May 01, 2019

Coffee with Chinese Characteristics

Dan Bolton

Dan Bolton
President/Mystic Media Consulting

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Experiencing coffee is fundamentally sensory but involves far more than taste. The interaction of the senses is ongoing, a pleasurable learning opportunity shaped by settings and feelings that uniquely define a local coffee culture.

China is discovering coffee at a pace and level of sophistication equal to Japan and South Korea but distinct.

In this article STiR coffee and tea explores coffee with Chinese characteristics.

“There is a great divide in China when it comes to preferences in drinking coffee,” observes Eric Baden, founder and c.e.o. of Coffee Commune, in Shanghai. “On one side there are the believers in the plain vanilla (not vanilla flavored!) americano and latte varieties. Each day, they flock by the millions to Starbucks, KFC, and McDonald’s, and more recently order by app for fast delivery from Luckin Coffee,” says Baden. “This group is content stepping up from 3-in-one instant coffee and sees no point in exploring the many-faceted world of origins, varietals, and brewing methods,” he explains.

“Then there are the worshippers of the coffee-lover lifestyle. They are a fast-growing minority who stop at nothing to expand their coffee horizon,” said Baden, a German ex-patriot who has lived in China the past 20 years.

These young professionals “hold down well-paid jobs in the CBD’s [central business district] of major cities and have no intention of changing their career track— yet, they attend classes that turn them into certified baristas, roasters and Q-arabica graders,” he says, admiringly. “They won’t enter your store unless they spot a Strada, Racer, Spirit, or Black Eagle on the counter and they don’t waste time studying the menu. They will ask which SOE [single origin expresso] is on the second grinder today and expect the barista to describe how it develops from first sip to aftertaste,” says Baden. These coffee connoisseurs then “debate the acidity and balance of the pour-over you made for them as it relates to the brewing parameters. They might even suggest a different roast profile the next time around.”

 

Taste preferences

 

Joy Chen, a burly Yunnan-based specialty coffee roaster at ManLao River Coffee, says, “We find that the characteristics that Chinese lean towards are clean, balanced, and floral with a solid aftertaste. Having said that though, it is not a hard preference.”

“With the coffee industry in its youth here, there is a huge amount of experimentation going on with people mixing up what they buy in terms of origin and style,” he observes. ManLao River started in 1997 when 3,000 farmers were moved from their depleted land to grow coffee on 10,000-hectares of rainforest as part of a poverty-alleviation program.

“We probably see this behavior more than the larger more commercial roasters as our consumers, who have decided to take the plunge into high-end specialty coffee, have typically taken the initiative to explore the wide world of coffee already,” Chen explains.

“Coffee drinkers older than 40 years order the house-blend coffee or the dark roast with the lowest acidity,” says Jenny Tong, c.e.o. at SP Specialty Coffee in Guangzhou, adding, “they love the strong, nutty, and sweet coffee but not coffee with acidity.”

Phil Peng, senior barista at Coffee Commune in Shanghai, confirms that “mostly sweeter, fruity, and floral notes are preferred over the brightness of high acidity. Strawberry, blueberry, lychee are big favorites,” he says. “Personally, I love Ethiopia Yirgacheffe. My favorite way to brew coffee is pour-over, it smells so floral and sweet when it goes into my mouth, the citrus feeling refreshes me, neither too sour nor too bitter,” says Peng.

Coffee Commune is a seed-to-cup coffee company in Yunnan, Shanghai and Munich, Germany.

 

Brewing methods

 

“Many specialty shops take a tea-like approach to coffee,” reports David Lemieux, a barista-in-residence from Portland, Ore. now working in Shanghai.

“The taste of pour-over coffee is usually lighter in mouth-feel than a westerner’s approach, yet has a wonderful sweetness to it,” says Lemieux, who previously worked at Insomnia Coffee.

“Most of the specialty coffee baristas love to use the [Hario] V60 to brew their coffee,” says Tong. “They are skilled at adjusting water temperature, the brewing ratio and grind according to their knowledge about the different coffees and their consumers’ preferences,” she said.

 “In terms of brewing method, we find that our blends roasted for espresso drinks represent the largest percentage of overall sales, but once we look at our single-origin pour-overs, lighter roasts are where our customer’s preferences seem to rest,” says ManLao River’s Chen.

