Coffee -
China-Market Report
HEADLINES
- Coffee sees 9% growth in 2010, reaching total volume of
36,465 tonnes
- Drought damage in Yunnan province reduces domestic
coffee bean production in 2010
- Unit price increases 4% in current value terms by
Euromonitor data
- Nestlé (China) Ltd enjoys domination of China’s coffee
environment with 69% value share
- Coffee expected to see total volume CAGR of 8% over
forecast period
TRENDS
- Yunnan province is the largest coffee bean production
centre in China, accounting for around 98% of total coffee bean production
volume according to trade sources. However, Yunnan province was damaged by
a serious drought from the last quarter of 2009 to the first quarter of
2010. This considerably reduced coffee bean production volume in 2010.
According to Yunnan Coffee Association, total coffee production fell by
around 20% in 2010 over the previous year. However, trade sources indicate
that coffee consumption was not strongly affected, as the leading
manufacturers, such as Nestlé and Kraft, do not total rely on domestic
production, but also import a large volume of coffee beans. Consequently
the overall coffee environment did not see a shortage of supply or any
price hikes in 2010.
- Instant coffee grew less rapidly in 2010, while fresh
coffee grew faster. However, because of the larger volume size of instant
coffee, the overall coffee performance was slower. With the development of
specialist coffee shops in China, many Chinese coffee drinkers seek good
coffee scent and a pure taste. Many believe that instant coffee –
especially instant 3-in-1 coffee products – no longer meet their
requirements in terms of coffee quality. This slowed down instant coffee
environment growth, but spurred the performance of fresh coffee beans.
- Fresh coffee beans represented the most dynamic
category within coffee in 2010. The rising number of specialist coffee
shops strongly stimulated on-trade sales of fresh coffee beans. According
to Euromonitor consumer foodservice research, foodservice sales of
specialist coffee shops increased 15% over 2009-2010. Off-trade
consumption of fresh coffee beans was also increasing, along with consumer
demand for better tasting coffee.
- The average unit price of coffee increased 4% in
current terms in 2010, which made coffee the only category to see higher
than inflation price growth. The shortage in domestic production is one of
the reasons for the price rise. Although coffee manufacturers did not face
a shortage in raw coffee beans, they have to increasingly rely on imported
coffee bean volumes, which would add to cost increase and cause
manufacturers to revise their selling prices upwards slightly.
Premiumisation is another factor for the price rise. With people choosing
more premium coffee products than economic offerings, average unit price
will also increase as a result. However, due to intense competition
between the two major players, Nestlé and Kraft, unit price increases were
not too significant.
- Foodservice sales of coffee maintained faster growth
over retail sales in 2010. The rising number of coffee shops and western
fast food restaurants is boosting on-trade demand for coffee. For
instance, the leading global fast food brand, McDonald’s, started selling
its coffee brand McCafé in 2009. The company rapidly opened McCafé outlets
in China and promoted McCafé along with its breakfast meals, which
strongly pushed foodservice coffee sales. By contrast, retail sales growth
was slower due to a lack of consumer demand for instant coffee in
off-trade, and the low penetration of household coffee machines.
- The Internet is a booming off-trade distribution
channel for coffee. Although Internet retailing only accounted for under
1% of off-trade volume sales of coffee, it kept growing rapidly over the
review period. Consumers are not taking Internet retailing as a cheap
alternative to store-based channels, but seek premium imported brands that
are hardly available in supermarkets and hypermarkets, such as Lavazza and
Illycafé. With the rising number of B2C websites, Internet retailing will
become increasingly important for coffee sales in coming years, especially
premium fresh coffee.
- There are more coffee pods brands entering China while
volume sales of coffee pods remained negligible in 2010. The major coffee
pod brands are foreign, such as Illy, Lavazza and Nestlé. Nestlé
introduced its Nespresso brand in 2007, and launched a new flavour –
Kazaar – to fuel sales in 2010. Coffee pods are rising in popularity in
China because of the freshness. However, due to high pricing of specific
coffee pod machines, few people are able to afford such units.
Furthermore, foodservice sales of coffee generally use ground coffee or
coffee beans instead of coffee pods, also due to high pricing.
