Lessons in Retail Resilience from China

by

YUNNAN, China

By Dan Bolton

In February, Liu Minghui reacted like coffee executives in any country facing an unfolding disaster — he donated 13,500 cups of instant coffee to frontline medical staff and first responders.

Liu, chairman of Yunnan-based Ai Ni Group, would eventually ship truckloads of China-grown brew-in-the-cup coffee to the Red Cross, the Xianning Central Hospital in Hubei and the Charity Foundation of Badong County. The final tally topped 200,000 cups.

His effort and similar gestures of support by roasters across the country likely created a lot of coffee enthusiasts, given the extraordinary stress and exhausting hours required of those caring for China’s 83,000 COVID-19 victims.

ALSO: China’s Coffee Growers Survive a Difficult Year

The magnitude of the novel coronavirus contagion is altering consumer behavior globally. Prior to the crisis, market researchers estimated China’s annual growth at 8.7% through 2025. Revenue, which was projected to increase 11.4% year-over-year, contracted dramatically during the first quarter. The sudden shock to China’s $9.1 billion coffee industry is a bellwether of what lies ahead.

Lessons to heed:

• Quarantines and government-ordered closures of coffee shops and tearooms in China, Italy, Germany, France, and the US threaten the essence of a “third place.” These popular gathering places were shuttered at precisely the moment companies ordered millions to work at home, isolated and fearful. Universities idled students; transit terminals lay barren, malls vacant. Stock market values nose-dived and consumer spending slowed. The mass layoffs and economic recession that follows will upend the retail segment as we know it.

• Online order, payment, and on-demand delivery all surged. The out-of-home segment approaches 75% of sales in China where food delivery apps have an estimated 335 million users. Beverage outlets that were closed to walk-in customers teamed with delivery services, including Alibaba (ele.me), Meituan Dianping, and SoftBank-financed Didi Chuxing. Thousands of out-of-work restaurant employees were redeployed as delivery workers. The to-go lessons learned in China are now evident in the US, where Starbucks closed its dining rooms and is partnering with Uber Eats to expand delivery to 48 states before May.

• Rather than layoffs, companies engaged in aggressive marketing on WeChat by enlisting idled-at-home employees. Workers increase sales by engaging customers and sharing special offers via WeChat and other social circles.

• Smart IoT (internet of things) coffee makers and sophisticated vending machines, some robotic, are sterile, enclosed, and do not require consumers to interact with potentially contaminated surfaces or people. Chains are racing to install the latest versions which feature facial recognition technology while lowering payroll, rental fees, and overhead.

• Per capita consumption at 0.08 kilos is low in China, less than 5 cups per person per year compared to the average 240 cups consumed by coffee drinkers in western countries (the US average is 400 cups, Finns drink 1,495). Chinese consumers currently spend only $6.31 per person per year on coffee. Expect that average to climb due to in-home preparation that spiked as 500 million people learned to cope with rigidly enforced stay-at-home curfews.

In China, the immediate threat has ebbed, but economic recovery will take time. Industrial output dropped 13.5%, and retail sales declined by 20.5% in 60 days. Demand for electrical power decreased by 20%, and joblessness rose to 6.2% in February. China Daily reported that the economy contracted by 3.9% during the first three months of 2020. China was running at about 70% capacity by March, but the manufacturing sector will soon encounter soft demand as the rest of the world combats the contagion. Exports that plummeted 17% during January and February have yet to recover.

Lockdown

The impact of the lockdown on the $4.2 billion (RMB30 billion) coffee industry is far-reaching. In March, Kamen Depth, a beverage industry research company, surveyed 2,000 coffee shop owners operating 10 or fewer locations, a subset of China’s 222,914 coffee companies. Seventy-five percent of shops were closed during the lockdown, according to Kamen founder Lu Wenbing.

Revenue, compared to the same period in the previous year, declined to zero at 65.9% of the shops surveyed. Sales declined by 50-80% at 19% of the shops. Asked to evaluate the loss, 66% of shop operators described the event as devastating; another 31% described the impact as painful but “controllable.” Only 3.1% reported minimal impact. The Chinese government has since announced subsidies, low-interest loans, and relief from taxes for retailers in the vicinity of Wuhan.

The majority were most worried about the wave of closures (75.2%) followed by concerns about declining foot traffic (74.8%) respondents indicating they feared paralysis of cash flow (56.6%), according to a report shared with STiR titled “Epidemic Impact” that cited Kamen data. Chains fared no better. During this period, Starbucks closed more than 2,000 of its 4,000 locations, suffering a reported $430 million in losses. Starbucks c.e.o. Kevin Johnson told investors the experience “created a model we are now using around the world, and we know that model worked.”

