Market Reports

The China coffee chain war that never was

The coffee chains who are making their mark in China ‚Äì Costa Coffee, Starbucks and McCaf√© ‚Äì tell GCR there is no need to fight over market share with such vast potential for growth. ','none',' < img alt="Costa Coffee China Coffee Chain" src="/uploads/globalcoffeereview/articles/gcr-7-region-chinacoffeechain-med.gif" style="width: 300px; height: 196px; " />It’s the kind of content that headline writers love, with enough puns to do the rounds. 

“A coffee war heats up in China,” posts; “Coffee wars brewing in China,” Business Without Borders reports; “I declare a coffee war,” China Hearsay hails.

But those companies on the supposed ‘front lines’ say the vast opportunities that China presents as an emerging coffee consuming nation means that there is little need to fight each other for market share.

“I don’t think there’s a war in China over coffee,” Paul Smith, Asia Director for Costa Coffee, tells GCR. “Everyone is helping move the Chinese consumer towards coffee drinking. If you look at the coffee shops per capita in China compared to other areas there’s still lots of room for growth. I don’t think there’s a war on.”
Rather than a strategy of attack, in his discussions of the UK coffee chain’s move into China at the beginning of 2007, Smith says his experiences have been more about learning from the market and adapting their business model accordingly.

Smith says this work hasn’t gone unnoticed by the company most often put forward as their biggest adversary, American-giants Starbucks. After 14 years of operations in China, Smith says Starbucks is similarly adapting their business model more than they ever have before.

“I’d like to think that we probably helped them see that,” he says.

Starbucks China coffee chainStarbucks is undoubtedly the earliest player in what has been dubbed “the coffee wars”, having opened its first store in the Greater China market area in Taiwan in 1998. The first Starbucks store on mainland China opened in Beijing in January 1999, through a licensing agreement with Mei Da Coffee Co. Ltd. At time of print, Starbucks operated around 550 stores across 47 Chinese cities, having entered 13 new markets over the course of the company’s Fiscal 2011. “The stores in these new markets have been popular and well-accepted by the local customers and community,” a company spokesperson tells GCR. “We aim to accelerate our growth momentum in 2012.”

In a statement upon the opening of the companies 500th store last October, a Starbucks press release noted that: “For the past 12 years, Starbucks has not only been a symbol of China’s rapid urban development, but also for its customer: the authentic coffee culture, genuine moments of connection between its partners and customers, and unique Starbucks Experience have come to embody a new modern lifestyle pursuit and aspiration.”

Adding to this position, earlier this year Starbucks announced it was getting into China’s coffee growing processing industry, forming a joint-venture company with the Ai Ni Group, a coffee operator and agricultural company in Yunnan Province.

Costa’s entry into the Chinese market eight years after Starbucks has seen a similar rapid rise in the number of outlets. In a presentation to investors in 2011, Costa Coffee’s Managing Director, John Derkach, said that in 2012 its investment in China was close to breaking even, and will surge forward into 2016 with plans to open 350 stores nationwide.

The unlikely player that has emerged into discussions of the spread of coffee chains in China has been McDonald’s specialty coffee concept –  McCafé. Originally from Australia, McCafé emerged from the desire for accessible quality coffee, and Australians’ preference for espresso-based drinks. The McCafé concept has since grown around the world as an addition to the McDonald’s experience. With over 2000 McDonald’s restaurants already in place in China, where the market is right, the company has been adding their specialty coffee outlet to their Asian offerings.

McDonalds McCaf√© ChinaMirroring Costa’s Smith’s remarks, Vice President of Corporate Relations for McDonald’s Asia, Pacific, Middle East and Africa, Liam Jeory, says he certainly doesn’t consider McCafé entangled in any “coffee war”.

“The Chinese market is so big, there really is room for everyone here,” he says. “Let’s put it this way – there is not a coffee sale that happens at any outlet that is at the expense of anywhere else.”

Interestingly, in their lessons learned McCafé and Costa Coffee have taken different approaches in bringing their products to the Chinese market. Costa and Starbucks are adapting their floor plans and drinks to suit local preferences, however Jeory says that McDonald’s is using the same model that has worked everywhere else.
“The Chinese are like everyone else in that they like to experience the brands available in the West, like McCafé,” he says. “These McCafés have the same offering as everywhere else in the world. You don’t go into a McDonald’s not to get McDonald’s.”

The decision for McDonald’s to enter the Chinese market, Jeory says, came from the simple potential for growth. With such a huge population, and a rapid pace of urbanisation, the potential for quick service restaurants (QSR) was enormous.

The motivation to introduce McCafé, he says, came from the evidence of a large number of ex-pats looking for convenient, quality coffee and an increasingly sophisticated number of young Chinese who were taking a liking to the coffee culture.

These were similar motivations that led to Costa’s introduction to China. However, the UK chain’s Smith says they were more careful in the way they introduced a brand that was less ubiquitous than McDonald’s. “The consumer opportunities in China were enormous, but we were careful enough to assume it wasn’t going to be as easy,” says Smith. “We had to be more customer-driven than we’d ever been before.”

The dilemma, Smith points out, is that before adjusting their model, they would first have to use the traditional Costa model, and use a learn-by-doing approach.  
Smith says that Costa’s first two to three years were mostly about testing the waters, investing in a heavy amount of research and customer surveys. Smith says it’s only since 2010 that the company has been able to use that research to adopt their model accordingly.

One of the major lessons Costa has learned along the way, Smith says, is that in China people mostly visit a coffee shop for the environment. With 1.3 billion people in the country, he points out it can get pretty crowded, and the coffee shop is often sought out as a sort of sanctuary.

As such, Costa has adjusted their store layout to provide enough small, isolated areas, where people can have some personal space. “That’s what you’re selling the Chinese, you’re selling them an experience – 20 minutes of space and a good cup of coffee,” he says.

While the food is still traditional coffee shop food, Costa has adapted to the local culture.

“The focus in China around food is that people see us as more as a snacking and sweet food option,” says Smith. “As a result, we have tailored our range to offer more ‘mini’ products like sharing plates, and really focused on our desserts and cakes.”

In their Chinese stores, Smith says Costa offers more indulgent drinks, including ice-blended drinks with a range of toppings, that can be customised by different flavour syrup shots, and in much larger sizes. Interestingly, Smith says they often sell a lot of drinks in take-away cups, although customers rarely leave the store with their drinks. 
“It’s a lot about being seen,” he says, adding that customers often purchase the largest cup they can, enjoying the large brand names.  

The pricing of their drinks was also an interesting lesson for Costa. When Smith first started with the company, they were selling coffee in China for the equivalent of US$4.45, much higher than the $3.50 in the UK. With China a developing market, Smith says he found it “ridiculous” they would charge more for their coffee in a poorer market.
As such, they did a trial in a city where they brought the price down to around US$3.00. While the sales initially reacted, they quickly went back to normal. In a customer survey, their clients told them to leave the prices as they were because Costa was an “aspirational brand”.

As these companies continue to expand, market reports continue to show why there’s space for everyone to grow. The UK, with a population of less than a tenth of China’s, currently has almost ten times the number of Costa outlets. The United States, with less than a quarter of China’s population, has over 20 times the number of Starbucks outlets.

With this much potential, it’s little wonder these coffee giants are leaving their battle gear at home. 

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