Tong notes that shops pull a lot of shots. “Lady coffee drinkers and new coffee drinkers love to try coffee but don’t like the bitterness. They prefer to drink lattes or cappuccino. Thus, milk coffee is the very popular coffee in the Chinese market now,” she said.

The most popular single origins are from Panama, Ethiopia, Kenya, and Guatemala, according to Tong.

 

Coffee market

 

Lucy Jingya Fu, standing vice chairperson and secretary general of the China Coffee Association (CCA) has witnessed remarkable growth in the past decade. “China’s retail market is surging,” she told attendees at The European Congress on the Chinese Coffee Market in Hamburg, Germany in November 2018.

In 2007 there were 15,906 coffee shops in China, according to the Zhongshang Industrial Institute (askci.com). There are now more than 140,000 coffee shops in China where 90,000 operate as small independents.

Demand far exceeds supply due to steadily increasing domestic consumption, explains Fu. “China’s coffee consumption approached 250,000 metric tons in 2018, with an output of only 126,000 tons, creating a gap of 120,900 tons, nearly 50% below consumption,” says Fu.

“The gap will be increasing continuously for many years – coffee plantations won’t grow unlimitedly,” she says.

China is now one of the world’s 15 largest arabica producers and currently consumes more coffee than Australia. In 2017 China imported 2.1 million 60-kilo bags of coffee, by 2020 that quantity is expected to grow to 4,585,000 bags, according to Pintu Business Review (pintu360.com).

Urban Chinese households earning $16,000-$34,000 annually are expected to number 51 million by 2020. Affluent households [earning $34,000+] are projected to number six million. In 2010 only 6 million households were considered mainstream middle class and fewer than 2 million households were affluent.

“By 2022, our research suggests, more than 75 percent of China’s urban consumers will earn 60,000 to 229,000 renminbi ($9,000-$34,000) a year. In purchasing-power-parity terms, that range is between the average income of Brazil and Italy. Just 4 percent of urban Chinese households were within it in 2000—but 68 percent were in 2012,” according to the McKinsey Quarterly article, “Mapping China’s Middle Class.”

 The compound annual growth rate has slowed of late, but lower middle-class households transitioning to mainstream, and mainstream households transitioning to affluence continue to grow in double digits, according to Mackenzie & Co. consultants.

In 2015 sales of coffee in China accounted for only 0.5% of the global market, by value. Gross domestic product (GDP) will exceed $15 trillion and there will be 600 million members of the middle-class by 2021, double that of America. Guosen Securities projects $43 billion in sales by 2020 reflecting a compound growth rate of 15%.

The market could “breakthrough” RMB1 trillion ($145 billion) by 2025, according to Fu’s presentation on behalf of CCA, a national organization responsible for promoting coffee consumption.

 

Cultural evolution

 

As to specialty, the niche is growing beyond aspirational to affordable as incomes rise. Lattes still cost an average $4.35 and mochas $4.75.

A consumer survey of 6,765 coffee drinkers in 2018 by Coffee Salon found that 53% are female and 47% male. The most likely coffee drinkers are ages 26-35 (46%) followed by those 19-25 (33%). Consumption tapers to 18% of those 36-50 years. Cohorts under 18 and over 50 years of age each account for less than 2%.

ManLao River’s Joy Chen says that “for many people in China coffee is all about the experience and the feeling more than a particular taste. Knowing that you are drinking a Yunnan coffee from the foothills of the Himalayas or a Columbian from far off Latin America allows people’s minds to travel around, tasting the flavors of the world,” he said.

“It is viewed much like taking a short holiday. Consumers want to drink something that inspires, enjoying the experience of sampling different destinations as much as they long for the comfort of an old personal favorite,” he says. Per capita consumption is tiny–only half a cup a year–compared to 369 cups per person in the US. Europeans buy an average of 5 kilos of coffee a year. In Finland, coffee drinkers purchase 9.6 kilos per year and drink every drop. Canadians purchase 6.2 kilos annually, Japanese about 2 kilos, enough to brew 207 cups.

