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    China Business
     Mar 11, 2011


China's new brew
By Daniel Allen

BEIJING - Since its introduction in the late 19th century, all the coffee in China hasn't amounted to a hill of beans. The Middle Kingdom has long been a land of tea, and love of the leaf runs deep. Now, however, with white collar Chinese looking for a taste of Western life, change is brewing. From the arabica plantations of Yunnan to the proliferating coffee shops of the big cities, China's cappuccino craze has an ever-growing number of companies frothing at the mouth.

Beijing-based coffee roaster Stuart Eunson recalls a time when coffee was an unknown quantity for many of the Chinese capital's residents. "Back in 1994 I was traveling in a taxi here and told the driver I was involved in the coffee business," he says with a smile. "The guy didn't have the faintest idea what I was talking about. He thought coffee was a kind of vegetable."

Fifteen years later and Eunson's business is booming, with

 
China's demand for coffee growing at an estimated 15 to 20% a year (the world average is around 2%), driving up sales of beans to hotels, cafes and shops. China's coffee consumption was estimated to be approximately 45,000 tonnes in 2006, but some analysts predict this number could jump five-fold or even six-fold to reach 300,000 tonnes annually by 2020. Coffee sales currently account for a little over 20% of the hot drinks market in China, compared to around 70% for tea.

"The potential for growth in the Chinese coffee market is enormous," explains Adrian Ho, Head of Coffee and Beverages for Nestle in the Greater China region. "Per capita coffee consumption currently stands at a mere 5 cups per year. In Hong Kong the figure rises to 60 cups, and in Japan 300 cups per year."
Analysts cite the 20 years of promotional activities that coffee companies undertook in Japan before demand reached present levels. They believe China could soon leapfrog Japan and Germany to become the world's second largest coffee consumer after the US, where average consumption is now over 3 cups per day.

"Japan was at the current Chinese consumption level in the mid 1960s but now consumes over 7 million bags," says Nestor Osorio, executive director of the International Coffee Organization (ICO). "It's likely that China will follow a similar growth path."

Like wine, coffee is a Western concept to most Chinese consumers, and coffee drinking is perceived as a sign of cosmopolitan sophistication. "For many Chinese, especially in big cities, coffee is part of a lifestyle aspiration," explains Adrian Ho. "More and more young professionals are choosing to start the day with a cup or two at home."

China's coffee market can essentially be divided into instant coffee, which is drunk at home, and roast and ground coffee, which is consumed outside in coffee shops such as Starbucks, Blenz and Costa Coffee. Very few Chinese make "real coffee" from beans or ground coffee at home. Instant coffee, the market for which is overwhelmingly dominated by Nestle, still accounts for the lion's share of China's consumption figures - the Swiss company opened a large, state-of-the-art instant coffee factory in Dongguan in southern China in 1992 to meet demand.

China's predilection for instant coffee can be attributed to both convenience and price; US$5 for a Starbucks cappuccino is a lot to pay when you consider a native Beijinger's average annual income is still less than US$6,000. A box of 10 Nestle instant coffee sachets can sell for as little as US$1.50.

"The growth in China's instant coffee market owes a great deal to Nestle's extensive marketing and a promotional campaign by the ICO in the late 1990s," explains Nestor Osorio. Promotional displays of Nestle instant coffee are a common sight in Chinese supermarkets, as are attractive "Nestle girls" handing out free tasters and advising consumers on purchasing options. "We are currently running the world's biggest coffee sampling project in China," says Adrian Ho proudly.

As well as ordinary instant coffee in sachets and jars, Nestle offers Chinese consumers sachets and cans of "1 + 2" coffee and ice coffee with creamer and sugar, and attractive gift boxes. At less than US$1 Nestle cans are far easier on the wallet than the US$3 bottles of Starbucks frappuccino with which they share supermarket shelves.

Nestle is hoping to piggyback on its popularity in China's instant market with the more upmarket Nespresso brand, a range of specialized home use machines which brew a variety of espresso-based drinks from ground coffee "capsules". The company opened a boutique in Beijing's exclusive Shin Kong Place in 2007 where Chinese can buy both machines (starting at US$570) and boxes of 10 capsules (US$8).

At the moment, the market for Nespresso in China is small, but the company is optimistic about sales. "At the moment our target group is discerning, coffee-loving Chinese PMEBs [professionals managers, executives and business people] over the age of 30," says Ernest Yong, Marketing Manager for Nespresso Asia. "Trends are very favorable. Roast and ground coffee is getting more popular every day, and we view Nespresso as a mass luxury product which a growing number of Chinese will learn, want and be able to enjoy."

While coffee shops are clearly a pricey option for those Chinese jonesing for java, they are figuring more and more in the routines of young and affluent urbanites. With traditional espresso considered too bitter, lattes, cappuccinos and frappuccinos are generally the order of the day, along with non-coffee options such as smoothies and hot chocolate.

