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Mainland Predicted to be World's Largest Coffee Market within 10 Years

Cafe Show China doubles in size year-on-year as mainland office workers embrace coffee culture, sending sales stratospheric, with new outlets opening all the time, the country is on course to eclipse the drink's traditional markets.

Photo: Coffee: Percolating into China’s corporate culture with a vengeance.
Coffee: Percolating into China's corporate culture with a vengeance.
Photo: Coffee: Percolating into China’s corporate culture with a vengeance.
Coffee: Percolating into China's corporate culture with a vengeance.

Increased exhibitor interest from around the world saw this year's Cafe Show China come in at twice the size of its 2013 predecessor. In line with this, attendees said they were hugely optimistic about prospects for the China coffee market.

Appraising the current state of the sector, Bai Fang, Secretary-general of the China Coffee Association Beijing, said the market could be roughly characterised as having developed in four stages since the opening up process began in 1978. Initially, he said, coffee was largely only found in the country's foreign-owned hotels, with the local market being practically non-existent.

Photo: Coffee makers: Must-have machinery.
Coffee makers: Must-have machinery.
Photo: Coffee makers: Must-have machinery.
Coffee makers: Must-have machinery.

The appearance of instant coffee in mainland Chinese supermarkets then marked the second stage of development. Taiwan's Ming Tian Coffee and Ueshima Coffee Lounge made their first forays onto the mainland as part of the third stage of development. Finally, there was an explosion of coffee shop openings, led by a number of international brands (notably Starbucks), at which point a nation of coffee lovers began to emerge.

According to Bai, coffee is now fairly popular among the general populace and no longer as prohibitively expensive as once it was. The online shopping boom has also helped provide inexpensive beans and powder for households. Making a cup of coffee at home is now seen as an enjoyable experience for many city dwellers. Coffee is also now served in cake shops, bars and even Chinese restaurants, with the drink also proving highly popular among office workers.

Vast potential

The fourth – and most recent – stage of development has been characterised by brisk coffee sales and a practically insatiable demand for specialty coffee, factors that are driving the rapid development of the mainland market.

Photo: The office coffee ritual.
The office coffee ritual.
Photo: The office coffee ritual.
The office coffee ritual.

Yunnan is China's leading coffee production province, with a growing area of 120,000 hectares, up 50% over 2011 and 300% more than in 2008. In 2012, the annual output of raw coffee beans reached 96,100 tonnes, while the import of coffee beans rose to nearly 10,000 tonnes. It had previously been around 2,000-3,000 tonnes.

Over the last five years, the number of teahouses in China increased by just 4%, while the number of coffee shops shot up from just over 10,000 to more than 30,000. A survey by Euromonitor International indicates that China's annual consumption of coffee is now worth around Rmb70 billion – still far behind the Rmb2-3 trillion of mature markets. Industry experts, however, predict that, within 10 years, China will be the largest coffee market in the world.

Assessing the potential for future growth, Wang I-sung, a Taiwan vendor of coffee equipment, said: "Currently, annual coffee consumption per capita in China is just five cups, lagging far behind Southeast Asian countries, where the average per capita consumption is 100 cups. The Japanese and Koreans drink 160 cups, Europeans 200 cups, and North Americans 250 cups. Given the staggering rate of growth in the China coffee market, though, the scope for future expansion is vast."

Wu Jiahang, Head of the National Federation of Coffee Growers of Colombia in China, has been promoting his country's coffee in on the mainland since 2000. He describes the market as a "sunrise industry", one certain to be propelled by the country's huge population and rising income.

From first- to third-tier

Faced with this vast potential business opportunity, what advantages do industry players from Hong Kong and Macau have? As these sites have traditionally had far more exposure to Western culture, their coffee markets are more mature than their mainland counterparts. In terms of hardware, the gap between the mainland and Hong Kong and Macau is narrow, but in terms of service, operation and capital, Hong Kong and Macau players possess distinct advantages.

Among industry insiders, there is a belief that local coffee growing will drive the industry. As previously mentioned, Yunnan is China's main coffee producer, accounting for 98% of the national total. In recent years, a number of global coffee giants, such as Nescafé, Starbucks and Kraft Foods, have increasingly focused on coffee bean production in the province as part of a bid to secure a steady supply of good quality, raw coffee beans.

Photo: Educating palates.
Educating palates.
Photo: Educating palates.
Educating palates.
Photo: On the rise: Coffee cafes.
On the rise: Coffee cafes.
Photo: On the rise: Coffee cafes.
On the rise: Coffee cafes.

