate youth's preferences. This could be a problem in the future," points out Tamaro, adding that overall, Japan has a high buying power while China's remains relatively low.

However, sales of Illy coffee in China are growing. The brand is marketed as an exclusive product with a price tag that reflects its status. However, despite expressing satisfaction with growth of sales in China, Tamaro wryly notes that "If in five years we sell as much as we do in Norway, we'll be very happy. Currently, we sell less in China than we do in Bulgaria."

Davidoff, a company not normally noted for its coffee, has entered the China market in partnership with Mandarin Fine Foods with a selection of fine coffees offered in high quality restaurants, private clubs and upmarket supermarkets and malls. According to Davidoff international and Asia brands director Wolfgang Gutt, "Davidoff enjoys instant brand recognition, synonymous with luxury and high quality." The arabica coffee is sourced from Kenya, Columbia and Guatamala, roasted in Italy, and is offered as instant and fresh forms.

Flavors and fads

While not every brand of coffee may be to the Chinese consumer's taste, flavoring companies are making an effort to penetrate the market.

Courtesy : Business Line - 28th, January, 2004

Current Issue              Archives