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Coffee players are eyeing up the growth potential in China, although there has not yet been any significant shift from tea to coffee beverages in this market. The key to marketing messages is to try and convince consumers that you are here to add to the diversity of drinks, rather than asking the Chinese to replace tea with coffee. At this stage, it is important to identify which products might best meet consumers’ tastes and the suitable channels to distribute these products through. Euromonitor International’s soft drinks and hot drinks databases show that coffee as a hot drink and RTD coffee “behave” differently in terms of consumer consumption patterns. Understanding the marketplace will be helpful in developing a pragmatic strategy to enter or expand in the Chinese market.
|China: Coffee Beverages, Retail/Off-trade Brewed Volume, Litres Per Capita and Growth Prospect|
|2015||2020||Absolute Growth US$ mn, RSP, 2015/20|
Source: Euromonitor International Database:Soft Drinks, Hot Drinks, Consumer Foodservice, Health and Wellness
It is noted that the target audience for coffee beverages has now grown beyond younger consumers and white-collar workers, and some people in second-tier cities have even picked up the habit of drinking coffee. The expanded consumer base is now an attractive platform for brand owners, although “the journey of nurturing coffee drinking” is still an ongoing challenge. In terms of channel development, foodservice sales of RTD coffee are still limited as consumers are habitualised to drinking tea and other beverages. Moreover, RTD coffee is not the most suitable complementary beverage for Chinese cuisine. However, Euromonitor International’s hot drinks database shows that foodservice sales of hot coffee have started to take off and outpaced retail sales in volume growth terms. This was underpinned by rapid growth of chained coffee specialist shops such as Starbucks, Costa Coffee and Lavazza. Despite the slowing Chinese economy, chained coffee specialist shops saw a net increase of around 2,000 outlets in 2009-2014, according to Euromonitor International’s consumer foodservice database.
With RTD coffee expected to record a net sales increase of around US$1.6 billion in 2015-2020, this huge potential has attracted a great deal of investment from major players. 2015 was a particularly eventful year. Coca-Cola made a re-entry into the category with Georgia and its marketing has raised the product and brand profile. Nestlé’s Nescafé, a strong category leader, contracted actress Angelababy for TV advertisements, which yielded healthy growth in sales. Starbucks and Ting Hsin (PepsiCo’s local distributor and bottler) agreed to jointly produce and distribute RTD coffee. Starbucks will be responsible for providing coffee expertise, brand development and future product innovation, with Ting Hsin focusing on producing and selling Starbucks products in China. Suntory and Hui Yuan also set up a joint venture to market RTD coffee and RTD tea. In 2015, Hui Yuan was the largest local player in off-trade volume sales terms.
In terms of flavour, the most popular flavour is latte, accounting for over 54% of off-trade volume sales in 2015. Chinese consumers are becoming more experimental as they are engaged in more overseas travel than ever before. There is a tentative increasing demand for high-end premium RTD coffee thanks to growing awareness of coffee beans and their origin. This awareness may open up growth opportunities for players like UCC and Illycaffè SpA.
As consumers are exposed to freshly brewed coffee in specialist coffee shops, they are also tempted to have the same fresh experience at home – with retail value sales of coffee pods surging in 2015. Nestlé dominates pods sales with Nespresso and Dolce Gusto, with Lavazza also registering some share in 2015. Pods sales are expected to account for over half of fresh ground coffee sales by 2020, suggesting that some consumers may choose to “leapfrog or skip” the standard format and directly trade up to pods. In the wider consumer market, this is not an unknown phenomenon – for example, Chinese consumers migrated to mobile phones despite very limited availability of landlines. Nestlé is planning to launch new products to meet local Chinese consumers’ needs, such as chocolate milk tea.
Despite Nestlé’s dominance, 2015 saw You Ji Jia (Shanghai) Food Trading Co Ltd register the strongest value sales growth, underpinned by speciality coffee mixes, including instant cappuccino, café latte and mocha. Instant coffee is and will continue to be the mainstay of coffee consumed in China to 2020. Going forward, as health and wellness awareness increases among consumers, there are likely to be some opportunities for reduced-sugar and creamer coffee mixes.
In brief, China will continue to offer solid value growth potential for coffee beverage players as new consumers are continually being attracted to support the category.