During the crisis, Starbucks guaranteed to pay hourly workers who were forced to stay home after contact with customers or with co-workers suffering from the virus. Johnson said the team in China “elevated cleaning protocols for stores” and doubled-down on carryout, drive-thru, and delivery. During the company’s annual meeting, he announced Starbucks China would build a $130 million coffee innovation park consisting of a roastery, warehouse, and distribution center in support of a planned expansion to 6,000 stores by 2022.

Instant coffee remains the largest coffee segment in China, accounting for $8.3 billion in sales, according to market research firm Statista. The number of coffee shops in China has increased by 52,000 since 2017, and there is evidence that coffee drinkers are becoming more habitual as they shift from afternoon to enjoying a morning brew, market research firm JingData.

Specialty coffee is more often served black and priced from $4.25-5.70 (RMB30-40). According to JingData sales of take-away coffee increased by 60% between 2017 and 2018. Nearly 70% percent of past-day coffee drinkers report their coffee of choice was instant, down from 90% in 2010. However, most customers accustomed to less bitter, low-cost soluble coffee, are unwilling to pay more than $2.85-4.25 (RMB20-30) per cup, writes JingData.

Americanos, espresso coffee, and coffee that is taken black are growing in popularity in the offline, take-away coffee segment. Consumers also have more choices online including basic coffee types such as cappuccino and latte along with various flavors such as hazelnut, according to JingData. “The process of cold-brewed coffee has gradually been mentioned by consumers. Iced Americano and iced drip coffee are consumer’s first choice for summer,” according to JingData.

Online coffee

Lucy Fu Jingya, standing vice-chairperson and secretary-general of the China Coffee Association (CCA), writes that “online penetration of specialty coffee has continued to increase. Online sales make up for the lack of offline stores in low-tier cities, although the first and second-tier cities are still the main consumer groups of specialty coffee. Sales volume in 2018 increased by 153% compared to 2017.”

“The developed coastal areas of the south are the main provinces for online coffee consumption,” writes Fu. “Shanghai has enjoyed a fantastic rise with 7,000+ stores, Beijing is second. Chengdu, Chongqing, and Hangzhou have also seen huge increases,” she said. According to Fu, “post-90s and post-95s consumers are the main force driving online coffee consumption. Among them, consumption by the post-95s accounts for a significant increase. Women accounted for more than 60% of online sales at growth rates significantly higher than men.”

Fu cited a consumer survey of 6,765 coffee drinkers in 2018 by the Coffee Salon that found 53% of Chinese coffee drinkers are female and 47% male. The most likely coffee drinkers are aged 26-35 (46%), followed by those 19-25 (33%). Consumption tapers to 18% for those 36-50 years of age. Cohorts under 18 and over 50 years of age each account for less than 2%.

“Instant coffee accounts for 72% of the $15 billion in domestic market sales, according to Mintel International. Freshly ground coffee holds an 18% share, and ready-to-drink accounts for 10% of sales. In China, sales of RTD coffee and tea already exceed $11.7 billion a year.

Mark Floisand, s.v.p. of product and industry marketing of Coveo, an AI company personalizing in digital experiences, explains that “a personalized and relevant online shopping experience is critical. During the coronavirus pandemic, with more and more shoppers electing to avoid the risk of public spaces, they’ll head to the retailer that provides the most efficient and personalized online shopping experience. And the corollary is that those that don’t deliver on these online expectations will lose out to those that do. Shoppers are going to put their personal health above their default store preferences.”

Because of this, online shopping traffic is going to hit an all-time high, and brands that are going to succeed are those that can ensure relevant and efficient experiences for their consumers at scale.

A coronavirus-triggered recession could affect businesses in unexpected ways such as threatening international collaboration, cross-border supply chains, and global consumer demand, as well as prove a boon to e-commerce and other tech-driven trends that let lives go on with less direct human contact, according to Axios. “The epidemic is a warning to coffee stores: regardless of size, pay more attention to business fundamentals, standardize store development, improve business strategy, focus on team training, and make good store safety planning,” writes Fu.

Lessons shared

In March, Chinese President Xi Jinping sent an anti-epidemic team of medical experts to Italy, a country suffering from coronavirus on a scale comparable to Wuhan. Billionaire Jack Ma donated 500,000 testing kits and one million masks to the US that arrived March 17 for distribution by the US Center for Disease Control and Prevention (CDC)

“The epidemic is ruthless,” advised a social media post by a worker at Xiaomi, an internet electronics company that donated materials to help Italy resist the virus. “I hope that the Italians, while maintaining their romantic nature, also pay attention to epidemic prevention,” reads the post. Quoting the ancient Roman philosopher Seneca, the writer observed that “We are waves of the same sea, leaves of the same tree, flowers of the same garden.”