Can a paper cup of coffee ever compete?
Increasingly, coffee purveyors are finding the answer is yes. While coffee won't replace tea in Chinese culture, the growth potential is enormous.
According to China Briefing, China’s coffee market has grown by an estimated 10-15 percent each year, compared to the worldwide average of 2 percent. While an American drinks 441 cups of coffee each year on average, a Chinese consumer drinks just four. And most of that is instant coffee, often sold as "3-in-1" -- a mixture of instant coffee, powdered milk and sugar.
Led by Starbucks, the Chinese are beginning to embrace coffee culture. How can smaller chains capitalize on this opportunity?
Lessons from Starbucks' expansion in China
"It's a good place to meet people," teacher Cheng Xiaochen told the Wall Street Journal in 2012. "But the coffee is so bitter it tastes like Chinese medicine." That, in a nutshell, is the challenge facing Starbucks as it continues to expand its presence in China.
Starbucks plans to open an additional 500 stores in China by the end of 2014, according to Business Insider, making the nation its second-largest market outside the United States. But to succeed, Starbucks can't simply replicate what works in other countries. Chinese customers disdain the grab-and-go concept that Americans love; instead, they prefer large stores with couches that invite socializing. The flavors, too, are adapted to the Chinese palate: red bean Frappuccinos and lychee and raspberry mooncake, for instance.
Black coffee is often perceived as too bitter, but sweet drinks are increasingly popular. The secret may be the blender: In the summer of 2014, one of the chain's best-selling drinks in China was a Strawberry Cheesecake Frappuccino topped with flavored whipped cream, graham-cracker crumbles, and strawberry syrup. According to Business Insider, the sugary concoction set instant sales records for a limited-time Frappuccino offering.
How much do the Chinese love Frappuccinos? When Starbucks offered a buy-one-get-one-free promotion to just under 200 fans, the ensuing excitement led to more than 2.7 million online posts about the offer and lines of more than a hundred people.
Opportunities for smaller coffee chains
As Starbucks expands aggressively, smaller chains have been staking their claim as well. The major players, according to China Briefing, include British chain Costa Coffee, which seeks to build 500 stores by 2016; McDonald's McCafe concept, with more than 750 locations; and Taiwanese chain 85 Degrees, which is aiming for 450 locations by the end of 2017.
Despite their growth, the coffee giants have their own Achilles' heels. For Starbucks, it's cost. Adjusted to per capita income, a grande latte costs the equivalent of $27 in China. That hasn't dissuaded affluent Chinese customers in coastal cities from buying fancy drinks, but logistics and taxes have prevented Starbucks from dropping its prices. McDonald's, the biggest seller of cheap coffee in China, has struggled with declining sales.
One challenge for all fast-casual restaurants and coffee shops, Hamilton Beach Commercial's research shows, is that Chinese consumers prefer products that “taste like homemade.” For this reason, blended beverages can become the star of the menu. And with high-performance commercial blenders, coffee shops can serve blended drinks with a creamy profile that taste better than homemade.
One other important trend, China Briefing observes, is that "many Chinese coffee drinkers place greater value on the experience and environment these cafes provide, rather than on the quality of the coffee itself." This means that cafes can make a name for themselves by showing consumers what good coffee is all about in a uniquely inviting setting. One example is SeeSaw Cafe in Shanghai, where highly trained baristas turn brewing into a show. Another is Café del Volcán, which roasts its own beans and offers tastings.
In short, there's still room for newcomers to compete with high-quality coffee and novel offerings.
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