Under Yunnan's 12th Five-Year Plan (2011-2015), coffee is a key strategic industry, with its output of coffee beans expected to grow more than fivefold, reaching 200,000 tonnes by 2015. At present, Yunnan requires an investment of about Rmb100 billion a year to maintain this growth. In light of this, it is seeking international partners to boost its development.

In recent years, the development of mainland coffee shops has been stunning and has proved an area where foreign brands and organisations have made significant inroads. Over the past two years, Korean coffee shops have also become popular, largely on account of their relaxed and natural environment. Maan Coffee, founded in 2011, and Korea-based Caffé Bene – which launched on the mainland in 2012 – are both expanding rapidly.

During the course of the Cafe Show, large crowds of visitors gathered by the Caffé Bene booth, all keen to enquire about franchise possibilities. One company representative commented that a standard shop of 240 sqm would command a franchise fee of around Rmb2.7 million.

Photo: Overseas exhibitors at the Cafe Show.
Overseas exhibitors at the Cafe Show.
Photo: Overseas exhibitors at the Cafe Show.
Overseas exhibitors at the Cafe Show.

According to "Dou Shu" (Uncle Bean), a Beijing coffee dealer, opening a 50-100 sqm, independent coffee shop in a first-tier city would cost about Rmb500,000 (excluding rent), while operating costs would be about another Rmb500,000. He emphasised that establishing a coffee shop required careful consideration, while the returns were not "too high or too fast".

This is down to a number of factors. Firstly, China's tea culture has traditionally had the upper hand, with the number of people drinking coffee in the morning still relatively small. Secondly, it's mostly young consumers who patronise coffee shops, usually in the late afternoon onwards. Thirdly, they go largely for the ambience, not wishing to drink too much in case the caffeine affects their sleep quality. Fourthly, customers tend to spend a long time in the shop and turnover is low. Finally, as rental costs have risen dramatically in recent years, there is a huge pressure on the coffee shop owner's bottom line.

Even so, given changing coffee drinking habits, the market is bound to grow. The prospects, therefore, are fairly good for a coffee shop start-up, with many entrepreneurs in particular, taking the plunge. Overall, it is believed that second- and third-tier mainland cities still have considerable room for expansion. Starbucks, for instance, has plans to 1,500 additional mainland outlets in 2015, many of them situated in the lower tier cities.

Grinding out a profit

According to many of the coffee equipment traders at the show, said annual growth on the mainland was 30% or more. Yang, a Taiwanese businessman, who registered his machine and equipment company in Hong Kong 20 years ago, believes it was Starbucks arrival on the mainland that has spurred the growth of the market. Over the last 20 years, his company has grown from 10 to 200 employees, while its turnover has increased 1,000%.

Wang believes that his coffee equipment is not only being used in mainland coffee shops, but is now also being purchased for home and office use. He says, large espresso machines and coffee making accessories are now widely in demand, with the latter proving particularly popular.

Photo: Espresso, China’s favourite coffee.
Espresso, China's favourite coffee.
Photo: Espresso, China’s favourite coffee.
Espresso, China's favourite coffee.
Photo: Coffee careers: Barista training.
Coffee careers: Barista training.
Photo: Coffee careers: Barista training.
Coffee careers: Barista training.

One prospective entrant to the sector is Zhang Xuhong, who intends to open a coffee products company. She plans to act as an agent for premium coffee equipment makers, providing coffee beans and coffee powder, while also targetting corporate clients, offices and office workers. Three years ago, a coffee company's sales to offices typically accounted for just 15% of its total. Today, it is more like 60%. In effect, office workers are driving the market, with having a coffee machine and coffee beans in the office now very much part of corporate culture.

Zhang believes the investment required is not too onerous, with most of it going towards office rental and staff costs. She estimates that she will need start-up capital of around Rmb300,000-Rmb500,000. Currently, she plans to source relatively cheap products from upstream suppliers and sell at a mark-up of about 30%-40%. At the same time, she plans to open an online shop to capitalise on consumer demand.

As a side issue, it is worth noting the mainland coffee industry has generated a significant training and education market. As well as training baristas and service providers, considerable effort is being applied to educating potential customers and developing the palate of coffee consumers, ensuring they are more sophisticated in their choices of products.

Xue Yuan, Special Correspondent, Beijing

Content provided by Picture: HKTDC Research
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