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Enter the China Emerging Coffee Market

Feb 21, 2020

China may be the fourth largest country in the world and have the largest population on the planet, but with some citizens drinking on average only one cup a year, it has one of the lowest coffee consumption rates in the world.

Although this may not seem promising, coffee consumption rates in China are growing at an annual rate of 30% , compared to the international rate of 2%. For growers and roasters looking to enter an untapped market, this offers incredible potential.

To learn about this market, I spoke with Felipe Cabrera, director of wholesale coffee sales at Ocean Grounds Coffee,and Natalia Li, green coffee buyer for Ingenuity Coffee. Both will be presented with a conference entitled, "China: Emerging Market for Coffee" at this year's Producer & Roaster Forum , in Honduras. We discuss the recent evolution of the Chinese market, why consumption rates are rising and what roasters and producers can expect from this phenomenon.

Fresh tea leaves are harvested and collected in a basket.

China's Relationship with Coffee

For centuries, China has produced and consumed tea. It is estimated that the country produced 2.8 million tons of tea in 2018, and is currently responsible for almost 40% of the total consumption of this beverage in the world. 

Until the 1980s , coffee was considered an expensive gift, rather than a product to enjoy and only entered the conventional market in 1999, when the first Starbucks opened its doors at the World Trade Center in Beijing. At that time, the special coffee scene was still far from established.

Felipe, originally from Colombia, had lived in China for several years before taking up his current position at Ocean Grounds Coffee. He says: “When I arrived in China… the options in the city were very scarce. In addition to some Starbucks stores that were considered quite expensive at the time, there were two Western restaurants ... serving basic espresso- based drinks ... Most Chinese coffee consumers, however, at universities, their offices or even at home they kept drinking instant coffee like Nestlé or Maxwell. ”

Instant coffee was popular in China until 2012 , when imports began to decline. This was due to an increased interest in ground coffee, as more and more consumers chose to visit coffee shops instead of preparing instant coffee at home.

This change in preferences could be attributed to the rise of second wave coffee chains, such as Starbucks and Luckin Coffee . Currently, Starbucks owns more than half of the share of the coffee market in China. Between 2017 and 2018, its revenues almost doubled, and it is estimated that every 15 hours a new Starbucks store opens in the country.

Guatemalan coffee ready to taste at Ocean Grounds Coffee, in Shanghai. Credit:  Ocean Grounds Coffee

Why Increase Consumption?

Between 2008 and 2018 , coffee consumption in China increased by 1032%, thanks to the growing influence of local millennials . At present, those born between 1981 and 1996 constitute more than a quarter of the Chinese population, and are responsible for more than half of purchases of luxury goods and have more than two thirds of all passports. This group tends to have a higher disposable income than previous generations, so these luxuries can be allowed.

Millennials' inclination to travel means that some will be exposed to Western ideals while abroad, and that urbandwellers are likely to come into contact with Western lifestyles and media in their daily lives. In addition, a significant percentage of consumers will be students returning from their stays in countries such as the United Kingdom, Canada and Australia, and will want to maintain the coffee consumption habits they have established abroad. 

Felipe tells me: “Your purchasing power is quite significant. Do not hesitate to buy a cup of coffee of 30 renminbi or more (around USD 4.5) in Starbucks or Costa Coffee, or for coffee connoisseurs the amount can reach 50 renminbi (approx. USD 7) or more ” .

By being willing to pay more, this age group is helping special coffee emerge as an industry. As they are increasingly willing to pay higher prices for better quality, many local roasters and coffee shops have begun to take advantage of this situation.

Natalia tells me that another important factor that is helping the growth of the special coffee market in China is the Internet. He mentions that Taobao , the largest e-commerce store in the country, allows many roasters to sell their special coffee directly to the public, using a distinctive brand and an online store.

Starbucks coffee cups on a table. Starbucks is one of the largest coffee shop chains in China.

The Challenges to Enter This Market

Roasters and coffee shops that wish to enter the Chinese market must prepare for the domain of store chains. With more than 3300 Starbucks stores running and 10,000 stores that the Chinese chain Luckin plans to open by 2021, both companies have strong market control. In 2015 , KFC also launched its own offer of low-cost coffee, which is available in many of its 4500 outlets across the country.

