China’s Cof­fee Mar­ket Be­ing “Stirred Up” by the In­ter­net

China's Foreign Trade (English) - - Industrial Watch - By Lily Wang

While the in­ter­na­tional cof­fee gi­ant Star­bucks is re­lated to its soar­ing share in China’s mar­ket, do­mes­tic cof­fee brands have also sprung up with floods of cap­i­tal, and in­clude new busi­ness mod­els, such as In­ter­net cof­fee, bou­tique cof­fee and con­ve­nience store cof­fee.

It is pre­dicted that by 2021 the vol­ume of China’s cof­fee mar­ket will reach RMB 22 bil­lion. De­spite the fast over­all growth of the mar­ket, drink­ing cof­fee has not yet gained enough pop­u­lar­ity among the Chi­nese peo­ple. A set of widely quoted data shows the great po­ten­tial of cof­fee in this coun­try: an av­er­age Chi­nese per­son drinks five to six cups of cof­fee on av­er­age per year, which is rather low com­pared with 200 cups in Ja­pan and 140 cups in Ko­rea.

In­creas­ingly fierce com­pe­ti­tion

In 2017, Star­bucks spent USD 1.3 bil­lion to pur­chase the fran­chise rights of all of its stores in main­land China and an­nounced its plan to have 5,000 chain stores open in China by 2021. This would mean that on av­er­age 1.33 new Star­bucks would open­ev­ery day. The stakes are high for this cof­fee com­pany in the face of the ris­ing mid­dle class and ex­pand­ing ur­ban­iza­tion of China’s mar­ket. How­ever, it has faced chal­lenges from the in­creas­ing num­ber of Chi­nese fine cof­fee and niche cof­fee brands.

Firstly, a new cof­fee re­tailer Luckin Cof­fee quickly at­tracted at­ten­tion with“Mas­ter Prod­ucts” as a sell­ing point and gift-buy­ing ac­tiv­i­ties as an at­trac­tion. An­other new cor­po­ra­tion, Cof­fee Box, grew rapidly un­der cap­i­tal pa­tron­age, and con­ve­nience stores in­clud­ing Fam­ily Mart and 7-11 have all launched their own cof­fee brands, win­ning over their share of reg­u­lar cus­tomers with their ad­van­ta­geous prices.

Cap­i­tal has also be­gun to join the com­pe­ti­tion for China’s grow­ing cof­fee mar­ket. Ac­cord­ing to in­com­plete sta­tis­tics, 18 fi­nanc­ing deals took place in China’s cof­fee in­dus­try last year, mostly con­cen­trat­ing on take­out brands, bou­tique chain brands and take-out chain brands.

Mean­while, the global cof­fee in­dus­try is be­com­ing more in­te­grated. Nestlé and Star­bucks, once re­garded as ri­vals by one an­other, have de­clared that they will form a global cof­fee al­liance. Nestlé willac­quire Star­bucks’ re­tail and cater­ing busi­ness for USD 7.15 bil­lion and have per­ma­nent rights to sell Star­bucks prod­ucts all over the world, ex­cept for in cof­fee shops.

“China is un­der­go­ing rapid changes. We have probed deeper in­to­var­i­ous Chi­nese cities and re­gionsby ac­cord­ingly pro­vid­ing dif­fer­ent prod­ucts, as well as new on­line and off­line forms,” stated a rep­re­sen­ta­tive, in­di­cat­ing that Nes­tle’s mar­ket­ing strat­egy in China is to dif­fer­en­ti­ate its sched­ules in line with dif­fer­ent lo­ca­tions, so to spur fu­ture growth.

Com­pe­ti­tion is highly stiff in this in­dus­try. Apart from tra­di­tional chain re­tail shops like Star­bucks and Costa, freshly brewed cof­fee is also pro­vided by Mcdon­ald’s and KFC. As far as in­sid­ers in the in­dus­try are con­cerned, ev­ery com­pany is es­sen­tially re­garded as be­ing ho­mo­ge­neous com­pe­ti­tion.

Ly­ing be­hind the mass com­pe­ti­tion is the strong im­pe­tus of the cof­fee mar­ket which has been brought about by the up­grade in China’s con­sump­tion. Ac­cord­ing to data from the China In­dus­try In­for­ma­tion Net­work, the an­nual ex­pan­sion rate of China’s cof­fee mar­ket has re­mained over 25%, more than 10 times of the world av­er­age, thanks to its small base scale.

