Specialty Coffee Retailer

Starbucks has grown a 60 percent market share in mainland China since opening its first store there in 1999. of coffee shops in Xiamen has jumped from 1,000 in 2009 to 3,000 today. "As the economy is developing, more and more Chinese people accept the taste of coffee and the coffee market keeps on growing," she says. A LUXURY PRODUCT According to James Roy, Senior Analyst at the China Market Research Group, "going to a Starbucks has become a way to participate in a cosmopolitan global culture and a symbol of modernity and sophistication, in contrast to tea houses, which are seen as more traditional. That idea caught on with a lot of upwardly-mobile Chinese consumers first in major Tier 1 cities and then secondary cities like Hangzhou and Chengdu, and is continuing to spread to smaller cities all around the country." Given that coffee is a luxury product, the pricing strategy at most coffee shops does not make a cup affordable for the "laobaixing" (the ordinary person). At Also Milo Coffee in Dalian, a modest cup of coffee costs $9.42. When using China's GDP per capita of $9,200 and the United State's GDP per capita of $50,000, a $9.42 cup of coffee in China would equate to a $51.20 cup in the U.S. Coffee is an example of the luxuries that are affordable for the rising middle class. The China-US Exchange Foundation estimates that in ten years, 630 million Chinese will be considered middle class. This will create a growing customer base for the fledgling coffee industry. Given the habitual nature of drinking coffee, if Chinese consumers do increase their consumption, other areas of the global supply chain will be affected. Behind petroleum, coffee beans are the second-most traded commodity. A measurable consumption increase in China will have a material impact on the trading prices of the already volatile commodity. PACKAGED COFFEE For many Chinese, consuming instant coffee at home is becoming part of their daily ritual. At 16 cents per pack, it is a more affordable option for the coffee enthusiast to drink on a daily basis. According to Euromonitor, at $1.3 billion, the instant coffee market was 56 times larger than the fresh coffee market in 2012. Euromonitor puts the growth rate for instant coffee at 18 percent over the last five years and estimates it will be 9 percent over the next five years. And Nestle's Nescafe dominates this market with more than 70 percent market share. Nestle first entered mainland China when they opened a Shanghai sales office in 1908. They have continued to invest in the market. In April of this year, they announced plans to establish a Coffee Centre in China's Yunnan province, which will provide training and infrastructure for local farmers. In July of this year, they also announced the completion of a $144 million, 2.4 million sq. ft. factory in Qingdao. In the press release, Paul Bulcke, CEO, Nestle S.A., was quoted as saying, "the position of the Chinese market in Nestle's global strategic growth will be enhanced. The newly built factory fully demonstrates Nestle's continued commitment in the Chinese market and lays a solid foundation for the company's future development." Nestle's first mover advantage and continued reinvestment in the market give it significant competitive advantages, but other companies are still attempting to compete with them. Singapore-based Super Group Ltd. is looking for acquisitions, which can increase their instant coffee market share in China. They are one of the companies that recognize the challenges of the Chinese market, but believe the potential opportunities warrant the capital investment. SCR Josh Bateman is a freelance writer based in Asia. 15

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