In recent years, more and more consumers have begun to accept and enjoy drinking coffee. The Chinese coffee market has achieved significant growth in the past few years, maintaining a relatively fast pace of expansion and is expected to continue at a high speed for the next few years. The main consumers of coffee in China are young people, especially young white-collar workers and students in cities, who have an increasing demand for coffee; there are a variety of coffee brands on the market, and fierce competition has been waged in terms of products, prices, marketing, etc.; Chinese consumers like to drink coffee on various occasions, with cafes, offices, homes, and other places being important coffee consumption scenarios. In addition, with the development of the internet and takeaway services, online purchases and takeout coffee have gradually become popular; as consumers' tastes diversify, many new types of coffee products have emerged on the market, satisfying consumers' pursuit of fresh experiences.
01
The development history of the Chinese coffee market
Coffee, tea, and cocoa stand together as the world's three major beverages, with a 1,000-year history of consumption since the 11th century. Coffee originates from the seeds of coffee fruits, known as coffee beans. After the coffee fruits are picked, they are processed through procedures such as sun-drying and washing to remove the pulp and form raw beans. These are then roasted and finally extracted, with additional ingredients such as water and milk to create the beverages commonly consumed by the public.
The perception of coffee among mainland Chinese consumers began in 1989 when Nestle introduced '1+2' instant coffee to the Chinese market. Subsequently, the entry of Starbucks into mainland China made coffee a high-end product in the minds of consumers at that time. In 1999, Starbucks' entry into China allowed consumers to experience freshly ground coffee and its production process for the first time. Since then, the trend in the Chinese coffee market has gradually shifted from traditional instant and ready-to-drink coffee towards high-quality coffee products.
Source: Analysis by Frost & Sullivan
The Chinese government has been actively promoting consumption upgrading, creating a favorable environment for the development of the coffee industry. The government encourages innovation and supports the development of small and medium-sized enterprises, bringing vitality to the coffee market. It has implemented differential import tariffs on the coffee industry, with ordinary import rates andmost-favored-nation tariff rateThe difference is significant. Coffee import policies mainly favor developing countries, while different tax rates are set for raw beans, roasted beans, and processed products to protect the development of the domestic coffee processing industry.
02
China coffee market scale
With the accelerated development of urbanization in China, people's living standards and consumption concepts are also continuously improving. More and more consumers are beginning to pursue a higher quality lifestyle, and coffee, as a symbol of fashion and quality, has gradually become a consumer product favored by young people. In recent years, China's coffee market has shown a strong growth trend, increasing from several hundred billion yuan in 2017 to one thousand billion yuan in 2022, with a compound annual growth rate of about 24.1%. However, the outbreak of the COVID-19 pandemic at the beginning of 2020 affected the growth of the Chinese coffee market, leading to a decrease in the number of customers at coffee shops, restaurants, and convenience stores. But as the pandemic eased and China's economy recovered, the coffee market gradually regained its growth momentum.
Looking ahead, with the deepening of international exchanges, coffee culture is gradually spreading in China and being accepted by more and more people. Especially among the younger generation, who have a high passion for coffee, it has gradually become an important medium for their socializing and leisure activities. It is estimated that from 2022 to 2027, the coffee retail market size will grow at a compound annual average growth rate of 25.1%, reaching several thousand billion yuan by 2027.
Source: Analysis by Frost & Sullivan
The categories of the Chinese coffee market can be classified into freshly ground coffee, instant coffee, and packaged coffee; in 2017, freshly ground coffee dominated the Chinese coffee market, accounting for about 66% of the total market size, followed by packaged coffee, which accounted for about 21%; as of 2022, freshly ground coffee experienced rapid growth during this period, accounting for about 75% of the total market; it is expected that by 2027, the proportion of freshly ground coffee in the Chinese coffee market will exceed 84%.
03
The market competition pattern of Chinese coffee
From 2014 to 2016, the financing in the Chinese coffee market was relatively limited, with the market mainly occupied by traditional coffee brands and chain stores.However, with the emergence of new brands and innovative business models, financing activities gradually increased between 2017 and 2019. Especially from 2018 to 2019, Luckin Coffee, as a new brand, rose rapidly and attracted a large amount of venture capital and equity financing.
In 2020, the financing environment of the Chinese coffee market was briefly dampened.However, the market is still developing continuously, and some other local brands and startups have also received funding during this period.
In 2021, as the epidemic gradually stabilized, the Chinese coffee market resumed its growth momentum.In this year, many coffee companies sought new business models and technological innovations to adapt to the post-pandemic market environment. As a result, investors' interest in the coffee industry has been reignited, and financing activities have become active once more.
Overall, from 2014 to 2022, the financing situation in China's coffee market developed steadily at first and then rapidly, despite certain shocks in between. However, the overall trend was positive.
Source: Analysis by Frost & Sullivan
04
Driving factors for the development of the Chinese coffee market
With the continuous growth of the Chinese economy, people's income levels and living standards have been significantly improved. This has made consumers willing to pay for a higher quality lifestyle, including investment in coffee consumption. Moreover, people's consumption concepts are also changing. More and more consumers are beginning to pursue personalized and high-quality consumption experiences, and coffee, as a symbol of fashion and quality, just meets this need. The young population in China has a high enthusiasm for coffee; they not only regard it as a beverage but also use it as an important medium for socializing and leisure. This gives the coffee industry great development potential in the Chinese market.
The penetration and integration of internet technology in the catering industry have greatly promoted the explosive development of the catering takeaway market. The pandemic in 2022 has further accelerated market development. As of the end of 2022, the catering takeaway market size was approximately 1,190.5 billion yuan, an increase of about 31.4% compared to 231.3 billion yuan in 2016.
During the pandemic, offline store traffic has plummeted, posing a significant challenge to the profitability of coffee brands. The importance of online digital operations (mini-programs and official account ordering, private domain traffic management, etc.) has become increasingly evident. The development of brand IP products (brand merchandise, limited-edition drinks, etc.) and online retail layout help to strengthen brand culture and, to some extent, offset the negative impact of reduced dine-in traffic under the pandemic context.
Digital upgrading will become the focus of coffee brands in the future digital era. Empowering with digital technology helps to further enhance consumer experience, obtain precise consumer insights, cultivate effective active traffic while increasing brand loyalty, and ultimately achieve a closed-loop marketing repurchase ecosystem. Consumer big data asset reserves should be tapped to unlock the value of consumer data, obtain a large amount of terminal consumer data, study consumers' preferences and purchasing behaviors, and provide support for future strategic decision-making, brand management, new product research and development, etc.
Digital operations, such as online platform construction, can enrich online social cultural scenarios, eliminate queuing, achieve precise marketing, and break through offline physical barriers during the pandemic. The inevitable trend is that traffic is becoming increasingly expensive. By building private domain traffic through digitization, businesses can avoid being completely controlled by increasingly monopolistic internet platforms and gain a certain degree of voice.
4) The development of the underserved market drives the coffee industry
From a macroeconomic perspective, the future growth trend of disposable income among people in new first-tier and second-tier cities is evident. China's urbanization rate is steadily increasing year by year, and in the future, the overall development speed of new first-tier and second-tier cities will be relatively fast. From the perspective of competition among coffee brands at various levels of cities, currently, competition for first-tier market space is particularly fierce. As first-tier coffee shops gradually become saturated, it will become an inevitable trend for the market to shift to second- and third-tier cities. In addition, coffee consumption growth not only relies on economic development drivers but also includes cultural penetration and even requires intergenerational cultivation. In the future, the sinking market will become the key to whether coffee development can achieve a breakthrough.
