Unprecedented Boom in Chinese Coffee Market Enticing International Giants’ Substantial Investment
BY Shine HuDec 23, 2020
Starbucks expects to open 600 new stores in China in the fiscal year 2021. It aims to make a presence in 230 cities and own 6,000 stores nationwide by the end of the fiscal year 2022. McDonald's plans to enlarge the McCafé outlet number to more than 4,000 by 2023. Tim Hortons aims to open more than 1,500 stores nationwide within ten years.

The growth rate of the Chinese coffee market is terrific. According to the "Analysis Report on China's Coffee Industry Market Demand and Investment Planning for 2020-2025" [1], the average annual growth rate of coffee consumption in China is 15%, while the world average growth rate is only 2%.

In recent years, Chinese emerging coffee brands represented by Saturnbird, Yongpu, and Secre have delivered excellent performances. Saturnbird has defeated Nestlé for two consecutive years (2019 and 2020) to be the TOP1 selling brand in the coffee category on Tmall's Double Eleven. It also completed five rounds of financing in less than two years [2].

ChemLinked has written an article earlier this year to introduce the Chinese coffee market competition landscape -- See here: China's Booming Coffee Market.

Interestingly, the rise of Chinese-grown brands and the global epidemic challenge have not slowed down international giants' expansion in the Chinese market and on the contrary, many brands have expedited opening new stores and releasing new products/brands in China.

ChemLinked suggests that this momentum will become even stronger in the next few years. This is greatly due to China's effective control of the epidemic, which has strengthened the Chinese market's strategic importance in the expansion of international coffee brands.

Starbucks: store expansion and digitalization

In the fourth fiscal quarter of the fiscal year 2020, Starbucks opened 480 stores worldwide, with 259 in China, setting a new quarterly record for the total number of Starbucks stores in China. As of the end of September this year, the total number of Starbucks stores in China has reached 4,706 [3].

Starbucks expects to open 600 new stores in China in the fiscal year 2021 and make their presence known in 230 cities and own 6,000 stores nationwide by the end of the fiscal year 2022.

In July last year, Starbucks opened its first "Starbucks Now" store in Beijing, providing online ordering, self-pickup, and takeaway services. Due to the advantage of "Starbucks Now," which is more flexible in operation and aligns with Chinese consumers' online shopping habits, 10% of Starbucks China's new stores in fiscal 2021 will be of this type.

In addition to its store expansion, Starbucks will continue to enforce digital innovations.

Starbucks has leveraged the digital partnership with Alibaba (i.e., Tmall, Taobao, Alipay) to realize a seamless connection with consumers. It also launched delivery services on the WeChat platform. Up to now, 98% of Starbucks stores in China provide "Coffee Now" service, and 84% of stores offer delivery service. In the past 12 months, Starbucks China's mobile order shares more than doubled, reaching 26% in the fourth fiscal quarter [3].

alibaba-i-store-launch-01.jpgStarbucks online store on Alipay app. Photo source: Starbucks official

The company has also announced this November to invest more than 1.1 billion yuan ($156 million) in the China Coffee Innovation Industrial Park in Kunshan, East China's Jiangsu province. Looking at this, ChemLinked believes that the Chinese market has become a top priority for Starbucks' business growth.

McDonald's: store expansions

McDonald's introduced McCafé to the Chinese market in 2009. By the end of 2020, the number of McCafes in the Chinese mainland market is nearly 1,500 [4].

McCafé announced last month to invest 2.5 billion yuan in the next three years to accelerate the expansion in the Chinese mainland market. It plans to enlarge the McCafé outlet number to more than 4,000 by 2023 [4].

1000.jpgMcDonald's McCafé Photo source: McDonald's official

Although this is a vastly accelerated expansion plan, we at ChemLinked do not think it is difficult to materialize. McCafé can fully rely on McDonald's offline restaurant network for rapid expansion. As of October 2020, there are more than 3,600 McDonald's restaurants in the Chinese mainland market, and the fast-food giant is expanding at a rate of more than 400 new stores a year.

Nestlé: Premiumization

Nestlé aims to stay more relevant in the Chinese market through its premiumization of high-end, luxury products.

It launched the sub-brand “Gan CAFÉ” in China in 2017 to occupy the high-end market. The brand opened Tmall flagship store this May and rolled out three Yunnan regional flavor instant coffee products.

This month, “Gan CAFÉ” launched the “gold dust” range to enrich the high-end product portfolios. The brand also plans to launch more products in the future, including "Building Block Coffee Series" and "African Coffee Bean Series."

c-1.pngNestlé rolled out “Gan CAFÉ Gold Dust” range. Photo source: Tmall flagship store

Yum China: brand expansion

From KFC's K Coffee to the independent coffee brand COFFii&JOY, and the introduced Italian brand Lavazza, Yum China has been ramping up its presence in the Chinese coffee market through a multi-brand strategy.

KFC has more than 240 million members as of the end of 2020 June [5]. The brand rolled out pre-packaged cold brew freeze-dried coffee series to occupy more market shares based on its behemoth consumer base.

18-3.pngKFC launched cold brew freeze-dried coffee series. Photo source: web

COFFii&JOY has a significantly different positioning from K Coffee, featuring boutique and chic. This year, COFFii&JOY has opened more than 50 stores in nine cities, including Beijing, Shanghai, Hangzhou, and Nanjing.

Lavazza represents Yum China's expansion in the high-end segment. The brand has opened three stores in Shanghai, offering 40 kinds of coffee and drinks and more than 20 types of Italian food.

According to ChemLinked's observation, Lavazza is currently positioned at the top of Yum's "multi-brand strategy" in China, but the driving force is still KFC's K Coffee.

Tim Hortons: store expansion and digitization

The Canadian coffee brand Tim Hortons entered the Chinese market in 2019. After receiving hundreds of millions of yuan of investment from Tencent this May, the brand announced to open more than 1,500 stores nationwide within 10 years [6]. It has opened its 100th store this October.

Tencent's investment has fortified the brand’s digital infrastructure. Tencent's big data capabilities help the brand adjust and develop new products. The WeChat applet platform helps the brand to reach more consumers. At present, Tims has nearly 2 million members, and more than 80% of sales come from members, with a monthly repurchase rate reaching 40%. Future digital innovation will apply to site selection, product design, and supply chain improvement.

Shine Hu
ChemLinked Research Analyst
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