New re­tail sub­vert­ing tra­di­tional sales model

Lu Zhen­wang, an e- com­merce an­a­lyst, thinks that it is pos­si­ble that the cof­fee in­dus­try may be sub­verted by the “new re­tail” sales model, which adopts ad­vanced tech­no­log­i­cal ideas to make up for de­fi­cien­cies inthe tra­di­tional busi­ness model.

Com­pared with tra­di­tional cof­fee chain brands, In­ter­net cof­fee

is more in­clined to meet the de­liv­ery needs of white- col­lar work­ers and younger gen­er­a­tions con­sid­er­ing its great con­ve­nience and tar­get con­sumer sce­nar­ios. Fur­ther­more, many do­mes­tic cof­fee brands are now fo­cus­ing on­pro­vid­ing “de­liv­ery ser­vices”.

Luckin Cof­fee po­si­tions it­self as a “pro­fes­sional cof­fee op­er­a­tor in new re­tail”, and has quickly ad­justed its strat­egy to present a dif­fer­en­ti­ated store lay­out af­ter en­ter­ing the con­sumer sce­nario of white-col­lar of­fices. The “O2o+cof­fee+new re­tail” model shows that Luckin Cof­fee com­bines the hottest en­tre­pre­neur­ial con­cepts at present. To some peo­ple, it is a typ­i­cal In­ter­net model and has de­vel­oped through el­e­vat­ing the num­ber of con­sumers at an in­creas­ingly high speed, by us­ing the snow­ball ef­fect, thereby rapidly per­form­ing a round of fi­nanc­ing.

Con­ve­nience stores are also deal­ing with high stakes in the cof­fee take­out mar­ket. Fam­ily Mart’s own cof­fee brand, Par Cafe, are mak­ing ef­forts to ex­pand its de­liv­ery chan­nels. “Fam­ily Mart has been in co­op­er­a­tion with ele.me, waimai.meituan.com and dao­jia.jd.com, the three ma­jor food de­liv­ery plat­forms in China, since the be­gin­ning of this year. Par Cafe has found its way into the de­liv­ery seg­ment of af­ter­noon tea as an in­de­pen­dent brand and has been fur­ther pro­moted through take­away ser­vices,” Wang Yi­wen, a Fam­ily Mart rep­re­sen­ta­tive said.

Star­bucks, which once ex­pressed con­cern about the taste of take- out cof­fee, has be­gun to read­just its strat­egy in re­sponse to the new changes tak­ing place in China’s mar­ket. At its 2017 per­for­mance brief­ing con­fer­ence, Wang Jingke, CEO of Star­bucks China, said that they will soon be start­ing up their take-out busi­ness in China.

In essence, the take-away busi­ness in the mo­bile In­ter­net era has brought about a plat­form for in­for­ma­tion ex­change and on­line pay­ment, and the core of this is the seam­less con­nec­tion be­tween on­line ex­pe­ri­ence and off­line sup­ply chain. Cater­ing to the needs of con­sumers, de­liv­ery ser­vices not only help avoid con­fronta­tion and over­lap­ping prod­ucts and ser­vices with tra­di­tional cof­fee shops, but also re­duce pres­sure in terms of spa­ces to rents and store man­power. For de­liv­ery ser­vices, only a small room for pro­duc­tion and pack­ag­ing and a group of de­liv­ery­men are needed, thus fur­ther push­ing down the ra­tio be­tween cost and profit.

Al­though the new busi­ness model has gath­ered a large num­ber of cof­fee fans in the short term, Lu Zhen­wang holds that for long- term vigor and pros­per­ity, as well as sus­tain­able de­vel­op­ment, the new­com­ers must im­prove their ser­vice ca­pa­bil­i­ties, en­hance the af­fec­tion and loy­alty of their reg­u­lar cus­tomers, and most im­por­tantly, must al­ways guar­an­tee the qual­ity of their cof­fee.

