China has a thriving coffee culture, with no shortage of places to buy a latte or a flat white. According to Meituan, there are nearly 8,000 coffee shops in Shanghai alone, making it the city with the highest concentration of coffee shops globally. While these coffee shops provide freshly brewed coffee, there is also a significant number of instant or RTD coffee providers, satisfying customers all kinds of demands. This makes the coffee market in China competitive, promising while challenging.
Here are the competitive landscape in China’s coffee market and the opportunities for growth in the future.
Main competitors in the freshly ground coffee market
China offers a ripe opportunity for both international and Chinese domestic brands to tap into its market. For international brands, Starbucks has successfully expanded its presence in China since 1999 when it established its first store in Beijing and operated 6,019 stores nationwide by 2022. Tim Hortons, which debuted its first store in Shanghai in 2019 with a focus on Tier 1 and 2 cities, has already established more than 500 locations in China by 2022. Costa Coffee entered the Chinese market in 2006 and has more than 500 stores by 2020, while the company faced challenges during the pandemic and was forced to close some outlets.
With the advent of Chinese coffee brands, Starbucks' dominant position in the market has been challenged. Luckin Coffee, a Chinese start-up coffee chain established in Beijing in 2017, has rapidly expanded its store count, reaching 7,846 locations in China by 2022. By offering lower prices (typically 20% lower than Starbucks) and innovative flavours (a new flavour on average every three days), Luckin Coffee has emerged as Starbucks' biggest competitor in the Chinese coffee shop market to date. Other notable Chinese coffee chains include Manner, Seesaw, Nowwa, M Stand, and Algebraist Coffee.
In addition to the above coffee players with their vast networks of stores, there has been a significant influx of new entrants that have crossed over into the coffee market, including:
China Post 中国邮政, the state postal service, which operates approximately 318,000 post offices across the country, opened its first coffee shop in Xiamen, Fujian Province in early 2022.
Chinese domestic sportswear brands are also getting into coffee. Xtep 特步 have registered three coffee-related trademarks and Li-Ning 李宁 launched its Ning Coffee brand in May 2022, which is available in the company's sportswear stores.
Tong Ren Tang 同仁堂, the largest producer of traditional Chinese medicine, has established a sub-brand called Zhima Health知嘛健康 and has introduced coffee products infused with traditional Chinese medicine concepts at seven new stores in Beijing.
New forms and flavour innovations will contribute to growth
The younger generation of Chinese coffee consumers exhibits a more sophisticated palate, which has prompted coffee companies to focus on product innovation in both form and flavour. The most popular form of portable coffee in China is coffee liquid, which has experienced a 300% growth in the market. Coffee liquid offers greater convenience and pleasure as compared to traditional powder instant coffee as it does not require mixing and can be customised with ingredients such as water, milk, or sparkling water to enhance flavour. Companies such as Tasgear, Yongpu, Seesaw, and coffee giant Nielsen have entered this rapid-growing market.
Chinese consumers have a developing appreciation of coffee, and in order to compete in China, brands need to offer not just basic coffee but also various flavoured options, including coffee mixed with fruit, tea, and even traditional Chinese medicine. To this end, several manufacturers have launched carbonated RTD coffee. For instance, local player Nongfu Spring introduced the first carbonated RTD coffee brand in China with its cold brew-flavoured offering. Coca-Cola China expanded its product line with its own cold brew-flavoured carbonated RTD coffee. In addition to carbonated options, coffee brands are also witnessing other new flavour innovations. Starbucks has introduced fruit-flavoured RTD coffee variants, such as the Peach Café Latte. Nestlé (China) introduced a limited-edition Cherry Blossom Soufflé Latte in 2021 and plans to offer a new limited-edition variant every spring. Furthermore, Nestlé offers a range of fruit-flavoured instant coffee powders, including grapefruit, strawberry, passion fruit, and peach flavours.
Specialist coffee experience will continue to be brought into the home The pandemic caused an increase in coffee consumption at home and changed consumers’ coffee consumption and shopping habits. With the closure of some local cafés and the adoption of remote work policies, consumers showed a growing interest in recreating the barista experience at home and many invested in equipment and ingredients to make coffee at home. Small appliances such as coffee machines were popular purchases. The increased demand for premium coffee at home contributed to the growth of standard fresh ground coffee and fresh ground coffee pods, which were among the fastest-growing products in hot drinks. The dominance of Nespresso-compatible pods, which account for the majority of sales of fresh-ground coffee pods, is also a factor in this success. As mentioned above, apart from the specialist equipment, consumers are also buying coffee liquid together with coconut milk, milk and others to make coffee at home in a much easier way. With consumers wanting to continue to use the appliances and ingredients they have already acquired, coffee at home is expected to have a positive outlook in the forecast period.
The Chinese market presents a potentially lucrative opportunity for coffee brands, however, establishing a presence and maintaining a competitive position can be challenging. To successfully enter and grow in this market, feel free to speak to our team today to discuss available support and solutions we can provide!