Navigating the Unpackaged Tea Market in China

China is by far the largest tea market in the world. At US$ 8.5 billion in retail value and 543,422 tonnes, the Chinese tea market is more than double the second largest player in value (Russia) and nearly double the next largest in volume (India). Despite its large size, the Chinese tea market is far from saturated, as it increased by an average annual rate of 15% in retail value between 2008 and 2013. Although much of this growth can be attributed to the ongoing transition from unpackaged to packaged tea, unpackaged tea continues to be both popular and prevalent and according to industry sources may account for an additional 70-80% of the market.  The staying power of the unpackaged tea market in China stems largely from the market’s highly developed and sophisticated retail landscape. A better understanding of these channels is useful for international manufacturers interested in gaining share in the lucrative Chinese tea market.

Localised and sophisticated preferences hinder international brands

Despite the significant presence of international companies across a variety of FMCG products in China, the Chinese tea market remains almost entirely dominated by domestic companies. Unilever is the only non-Chinese company to have significant share, accounting for 2% of overall tea sales in 2013. China’s highly localized and well-informed tea culture makes it difficult for international players to penetrate the market. Each region has its own drinking habits and preferences in terms of tea types, where differentiation is more nuanced than green versus oolong or black. Chinese consumers are also highly aware of the varieties within a singular tea type such as Longjing (Dragonwell) versus Biluochun (Green Snail Spring), two types of green teas that differ in taste due to different cultivation processes, soil make-up, climates, among other factors.

The importance of origin, variant, and freshness in Chinese tea purchases greatly affects the retail landscape.  While unpackaged tea products appeal to some consumers because they are priced lower than their packaged equivalent, they are also favoured by many not because of their value (which can be just as high or higher than packaged tea) but because of their perceived superior quality since they believed to be more authentic and fresh. The complexity of the factors that drive tea purchases is evident in the importance of tea specialists – shops where tea (both packaged and unpackaged) and tea paraphernalia are the focus. In 2013, this type of outlet accounted for nearly one-third of packaged tea volume in China, marking the highest percentage of tea sales through this type of channel than any other market in the world. For perspective, tea specialists in Russia, the second largest market, accounted for just 1% of retail volume sales in 2013.

Types of tea specialists

In China, the tea shop can differ nearly as much as the tea themselves. Some shops are established close to the tea plantation or tea garden. These shops naturally emphasize the freshness and high quality of their products. There are also shops that are less formal and more akin to street stalls, located through urban areas. This type of shop mostly sells low to mid-priced tea, catering to consumers who are mostly price-sensitive.  Other shops more closely resemble modern retail specialist shops, not unlike Starbuck’s Teavana outlets or Lipton’s T2 stores. These shops can be chained or unchained and offer a variety of tea types across a range of prices and formats including both packaged and unpackaged products.

Most of China’s top domestic brands operate their own tea shops, including Beijing Wuyutai Tea Co Ltd, whose Wu Yu Tai tea brand is ranked number one in green tea, and Da Yi Tea Group, the largest player in Pu’erh tea, with sales of US$ 255 million in 2013. Tenfu Group, the fifth largest overall tea player in China, operates over 1,300 tea shops across 31 provinces. Tenfu’s stores vary in concept and strategy depending on their location. Some of the company’s larger stores have begun to introduce foodservice concepts, a composite again not unlike the recent introduction of Teavana cafés in the US.

Opportunities for international players

Tea shops in China are not only a significant retail channel but also an important way to increase brand awareness. For international players, the establishment of tea shops may be a way to establish credibility in an industry that has been largely skeptical of international brands. Chinese tea drinkers are sophisticated consumers for which sophisticated retail channels have developed. Rather than trying to compete in traditional tea types like green tea or through Westernized formats like tea bags, which do not appeal to most Chinese consumers outside of offices and white collar workers, international players should consider focusing their tea outlets on less established tea types like black tea and fruit teas. A specialist tea shop from a brand like Twinings which is known for its black teas may be likely to attract more interest than launching new products through supermarkets and hypermarkets.

Although unpackaged teas will continue to make up a sizeable portion of sales through tea shops in China, packaged tea products are becoming increasingly important and are reported by some stores to be growing at a faster rate. Because consumers are familiar and trust tea shops, they may be more willing to switch to packaged products sold through these channels. As such, the development of tea shops may help international brands not only increase their access to the Chinese tea market, but also place them in a better position to benefit from the increasing shift towards packaged tea products.