In China, instant coffee accounts for 72% of the 100 billion RMB ($15 billion) in domestic market sales, according to Mintel International. Freshly ground coffee holds an 18% share and ready-to-drink accounts for 10% of sales. In 2014 Japanese coffee drinkers averaged 11.13 cups per week of which 4.54 was instant with 3.63 cups brewed from ground beans and 2.95 cups RTD. In China, sales of RTD coffee and tea already exceed $11.7 billion a year.

Lattes, mochas, caramel macchiato, and cappuccinos are the most popular espresso drinks in China. Frappuccino tops the list of RTDs, according to the Soo Too Institute. Soo Too’s consumer survey indicated 56% of Chinese coffee drinkers add milk and sugar while 27% prefer black coffee, with 17% of those responding saying they had no preference.

Joy Chen, a Yunnan-based specialty coffee roaster at ManLao River Coffee

 

Delivery is the differentiator

 

America has coffee drive-thrus. Japan is blanketed with vending machines. In China delivery will differentiate the specialty segment. Cashless transactions and tiny storefronts strategically positioned to guarantee quick delivery, make it practical for Chinese specialty retailer Luckin Coffee to present steaming-hot brew to thousands of customers within 2 kilometers of its walk-ins. Their machine setup is similar to Starbucks but even if you walk up to the counter to order, selections are made online and payment is by app. Some people pick up their coffee at Luckin but typically it is delivered to their office or home. There are no seats, sweets, or table service. Luckin has staked out 4,500 of these locations and will build 2,000 in 2019.

“Delivery is mainstream here. Everything is delivered. There are battalions of blue, yellow, and orange electric bikes that buzz around 24/7 picking up food, beverages, sports shoes, designer bags, stationery and bring it to customer’s doorsteps,” says Baden.

“But Luckin is taking it to the next level by having the brew stations dotted around in proximity to major consumer clusters so they can deliver extremely fast. They also do it themselves, not through a third party service,” he said.

“Starbucks [with 58.6% retail market share] has for decades defined the rules of the offline coffee chain,” observes CCA’s Lucy Fu. The chain’s Italian-inspired American concept of a “third place” paved the way for McCafe (6.1% share) and Costa Coffee (3.8% share). Independent shops and regional chains followed but Starbucks’ rapid expansion was largely unchallenged. The global mermaid remains a multi-billion dollar behemoth in China’s $4.72 billion retail segment with 3,700 locations in 158 cities and a five-year plan to operate 6,000 locations in 230 Chinese cities by 2022. There is plenty of room for growth. Market penetration remains well below the 41 stores per million inhabitants in the US and 38.8 stores per million residents in Canada.

“We continue to mindfully evolve a coffee culture in China where the reward will be healthy, long-term, profitable growth for decades to come,” Starbucks c.e.o. Kevin Johnson told Chinese investors. “No Western company or brand is better positioned to serve China’s expanding middle class,” he said.

Nestle will begin marketing Starbucks coffee in stores and distribution partner Tingyi will place Starbucks and Teavana RTD in 400 cities at 125,000 outlets.

During the last three months of 2018  comparable sales in China, Starbucks’ fastest growing market, were up 1% despite Luckin. The average order (ticket) increased by 3%. Chinese stores were the biggest contributors to the company’s 45% increase in revenue in Asia but the total number of transactions in China actually fell 2%. This is likely due to the fact that Luckin has located 1,100 of its stores within a quarter mile of Starbucks.

Luckin collects a lot of consumer data from its customers with two-for-one incentives, personalized promotions, and less expensive coffee.

“Their strategy is to grow the customer base as fast as they can and by understanding the consumer better than all competitors optimize their offering [product mix and convenience] to drain business away from Starbucks and other chains,” says Baden.

Starbucks is piloting delivery in a deal with Alibaba that relies on Taobao and TMall to challenge Luckin, which is aligned with WeChat, for market dominance. Starbucks is also partnering with Alibaba’s Hema supermarkets where delivery is available at more than 2,000 stores. Analysts are right when they say China presents a huge opportunity in coffee, but the competition is getting fierce.

In China, delivery will determine the outcome.

Comments? You can contact me directly via my AdvisoryCloud profile.

Coffee with Chinese Characteristics was originally published on the STiR website on January 31, 2019.

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