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In a special report, USDA says that in the current marketing year (Oct 2021-Sept 2022) strong Chinese demand for imported coffee products will increase imports to 4 million bags (1 bag = 60 kg) green been equivalent (GBE), which is a 5% increase over the previous year imports. Domestic coffee production is lower at 1.75 million bags GBE on declining incomes for farmers. To spur production gains, the Yunnan provincial government may consider programs to increase farmer incomes and make coffee production more appealing.
China Coffee Market Overview. In the last 30 years, coffee consumption in China grew. International producers such as Nestlé and Starbucks increasingly compete with local coffee brands such as Lian Coffee, Luckin, Yongpu, Seesaw, Manner, and SEngine for retail coffee purchases. Local companies utilize a “online to offline” (O2O) model, which allows consumers to purchase products online for delivery or in-store pickup. This model expanded following the Covid-19 pandemic.
The average coffee consumer in China tends to reside in first-tier cities, between the ages of 20-40 years old, with higher education and income levels, consuming between 2-3 cups of coffee per week. Analysts expect coffee demand in China to grow as disposable incomes rise, with China’s coffee demand growth to exceed that of more mature coffee markets (see consumption section below). Industry reports indicate that coffee consumers in China could reach over 350 million in 2021, and female consumers will account for nearly 65% of all purchases.
China Coffee Production. In this marketing year, coffee production will decline to 1.75 million bags GBE. Yunnan Provincial Statistics Yearbook data indicates that coffee production is declining in the recent years (see Chart 1 picture). Contacts of USDA also indicate that many coffee farmers in Yunnan find coffee production less profitable and are switching to other crops. Initiatives to spur improvements in coffee production in Yunnan were most active between 2014-2019. However, in the recent years programs to support coffee production expansion have gone quiet.
Coffee production will not decline dramatically in Yunnan Province as both Nestlé and Starbucks established production sites and purchase large quantities of local coffee beans for domestic consumption. For example, Starbucks markets “single origin” Yunnan coffee beans in China at retail cafes. In Hainan, investment in coffee and coffee production appears to be growing. However, production in Hainan Province accounts for less than 1% of all coffee production in China..
Imports. In the current year, China’s coffee imports will reach 4 million bags as demand in second and third-tier cities for coffee drives growth and expansion of domestic coffee consumption. China’s total imports of coffee (roasted, green, and soluble) products reached over 3.8 million bags – exceeding the 2010-2020 import volume by nearly 30%. Between 2015-2021, imports of green coffee to China grew tremendously. Additionally, soluble coffee imports also increased to nearly the 2015 rates (see Chart 3 picture).
Consumption. This year China's coffee purchases will reach nearly $16 billion (RMB100 billion) a 5% increase over the previous year. Industry sources note that the typical Chinese consumer consumes instant coffee 70% of the time, freshly ground 20%, and ready-to-drink coffee 10% of the time. Compared with other coffee consuming countries such as the United States and Japan, coffee consumption in China is a relatively new phenomenon, with younger consumers willing and interested in trying new flavors and coffee products.
Consumers in first-tier and second-tier cities show the most sustained growth in coffee consumption. Industry sources note that more than 50% of white-collar workers in first and second-tier cities will increase their coffee intake over the coming years. Additionally, trends set by first-tier cities may spur greater expansion of coffee consumption and coffee culture in second and third-tier cities.
Coffee Development, Trends and Opportunities China’s coffee market changed dramatically over the last 5-10 years. Previously, China was a market dominated by instant coffee. Today, innovative coffee products such as pods and single-service pour-overs represented by local brands (such as Yongpu and Saturnbrid) are expanding market share.
In 2020, the number of retail coffee stores in China totaled 108,000 nationwide, with 75% of all stores located in first and second-tier cities. By March 2021, Luckin coffee (a local brand) became the largest coffee retailer in China surpassing Starbucks, with an estimated 75 million purchasers. Luckin’s incentive and promotional programs played an important role in expanding consumer awareness of coffee and coffee culture in China.
Domestic convenience store purchases of coffee also expanded with such brands as Family Mart Coffee, 7/11 coffee, Convenience Bee Coffee, KFC Coffee (K-Coffee), etc. Other concept stores, such as the “Greener Store of Starbucks Coffee Lab” recently opened in Shanghai. These stores incorporate sustainable building, products, and practices to build consumer support.
Industry sources estimate that in the next few years coffee retail will grow by 5%, reaching over 120,000 stores by 2023. In third-tier and lower-tier cities, independent cafes account for over 95% of coffee stores. Large brands should consider these smaller markets for greater expansion.
Covid-19 Impacts on China’s Coffee Industry. Since October 2021, China faced the largest and most widespread Covid-19 outbreak. Local governments placed increasing restrictions, including citywide testing and lockdowns, which have negatively impacted the HRI (hotel, restaurant, and institutions) sector. These restrictions will lead to increased closures of brick-and-mortar coffee stores.
In 2021, Shanghai was nicknamed the "Coffee City" due one of the highest densities of coffee shops (nearly 8,000) in the city. Foreign brands including Hokkaido Letao Café, Japan’s %Arabica, Canada’s Tim Hortons, and Italy's Illy brands all opened retail coffee shops – and account for nearly 65% of all retail coffee outlets in the city. Blue Bottle Coffee, purchased by Nestlé, is scheduled to open its first retail outlet in Shanghai later this year.