Coffee chains brew robust future in China
From Best Buy to B&Q, many foreign brands and business models have struggled in China. But perhaps the least likely western retail concept of them all has prospered the most: foreign coffee shops.
Despite a history of thousands of years of tea-drinking in China, coffee chains from the US, UK and South Korea are expanding rapidly and coffee shop sales are growing faster than almost any mainland retail segment. According to figures from Euromonitor, coffee chain sales have risen from under Rmb10bn ($1.6bn) in 2008 to more than double that last year, with sales expected to double again by 2017.
Starbucks, the US coffee chain, virtually created modern café culture from scratch in China, retail analysts say, pointing out that tea is not just the country’s most popular drink, it is also deeply embedded in Chinese culture.
Since opening its first mainland store in 1999, Starbucks has become one of the most famous lifestyle brands on the mainland, by promoting its shops as stylish places to meet friends and approximate western lifestyle. Its popularity has even transformed Chinese taste buds, with fresh coffee consumption rising too.
The market is also diversifying as it expands. In the past few years, niche Korean-style coffee houses have sprung up, independent cafés have become the places to see and be seen in big cities, and everyone from McDonald’s and KFC to Japanese and Taiwanese convenience store brands has begun promoting fresh coffee sales.
Starbucks shrugged off an attack last year on its high mainland prices by CCTV, the state broadcaster, and has only accelerated its expansion. It plans to double its current store count to over 3,000 by 2019, it said earlier this month.
Whitbread-owned Costa Coffee also plans to double its China stores, to 700 by 2018, according to Esteban Liang, Costa managing director for Asia. Maan Coffee, a popular South Korea-founded café-cum-casual restaurant chain, says it intends to double its current 100 mainland stores to 200 by the end of 2015.
“Looking forward, the war between Korean, American, British, [and] domestic coffee chains and stylish independent cafés. . .will create a great deal of diversification in the market which will underpin extensive growth,” says Esther Lau, retail analyst at Mintel.
The more coffee shops there are, the more there may be in future, says Frank Yin of UBC, the Taiwanese coffee shop chain that was one of the earliest mainland entrants. “The emergence of more coffee shops is making people more familiar with coffee,” he says.
Yet UBC has been one of the biggest losers in terms of market share as Starbucks has grown, with the US chain’s share rising from 12 per cent in 2008 to 31 per cent in 2013 while UBC’s slice has fallen from 33 per cent to 22 per cent, according to figures from Euromonitor.
Over the same period, McDonald’s has risen from almost nothing to 6 per cent of the market as it has opened 800 of its in-store McCafe’s, while Costa has grown from 1 per cent to 5.5 per cent over the same period. Yum’s KFC, most of whose stores did not serve coffee on the mainland until recently, has started promoting the beverage and many mainland convenience stores in first-tier cities now also sell fresh-brewed coffee.
“Of course there is increasing competition but when I look at Japan and Korea, the density of coffee shops they have there, not even Shanghai has that density,” says Torsten Stocker, Greater China retail partner at AT Kearney.
At one suburban Shanghai branch of Maan Coffee on a frigid weekday afternoon recently, most of the shop’s 374 seats were occupied, primarily by friends chatting loudly in groups, while at Starbucks in a nearby office building most seats are also taken, mainly by individuals working on laptops or meeting with colleagues.
Even more surprisingly, mainlanders increasingly are not just patronising coffee shops, but are buying coffee-based drinks rather than the non-coffee beverages that used to be more popular.
“There’s a much bigger appreciation for the nuances than even five years ago, when coffee for most people was Nescafe 3-in-1,” says Mr Stocker, referring to the sweet creamy instant coffee popular with new coffee drinkers on the mainland.
With mainland coffee consumption currently only four cups per person per year, there is still plenty of room for growth, says Mintel’s Ms Lau.