Coffee culture in China is a fairly recent phenomenon, with Starbucks being the first major international chain to enter the market in the late 1990s. Since then, the habit of drinking coffee and hanging out in coffee shops has 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.
Nevertheless, despite the rapid spread of coffee shops to virtually every corner of China, most coffee chains have not cut back on growth plans. This optimism is mainly to do with the fact that Chinese people still only drink 5.4 cups of coffee per capita, compared to 341 in the US and 591 in Western Europe (Frost & Sullivan).
Like with most FMCG products,, rising incomes have been a big cause of why people have begun to drink more coffee. However, coffee has also come to be seen as an aspirational product for those wanting a sophisticated, modern and cosmopolitan lifestyle. In the last few years, social media has also been a contributing factor in encouraging people, particularly young women, to spend more of their free time in coffee shops. Photos in coffee shops with chic interiors serving cool-looking drinks show your social media contacts that you are living that aspirational lifestyle.
Intense Competition
The growth in the number of new coffee shops has far outstripped the growth in coffee drinking. China now has over 18,000 coffee shops, more than triple the number in 2014 (Euromonitor). What that statistic doesn’t show is the number of shops closing down, which is thought to be in the region of 10% per year. Price competition is a big reason for the high failure rate of coffee shops. While coffee is a premium product in China – costing 30 yuan ($4.24) on average – many chains will offer discount vouchers making it as cheap at 4.5 yuan ($0.60).
Coffee shops also need to make sure that their experience is desirable as coffee is also now sold at many other outlets, including convenience stores, vending machines and fast-food restaurants for less than at coffee shops. RTD coffee is a rapidly growing segment of the market, while specialty roasters from around the world sell directly to the connoisseurs through e-commerce.
Luckin vs Starbucks and the FututureMcCompetition
One local brand that has tried to increase its market share through offering heavily discounted coffee is Luckin. Often touted as the domestic rival to Starbucks, Luckin has experienced breakneck growth since 2017 on the back of offering heavily discounted coffee and aggressive marketing. Luckin now is thought to have roughly 4000 locations in China, with up to 2000 vending machines on top of that.
However, any numbers coming from Luckin have to be viewed with caution. In 2020 an internal investigation discovered that Luckin’s COO had inflated revenues by 2.2 billion yuan ($310 million). The company is still dealing with the fallout of this affair, which has led to it declaring bankruptcy. But its brand has continued to see strong support from consumers. Many of them forgive the fraud and see Luckin as a plucky local champion fighting against an American hegemon.
Speaking of the American hegemon, Starbucks is perhaps the only unqualified success in the Chinese coffee market. In fact, Starbucks is seen as one of the most successful and iconic foreign brands in China today. It has for now perfected its image of a premium, sophisticated Western lifestyle brand. Starbucks currently has over 4,300 stores in China and plans to have over 6000 by 2022, in 230 cities across China.
There are plenty of other foreign coffee shop brands in China, but none of them have been as successful or aggressive as Starbucks. This may soon change as McDonald’s has announced it will open 4,000 McCafes by 2023. Tencent-backed Tim Hortons also has big expansion plans, but most foreign chains are planning a slower growth trajectory as they get used to the market and learn to understand the consumer better. Some, like Costa, have cut back on their growth plans having been negatively affected by the pandemic.
Wither Tea Shops?
Up until recently, young and trendy people went to coffee shops and the 40+ crowd would frequent tea shops, usually spend longer there, play games (not on their phones) and take fewer selfies. However, in the last five years this rather sedate image of tea shops has been upended.
The new style of tea shops focus on bubble tea, a drinks craze that originated in Taiwan. Like coffee shops, the bubble tea shops are situated in busy shopping areas, offer a chic ambience and sell a product that lends itself better to Chinese tastes – not to mention its social media appeal. The rate of growth of bubble tea in the last ten years has even eclipsed that of coffee.
Post-COVID Outlook
Despite the vicissitudes of the pandemic, most of the major coffee and bubble tea chains have not announced any scale back or reversal of their plans to open new shops. Whether coffee or bubble tea, younger consumers in China are in the habit of going to such places to socialise and the competition from bubble tea does not look like it will dent consumers’ enthusiasm for coffee.
As China’s urbanisation and development spreads, cities that previously had no coffee shops will be able to support several. Although not all chains will be successful, the overall trajectory of growth does not show any signs of stopping yet.
Coffee Shops as Brand Windows
Like elsewhere in the world, coffee shops in China do not just sell coffee. Using China’s coffee shops and other premium food service channels as an entry channel is suitable for premium international brands looking to establish themselves as an aspirational product different from their lower priced, local competitors. Oatly is a good example of a brand that has taken this route, first being sold through Pacific Coffee and then Starbucks, before expanding rapidly into e-commerce and premium retailers.
Many of these coffee chains see the fact that they introduce new concepts to Chinese consumers as a point of pride and differentiation and are actively looking to bring new and innovative products to their customers who, after all, aren’t actually buying as much coffee as their equivalents in other countries do.