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Three key trends stirring up China’s coffee market

Things change very fast in China and for the country’s CNY 110 billion coffee market, it is no different. Yesterday, global names like Starbucks and Costa Coffee were the talk of town. Today, it is local-brewed names such as Coffee Box and Luckin Coffee that are ringing up the cash registers.

It is not just the presence of homegrown stores that are making all the noise, it is also about the shifting consumer sentiments and the increased adoption of technology that are transforming the industry or what the industry is calling the “fourth wave of coffee”.

You would think that it would take a rather mammoth feat to unsettled Starbucks and its over 3,300 stores across the country. Yet this is what several local coffee establishments are doing right now and the American icon is rattled. Apparently in some Starbucks cafes in Beijing, patrons were handed questionnaires to gauge how they compared against Luckin Coffee.

 

It is not like these established names are lying on their laurels as Starbucks continues to open new stores to cater for the growing number of coffee drinkers in China – they are said to be opening another 3,000 new stores over the next five years.

 

In fact, Starbucks has just teamed up with Alibaba to launch delivery services in Beijing and Shanghai this September. Starbucks’ drinks will be available for order on Ele.me and “delivery kitchens” in Alibaba's Hema grocery stores will brew and deliver those orders.

 

But rather that these local competitors are opening new stores faster than the rest of the field. Take Luckin Coffee for example, the Beijing start-up opened 525 outlets across major cities in China in the short nine months since its launch. Today, the business is valued at a cool USD 1 billion. In comparison, Costa Coffee took 12 years to open 400 stores in the country.

 

Another example is Coffee Box. It is already a popular brand since starting business in 2016 and operates a clever mix of online retail and social media messaging tools to serve its growing market segment. With over 150 coffee stations in Beijing, Shanghai and Guangzhou, the company promises delivery within 30 minutes.

How have these unknown brands magically appeared overnight to shock the big boys? Thanks to technology and plenty of digital savviness. The new players are relying on mobile applications, digital payments and leveraging on data analytics to boost their sales and marketing activities.

 

Many are combining e-commerce platforms with bricks and mortar stores. You can order your coffee online while you’re getting ready to go to work. You can choose to either have the drink delivered to your home within 30 minutes or easily pick it up on the way to the office at the nearest store along the way. All these add up to further convenience for the rapidly growing young middle-class segment with increasing spending power but lacking the time to queue up in a shop.

As coffee consumption grows across China, the demand for commercial and office coffee-making machines are also on the rise. According to Daxue Consulting, China’s coffee machine industry was worth CNY 616 million in 2017 with the bulk coming from commercial businesses.

 

The demand by consumers for higher quality service, more consistent products and faster production at the stores have pushed coffee makers to upgrade their coffee-making equipment to more advanced and tech-driven ones to meet these demands.

 

One company that is tapping on this growing segment is Eversys. Its coffee-making machines are all internet connected, use sensors to provide artificial intelligence in coffee brewing and maximize data analytics to constantly improve the production and quality of coffee to consumers.

 

To cope with the fast-paced food and beverage market, these advanced super automatic coffee/espresso makers feed real-time operational data vital to help operators manage the daily operations, monitor the amount of ingredients used, keep the consistency of production time for each extraction and monitor maintenance requirements, which helps to reduce operational downtime.

Although these fast-growing coffee brands are young and tech-inclined, they rely on old school marketing tools to garner “likes” for their products including using celebrity endorsement and cheaper prices. Much like the Chinese mobile phone makers, these coffee operators are using local celebrities like Zhang Zhen and Tang Wei as ambassadors for their products.

 

They are also giving the old boys a major headache by selling their coffee cheaper, having more creative promotions and making it more customized to the local taste bud. Last year, Coffee Box introduced more than 30 different kinds of coffee selections including popular choices like Bullet Proof and Pink Coconut Water.

 

Another increasing competition for the market is coming from independent, boutique cafes serving specialty coffee. As Chinese consumers, especially from the younger generation, seek out higher quality and more sophisticated beverages, these lifestyle-based cafes are swiftly coming into the fold.

About the author

Christian Haueter is General Manager of the Business Line Hospitality Technology in China. He brings a background of Strategy and Technology Management which he studied in HSG in Switzerland, NUS in Singapore and Stanford University in the U.S as well as several years of experience in doing business in Asia. Today his technological expertise focuses around innovative products and applications related to the fast growing food and beverage industry in China.