RTD coffee is a fast growing category in China that is undergoing structural change to become a segment focused on the premium end of the market. The segment experienced off-trade growth of 11% in value terms and 4% in volume terms in 2019 (Euromonitor), indicating that it is the premium end of the market that is driving growth. This rate of growth is expected to continue in the coming years with the premiumisation trend continuing.
Coffee shops have spread throughout China. In the last decade in particular, coffee has broken through to become a mainstream product. The number of coffee drinkers grew from 190 million people in 2013 to 330 million now, with a double-digit compound annual growth rate in second-tier cities and below. China now has over 18,000 coffee shops, more than triple the number in 2014 (Euromonitor).
Who Are The Coffee Consumers?
But despite coffee being available in most cities – and even towns – in China, it is first and second tier cities (i.e. the major commercial centres) which are the most suitable markets for RTD coffee. This is because the overall coffee consumption in China is low, only 5.4 cups of coffee per capita, compared to 341 in the US and 591 in Western Europe (Frost & Sullivan). But in the larger, more cosmopolitan cities, consumers drink more than average and have developed a need and demand for just coffee, without the experience and the frills of the coffee shop.
As with many consumer trends in China, it is the relatively affluent and carefree so-called post-90s and post-95s generations (i.e. those born after those years) that are driving consumption. These consumers often work in fast-paced, stressful white collar jobs with long hours. Having a convenient pick me up when they feel their energy levels dipping can be very important to them.
What Brands Are Selling In China?
Nestle is the dominant brand in China, with a massmarket product that has captured 73% market share. As well as its large geographical reach across the country, Nestle has invested heavily in marketing, which also has helped smaller brands by raising awareness of the RTD category among consumers. At the lower end of the market, domestic brands are dominant. However, it is the premium end of the market that is driving growth in this segment with consumers gradually abandoning the cheaper options.
Currently Starbucks remains relatively unopposed as the market leading premium RTD, but a challenge is coming as Costa recently launched an RTD coffee range in China. The product’s key USPs will be that it claims to be lower in sugar and fat than a regular coffee and its RTD competitors, key concerns of those health conscious younger consumers. However, both will still be manufactured in China, creating space for competition in the premium segment for authentically imported brands offering high quality imported ingredients in their products.
Product Innovation
The product innovation in the premium segment is what is driving the high levels of growth in the RTD market. New packaging and new flavours are designed to appeal to the young consumers driving growth in the market. An example of this is Costa’s Coca Cola flavoured RTD specifically for the China market. Both Nestle and Starbucks also have various flavours available.
What Channels Are Prospering?
E-commerce, supermarkets and vending machines will all have good prospects as sales channels for RTD coffee. However, conveniences stores will be the driver of growth in the next five years. This channel is underutilised by foreign brands. There are well over 120,000 convenience stores in China, responsible for over 226.4 billion yuan ($33.3 billion) in sales and the average store’s sales are increasing by 7% annually (KPMG).
Most city blocks in China will have multiple convenience stores and they are located closer to the communities where people live and the offices where they work than supermarkets, as well as being quicker to navigate. Also, the innovation in the convenience store market in China sets it apart from the traditional corner shop that people in Britain and other countries would be familiar with. Facial recognition, unmanned stores and mobile payments are just some of the new retail innovations that convenience stores are at the forefront of in China. This is why many mid-priced and premium local brands will see convenience stores as a key part of their launch strategies.
The RTD coffee market will see strong growth in China over the coming years. However, there are so far no major efforts from premium Western brands to capture a slice of the market. Even with a higher price point, there are good prospects for premium imported entrants into the market as long as the key differentiators in the ingredients and quality can be clearly communicated to consumers.