"I usually visit Starbucks or Costa Coffee three or four times a week," says 30-something Beijing lawyer Chen Xi. "Apart from the good coffee it's a relaxing place to meet friends, and with free wireless Internet it's also convenient for working. For me life without coffee would be like life without tea or rice."

Sentiments like these are the stuff of coffee promoters' dreams, and highlight the underlying reason why coffee shops are becoming so popular in China. Over and above the simple consumption of a beverage, drinking coffee outside the home is an emotional and cultural experience for most Chinese, who value the coffee-drinking space as much as what's in the cup.

"In addition to a good quality product, coffee shops that want to do well in China need to offer patrons a stylish and comfortable environment," says Paul Smith, Asia-Pacific president for Costa Coffee. "At Costa we focus on the whole bean-to-cup experience and try to localize shops as much as possible. Starbucks has a more rigid format whereas we try to be a little more creative in our decoration and products."

After a late start in China, Costa is rapidly making up lost ground on rivals such as Starbucks, which now has around 200 outlets dotted around the country. The UK chain opened its first stores in Beijing ahead of last year's Olympics, and now has seven in the Chinese capital and a further 30 in Shanghai.

"We have very progressive growth plans for China," explains Paul Smith. "By the end of this year Costa will have a total of around 60 shops in Beijing and Shanghai, and we're also planning to open stores in southern China soon."

Costa is just one of a wide array of companies competing for a slice of China's coffee pie. These include large-scale international outfits such as Starbucks and Canadian chain Blenz, local offerings UBC Coffee and SPR Coffee, and a host of smaller chains and individual shops. Even McDonald's is getting in on the action, rolling out its cheap arabica-based McCafe range of coffees in Beijing and six other Chinese cities in June to the accompaniment of some aggressive advertising.

The fact that so many companies are falling over themselves to open coffee shops in China means that retail space is often at a premium. "If there were enough suitable locations to rent at a reasonable price I could easily run 10 shops in Beijing," says Frank Siegel, owner of the city's popular Sequoia cafe. "Because chains like Costa are coming into the market it means finding good spots is really tough right now."

China is not only developing into a major coffee consumer, but also a producer. Coffee cultivation in China dates back a little over 100 years to when a French priest successfully raised the plants in a valley in Yunnan, a Japan-sized mountainous province bordering Vietnam, Laos and Myanmar. Serious production didn't begin, however, until 1988, when a joint effort by the Chinese government, the United Nations and World Bank saw coverage reach 4,000 hectares.

"Yunnan arabica now accounts for 95% of China's coffee production, and plantation coverage has more than quintupled to around 23,000 hectares," explains Stuart Eunson, whose Beijing and Shanghai-based company, Arabica Coffee Roasters, now sources 20% of its beans from Yunnan. With a further 20,000 hectares of land considered suitable for coffee cultivation, there's certainly room for further growth.

"Yunnan's climate, elevation and general geography make growing conditions comparable to those in Colombia and Indonesia, currently the world's third- and fifth-largest coffee producers," Eunson continues. "There's no reason why China cannot produce some very fine, high quality coffee."

Despite recent growth, China's coffee production remains small in global terms - according to official figures production will be 30,000 to 35,000 tonnes this year. This is a mere bean in the bag compared to neighboring Vietnam, the world's second largest coffee growing nation behind Brazil, where production is now over 1 million tonnes and almost all beans are exported.

Although dwarfed by its competitors, Yunnan's coffee industry is still a major foreign currency generator - an estimated 60% of Yunnan's coffee production is exported overseas, mainly to Japan and Germany. "Coffee now brings in more foreign currency for Yunnan than tea," says Li Gui Ping of the Baoshan Agriculture Center. "Last year it generated around US$47 million, compared to only US$18 million in 2004."

Multinationals such as Starbucks and Nestle have directly and indirectly helped boost the Yunnan coffee industry. Much of the coffee processed at Nestle's instant coffee factory in Dongguan comes from Yunnan, and the company has been instrumental in training coffee farmers in best practice techniques, opening an experimental and demonstration farm in 1997.

Starbucks, which launched Yunnan bean-based coffee drinks in its Chinese shops during the 2009 Chinese New Year, has been operating in Yunnan for more than three years. "We decided to use Yunnan beans simply because they are now good enough," says Caren Li, Starbucks' Communications Manager for Greater China. "We are committed to building and strengthening relationships with Yunnan farmers and suppliers that will help them stabilize, build and sustain their businesses, and also promote the sustainable production of high quality coffee."

Yunnan's arabica has yet to attain the refinement of Indonesia's Mandheling coffee, regarded by many as Asia's finest, but with continued investment and growing domestic and overseas demand the future looks promising. As the country's craving for caffeine deepens, so China will become an ever greater net importer of coffee and coffee shops will continue to increase in number. Coffee may never usurp tea as China's national beverage, but its days as a vegetable are surely long gone.

Daniel Allen is a freelance writer and photographer currently living in Beijing.

(Copyright 2011 Asia Times Online (Holdings) Ltd. All rights reserved. Please contact us about sales, syndication and republishing.)


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