COMPETITIVE LANDSCAPE
- Nestlé (China) Ltd and Kraft Foods (China) Company
Limited dominate China’s coffee environment. However, due to high brand
awareness and the deep penetration of Nescafé, it held the lead in coffee
and its value share kept rising in 2010. Neither Nestlé or Kraft
implemented major actions to promote their coffee products. Nestlé simply
relied on its extended distribution network to spur sales growth.
- Multinational companies dominate the Chinese coffee
environment. Of the eight leading companies at the end of the review
period, six were multinationals and accounted over 85% of off-trade value
sales in coffee in 2010. Domestic companies still have no advantage in
coffee because of the traditional thinking that coffee does not originate
from China, and that Chinese manufacturers cannot make coffee. Although
some domestic coffee plants are trying to make their own brands of roasted
coffee, they can hardly compete with multinationals with a long history of
coffee production.
- New launches focused on different coffee bean varieties
instead of launching new flavours in 2010. Along with Chinese consumers’
better understanding of coffee, more people would prefer to take the
original flavour of coffee instead of adding different flavours, such as
vanilla, mocha, etc. Hence, manufacturers stopped trying to launch new
flavours, but launched coffee roasted by different bean varieties, such as
Arabica and Blue Mountain, catering to consumers’ increasingly
sophisticated tastes. For example, in early 2010 Nestlé launched a coffee
gift pack – Nescafé Premium Selection – with four coffee bean origins,
including Brazil, Columbia, Tanzania and Asian coffee beans mixes.
- Premium coffee products are developing rapidly, and
on-trade channels represent the major developing areas for premium
products. For example, premium coffee brand UCC, imported from Japan,
mainly develops Japanese restaurants and also supplies restaurants in
Shanghai Expo park. However, with consumers’ increasing preference for premium
coffee, retail outlets, especially supermarkets and hypermarkets, will
have growing importance for premium coffee brands as well in coming years.
PROSPECTS
- Breakfast coffee sold through fast food restaurants
will account for a greater share of coffee sales in coming years. Due to
consumers’ increasingly hectic lifestyle and changing breakfast habits, an
increasing number will be used to drinking coffee in the morning. However,
instant coffee is unlikely to meet sophisticated taste expectations, while
coffee sold through specialist coffee shops such as Starbucks is
considered too expensive for daily consumption. Consequently, coffee sold
through fast food restaurants such as McDonald’s will represent a better
alternative for breakfast coffee. A cup of McCafé sold in McDonald’s costs
only RMB8.00, and the breakfast set in McDonald’s, including a hamburger
and a cup of coffee, costs RMB6.00 or RMB10.00 – considerably cheaper than
coffee sold through Starbucks, which costs around RMB20.00 per cup. Meanwhile,
McCafé also tastes much better than instant coffee. Therefore, breakfast
coffee sold through fast food restaurants will face intense competition
with specialist coffee shops and retail coffee sales as well over the
forecast period, and is expected to achieve greater importance.
- Foodservice sales growth of coffee will be much faster
than retail sales growth over the forecast period, with the increased
penetration of coffee shops and other foodservice establishments selling
coffee. With demand in developed cities and areas becoming saturated,
chained coffee shops and fast food outlets will seek to develop in
countryside areas. For example, the leading chained specialist coffee
shop, Starbucks, and the leading fast food restaurant, McDonald’s, are
planning to accelerate outlet expansion in low-tier cities, which will
spur on-trade coffee sales in these areas.
- The new launch of Nestlé’s gift pack Premium Selection
is expected to boost performance during festivals, because this product
has premier packaging, sells at a high price point and mainly targets gift
demand during festivals. Premium gift packs similar to Nestlé’s Premium
Selection are expected to be continuously launched over the forecast
period, along with the premiumisation trend in coffee.
- 3-in-1 coffee will still be the mainstream product in
instant coffee over the forecast period. However, standard coffee sales
are expected to grow. People are no longer satisfied with the combined
sugar and milk quantity contained in instant coffee, but would prefer to
make their own favourite tastes. Therefore, standard coffee without sugar
and milk powder would be preferred.
- Coffee pods will see wider availability, but will
continue to hold a minor share of the coffee environment over the forecast
years. With the leading coffee company, Nestlé, promoting coffee pods and
machines, coffee pods will gain attention among consumers. However, the
high pricing of coffee pod machines and the pods themselves will limit
coffee pod sales, especially in retail outlets. Therefore, coffee pod
manufacturers are likely to focus on developing corporative clients to
sell coffee pods to offices.