Luckin Coffee has grown exponentially, and has opened 525 stores in the 9 months since its foundation. Customers can only order online before picking them up, using an application linked to WeChat (the largest courier service in China). They say this allows them to track customers' coffee consumption habits, in order to better meet their needs. WeChat differs significantly from other social media platforms, since it can connect with another 85,000applications, which allows users to shop online, pay bills and make video calls.

At the end of this year, Luckin plans to open a toaster in Xiamen, with an annual production capacity of 30,000 tons. This facility promises to use green technology for air cleaning and smoke removal, and will supply exclusively to Luckin branches. It is a joint venture with Louis Dreyfus Company , a merchant and processor of agricultural products, and one of the largest green coffee merchants in the world.

Other specialty coffee chains in China are Fisher Coffee Company , Arabica Roasters and Ocean Grounds Coffee. The latter specializes in bringing Shanghai's specialty experience “from the farm to the cup”, emphasizing direct trade and processed beverages.

A second challenge to enter the market will be to overcome the cultural and linguistic barriers of China. Felipe says: “You cannot succeed here for yourself. Culture, language and bureaucratic barriers make it difficult to enter this market without help. ” These barriers may include the diversity of existing taste preferences. For example, consumers in Beijing and Shanghai are more inclined to sweet flavors , compared to the inhabitants of Canton.

These differences between palates could also extend to the way of processing coffee beans. Felipe explains that, "[Chinese consumers] welcome fermented notes, since various styles of Chinese food have fermented dishes or condiments." This could restrict the place where a toaster or coffee shop gets its coffee, and how it is processed.

The Chinese coffee market could develop new coffee preparation methods, different from those seen in the West. Credit:  Ocean Grounds Coffee

Overcoming Entry Barriers 

Felipe believes that the best way for roasters and producers to access the Chinese market is to partner with people in the industry. “Partner with a local company, agent, representative or professional who has a presence and experience in [the] Chinese coffee market. They can help you navigate between the peculiarities of the local market and introduce your product with the right price, volumes and sales approach. ”

It is important to partner with an established company, as Chinese consumers tend to prefer brands tested or recommended by family members. Being connected to the right company will help you market and promote your business or product properly, and help you adapt your offers to the habits of local coffee consumers.

Also, you will have to use technology in your sales and marketing. “The social media environment here is very different… There is no Facebook, Twitter or Instagram, and they practically do not visit the companies' websites. All promotion must be done through Chinese social media such as WeChat, Weibo, Red, etc., which use very different methods, ”explains Felipe. Understanding this form of marketing and adopting an interface that allows customers to communicate with you through an application could improve your chances of success.

While it is important to understand the current market, it is also important to predict future trends. At present, coffee consumption is concentrated in urban areas , which means that rural areas could be the next market. Felipe predicts that “roasting and special coffee making businesses will increase in megacities… where many young adults come to study and work… After some time, these young adults will return to their cities to start families, start their own businesses , or to take care of their elderly parents, and they will carry the specialty coffee culture with them. ”

Another change will be to highlight coffee grown in China. In 2018, the first event called International Specialty Coffee Expo and Forum was held , where the varieties of the Yunnan region were presented to roasters and international importers and local industry professionals were educated with talks and seminars. The success of the event, combined with the growing quality of the beans grown in China, led to the organization of a second event this year, adding an experience of origin in different farms. However, the event has been postponed due to the outbreak of Coronavirus.

The international giants of the specialty industry have already begun to take note of Chinese coffee, as British Square Mile roasters have done , who have officially introduced Yunnan grains from aerobic fermentation on their menu. This award-winning roasting caters to coffee shops across London, and is part of the Cup of Excellence and the Association of Special Cafes of Europe, among other organizations. Su Ou Yang is a creamy coffee, with notes of strawberry and lychee jam. It is named after the coffee grower who uses double natural fermentation to produce it.

A village in China, located on a hillside. Rural areas could be the next place in China where coffees and toasts are expanded.

With a fast-growing specialty coffee scene and a continuous increase in annual consumption rates, the Chinese coffee market presents an incredible opportunity that international stakeholders should not miss. 

If cultural traditions and preferences are considered, including the current use of technology in the country, local tastes and the importance of connecting with trusted companies; roasters and producers should be able to thrive in this industry.