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Coffee marketers are working on transforming China - homeland of tea - to a coffee-drinking nation. Coffee remains more fashion statement than beverage but consumption is growing rapidly. Hope Lee of industry analysts, Euromonitor, reports.

It has been revealed that Starbucks is suing a Chinese coffee chain, Shanghai Xingbake Co., for trademark infringement. But the fact that Starbucks has a presence in China in the first place underlines that coffee is a significant growth market there. It is virtually a law of nature that where there is one Starbucks there will soon be two and, with China's massive population, if the coffee trend really catches on, the potential is staggering. It is little wonder that the company is looking to protects its brand.

Total volume sales of coffee in China grew by nearly 90% between 1998 and 2003, to 6,504.5 tonnes. Domestic production of coffee beans has also expanded rapidly, from 3,573 tonnes in 1997 to 1,568 tonnes in 2000 and, according to the US Department of Agriculture (USDA), to around 13,000 tonnes by 2001.

Expanded local production and the low price of green coffee in international markets has reduced the retail price of coffee in China, fostering investment in coffee. The level of publicity and media interest in coffee also notably increased.

Coffee is a Western concept to most Chinese consumers, who associate it with Western lifestyles. Unsurprisingly, coffee consumption in China is highly concentrated in large cities such as Beijing, Shanghai and Guangzhou. Coffee appeals to adventurous, open-minded, young, affluent, urban consumers. The key challenge for marketers is how to convince these consumers that coffee is a beverage to be drunk regularly rather than just a passing fad.

Another large, influential consumer group is returnees, students who have lived in Western countries for a decade and have become accustomed to the coffee culture. They continue to drink coffee when they return and their strong earnings mean that they can afford to pay a premium price for a lifestyle to which they aspire.

The huge number of ex-pats living in China also fuel coffee demand. Ex-pats are at the high-end of coffee consumption and are also regular patrons of cafés. It is reported that Westerners and businessmen from Hong Kong and Taiwan represent 30% of customers at chained cafés such as Starbucks.

In terms of market composition, instant coffee dominates the Chinese coffee market. In this tea-drinking nation, coffee culture is just starting to touch down. Most Chinese do not fully appreciate the taste of coffee and they are content with the taste of instant coffee. It is also cheaper and easier to prepare and availability of real coffee is extremely limited. The convenience of 3-in-1 instant mixes, containing coffee, milk powder and sugar, has resulted in robust growth in volume sales but coffee mixes do not contribute much to overall value growth due to their low price.

On-trade coffee consumption, concentrated in urban areas through coffee bars, internet cafes and fast-food outlets, doubled between 1998 and 2003. Euromonitor's research indicates that coffee shop chains, such as Starbucks and Manabe (Japanese style café), saw spectacular growth in unit sales, up by 814% between 1999 and 2003. Starbucks has over 90 outlets in the country.

However, Starbucks faces increasing competition from other foreign players. China's accession to the WTO has led to the gradual relaxation of the policy governing foreign-owned retail outlets, and will lead to more foreign investment and new market entrants. The reduction of import tariffs on coffee will also encourage foreign investment in coffee. Canadian chain, Blenz Coffee, plans to open 50 outlets by the end of 2004 in China. Consumers can smoke in Blenz Coffee outlets which is a significant differentiation from Starbucks in a nation with 200m smokers.

Local coffee shops seem unable to compete with Starbucks directly. While the local players are busy cashing in on the café trend, some imitate Starbucks' operations, which has caused uneasy experience. This is highlighted in the high profile lawsuit between Starbucks and Shanghai Xingbake Co. Starbucks is suing Xingbake, whose name in Chinese characters is virtually identical to Starbucks, for trademark infringement after the two sides failed to settle out of court. The court has yet to make a ruling. Starbucks cannot afford to lose the lawsuit, as Shanghai is the core market for its mainland Chinese operation. To gain a firm management control in China, Starbucks increased its stake in President Coffee Co., a joint venture between Starbucks and the Taiwan based company Uni-President, from 5% to 50% in the middle of July 2004.

The Chinese coffee market is highly consolidated, with multinationals controlling the market. Nestlé was the first multinational to establish a coffee processing plant in China and its Nescafé brand is a long-running favourite in the Chinese instant coffee sector. Indeed, Nescafé has now become a generic name for coffee. In 2002, Nestlé accounted for 46% of retail value sales. Kraft trails Nestlé considerably, holding a 20% share in 2002.

Multinationals are fostering the development of the Chinese coffee-growing industry. Both Nestlé and Kraft use domestically grown coffee to supply the local market. Nestlé also sent technical staff to the Yunnan province to help growers produce beans to their own production standards.

The Chinese coffee market is expected to grow by 70% in total volume sales between 2003 and 2008 to reach 11,073 tonnes. Euromonitor research suggests that, within Asian countries, affluent consumers with a high degree of Western influence are more likely to accept a coffee culture.

Coffee consumption in Japan (1.4 kg per capita) and Singapore (1.9 kg per capita) is far higher than that in the UK (1.2 kg per capita). In the Greater China area, Hong Kong stood at 0.8 kg per capita, higher than the world's average at 0.7 kg. This is positive news for the Chinese coffee industry and coffee marketers are now working on persuading Chinese consumers to increase their coffee consumption significantly in the next two decades.

Concerted efforts have been made to promote coffee consumption within China. In 2001, the International Coffee Organisation organised coffee festivals in both Beijing and Shanghai. Some coffee marketers believe they can eventually persuade every Chinese citizen to drink a cup of coffee a year. If they succeed, this would translate into substantial market demand for coffee, thus benefiting local and international coffee manufacturers.

Despite the potential of a 1.3 billion population base, coffee marketers are wary of the difficulty in transforming a tea-drinking nation into a coffee-drinking nation. Tea is the Chinese national drink and will continue to be an integral part of Chinese daily life in the next two or three decades. Further to this, tea is seen as a drink, which has health benefits, while coffee is marketed as no more than a lifestyle drink. The price of coffee is still out of reach for the average Chinese consumer, while tea is a cheap indigenous product. Most Chinese consumers still have little or no knowledge about coffee. Therefore, despite the recent growth, the transformation hoped for by coffee marketers will not be easy.


Sectors: Water

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