While In­ter­net cof­fee is on the rise and has trig­gered a great deal of com­pe­ti­tion with tra­di­tional cof­fee chain brands, Zhao Jingqiao, Ex­ec­u­tive Direc­tor of the Re­search In­sti­tute of Ser­vice Econ­omy and Cater­ing In­dus­try at the In­sti­tute of Fi­nance and Eco­nom­ics of the Chi­nese Academy of So­cial Sciences, be­lieves that the new cof­fee mar­ket­ing meth­ods will in­deed have an im­pact on tra­di­tional brands, but will re­main un­able to shake the roots of the in­dus­try. “Cof­fee brands like Star­bucks may have ad­van­tages over newly emerg­ing ones such as Luckin Cof­fee in terms of cus­tomer ex­pe­ri­ence in so­cial net­work­ing and con­sum­ing sce­nar­ios, de­spite the lat­ter be­ing more cut­ting- edge than Star­bucks and Costa in de­vel­op­ing and ex­plor­ing new mar­kets.”

Zhao also stated that with the di­ver­si­fi­ca­tion of con­sump­tion across the en­tire mar­ket, there are go­ing to be more mar­ket sub- branches in the fu­ture, in­clud­ing self-help cof­fee and on­line cof­fee de­liv­ery. With the grad­ual ex­pan­sion of the mar­ket, so­cial re­quire­ments of the con­sum­ing sce­nar­ios will grow larger as well.

The key is to foster com­pet­i­tive­ness

There is a say­ing that among ten av­er­age cof­fee shops, six are bound to go bank­rupt, three end up with nei­ther a gain nor a loss, and only one has the chance to sur­vive and make a profit. Sur­veys by Ka­men and Meituan show that there were about 100,000 cafe stores in main­land China in 2016, and more than 14,000 of them were shut down in the same year, ac­count­ing for 14% of the to­tal.

Many ex­pe­ri­enced prac­ti­tion­ers in the in­dus­try have con­cluded that 6070% of the cof­fee shops re­ly­ing merely on cof­fee sales go bank­rupt in their first year. For­eign chain brands are also in­cluded in these sta­tis­tics, rep­re­sented by the great loss of Korean cof­fee brands. Along with the high ac­cep­tance and ado­ra­tion of Korean pop cul­ture in China, a host of Korean brands, such as Caffe Bene, Hollys Cof­fee, Maan Cof­fee, Zoo Cof­fee, Mango Six and Two­some Cof­fee, swarmed into China around 2012, and at­tempted to take a share of China’s cof­fee mar­ket through co­op­er­a­tion with Chi­nese en­ter­prises and mass ex­pan­sion. How­ever, in the blink of an eye, most of them have van­ished from China.

The ma­jor is­sue in start­ing a cof­fee busi­ness is to es­tab­lish its own strengths and com­pet­i­tive­ness.

Some hold the opin­ion that there is ba­si­cally no thresh­old in the con­sumer goods in­dus­try, while ex­perts be­lieve that en­ter­prises in the con­sumer goods in­dus­try can never stand out among their com­peti­tors if they fail to con­struct a “moat” for self-pro­tec­tion. Specif­i­cally speak­ing, the core com­pet­i­tive­ness of con­sumer goods lies in the brand ef­fect, scale econ­omy, net­work ef­fects and user mi­gra­tion costs.

As for the cof­fee in­dus­try, brands are the core com­pet­i­tive­ness. The scale of busi­ness and cap­i­tal are im­por­tant fac­tors, but are not as im­por­tant as the brands. When viewed in terms of the new re­tail for­mats that are cur­rently trendy in the mar­ket, the fun­da­men­tal rea­son for their pop­u­lar­ity is that much time and ef­fort has been spent on mar­ket­ing and brand­ing. For ex­am­ple, Cof­fee Box has ac­cu­mu­lated a large num­ber of users by means of de­liv­er­ing Star­bucks cof­fee, and Luckin Cof­fee has fre­quently aimed at gain­ing ex­po­sure by us­ing celebrity en­dorse­ments and ad­ver­tis­ing boards on build­ings.

In the end, a new busi­ness can never be car­ried out us­ing ex­actly the same steps and de­tails as be­fore, nor will op­por­tu­ni­ties be found through top-down anal­y­sis. Af­ter all, “meet­ing the needs of the ever- chang­ing new con­sumer groups” is the only valu­able start­ing point.

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