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