Pricing: A Moment of the Truth

Either Your Customers or Not Your Customers, and Nothing in Between

       When play tennis, there is a clear line between someone who know how to play and someone who don’t. For people who know, they can be a world champion or just a beginner.  However, for people don’t get the essences of tennis playing, they basically spend most of time to pick up the ball.  That is also the situation on ‘pricing products’ in China.  It may sound strange to compare tennis playing to pricing, but they do have much similarity especially in China.

       China is not an evolving market like America is.  America spent several hundreds years to get where it is now. In its history, the free market keeps the market balanced with minimum governmental intervention. On the contrary, for highly government regularized China, it skids the most of ‘evolving’ part of modernization and artificially inherits the western business models and ideologies, like someone who watched many world-class tennis matches even without an idea what top spin means.

       This would be a problem for many companies coming to China. In an evolving market, pricing is also an evolving process with historical and concurrent price references and various benchmarks. But in China, business entities artificially categorize Chinese customers into so called middle class, white collars, and so on as what they have done in their own more mature home countries with a price reference not rooted in China’s domestic buying power but referenced to the price of their own countries. McDonald’s price indicator may not work for all countries and for all commercial products. For the most of time, the end results of pricing tend to be way above the acceptable range of their targeted customers.  After spend tons of money on strategic planning and business development, the argument may be as simple as this: for 1.3 billion of consumers, if 25% of them buy one item a year, the business would be in good shape. However, sometimes, it is all or nothing.  People either buy, or not buy at all.  When they perceive a product is not priced in their league, no matter how bright and established a brand is, people would simply write the brand off their buying list.  This is particular astute in China’s consumer market. Unlike technology sector, where the choices are fewer and intellectual properties are more important, Chinese customers have to buy at high price.  For consumer market, the competition is very much not in favor of western companies because the pricing always tends to be higher for wrong argument.

       Coffee market is one of the best examples.  The whole coffee market in China has been in limbo for the past twenty years because of the high pricing. For instance, GuoMao is the most well-known office building in Beijing, hosting some of most well known Fortune 500 companies.  The average Chinese salary working in the building is also one of the highest in China. Its coffee shops also have one of highest revenues in China. However, the problem is that the coffee shops’ high revenue is due to large number of foreigners working in the building.  The overwhelming majority of Chinese in the building never visit the coffee shops, most of them not even once per year. The high price is already beyond what they can consider coffee as a beverage. When that mentality is settled in, they write off coffee and coffee house entirely.

       So is true for clothing stores.  Levi’s and Nick are all more expensive in China than in the US when China has yet to have a clothing chain compatible to Americans’ GAP, or Foot Locker.  The market is open and large for grab, but unlikely to happen if international companies cannot get their pricing right. The important thing is not how much to profit from per item sold, but what the bottom line is and how many items to be sold, which is particularly true to a 1.3 billion consumers market.

       For any non-luxury products brands, if its intention is to gain the top 5% of income consumer group, it may not gain even 0.1% of the whole consumers. People’s mentality is either to buy, or not buy at all, either in my league or not in my league.  If and when market entry pricing is right, there can be a series of products set on different price, and then there is a play. After all, a company needs to have a battle ground before to have a battle.  Otherwise, they may very likely be fighting for imaginary customers when the customers are not theirs at the first place.

1.3 Billion of Chinese Consumers or its Top 5%

To Realize What True Advantages of International Companies Are in China

       For many international companies entering China’s market, especially in consumer market such as retail and restaurant chain, are attracted to China’s 1.3 billion of consumers when their market strategies are actually to target its top 5% or even top 1% of consumer group. As said of a popular Chinese wisecrack, their strategy is to ‘turn on right light, but make left turn’.  For some of luxury brands, it may work; but for most of others, their chance to succeed is slim.  After all, it is 1.3 billions of customers are really what they need, and not everybody is LV bag.

The ubiquitous manifestation for this kind of practice is these companies’ high pricing strategies. Nike is more expensive in China than in US, so is Starbucks.  Both of them would lose to domestic brands if they don't realize it is 1.3 billions they want.  Before Gap, people bought things in Woolworth.  China’s real per capita GDP today is only equivalent to American’s in their 1955. It is important to reshape the way of thinking – whenever international companies think of China, they should think of America 100 years ago but with higher real estate.

The problem for the international companies is that they may not realize what their advantages really are.

The strengths of foreign companies are not just their brand, especially not their current product lines, but their management depth, financial capability, innovation, know-how and supply chain.  They have the mighty power to sell good products at very reasonable and acceptable prices to a large percentage of urban Chinese, especially these pocket-low middle class.  Their brand name and financials can secure them the most profitable locations when most of domestic or small players have no chances on competition.  Their management can weather one of the most challenging market environment, China.

       Supply chain is another advantage.  Most of China's domestic companies  is limited in scale (as new comers) and don't have much leverage in buying power, reputation and buying channels.  For most of established domestic manufactures, they also prefer export to domestic channels for the simplicity in dealing with foreign companies even for fewer margins but fewer headaches too. When you can buy cheap, why not sell cheap and sell a lot?  Woolworth would be working the best in China today though it died in American market 20 years ago.  Assumption is that international companies want that 1.3 billion consumers to buy them for next 100 years. Nowadays, the quality is always a relative term, but used repeatedly as an excuse for high price by many companies, foreign or domestic.

Another true advantage for international companies is innovation and the conveyance from innovation to the consumers. Chinese companies would lose the battles because they simply give up on the innovation and prefer to copy all the way. Technology, design and business model innovation are the unchallenged fronts in China.

International companies in the consumer market have unchallenged advantages in China, but those advantages are not in their products or their brand name, but their know-how, management, supply chain, and innovation. They have to think China as 1.3 billion people with a shallow pocket.  No matter what, 1.3 billion is still 1.3 billion.  Also, they have to think the way as Americans think in 1955.  Because of China’s domestic political environment, it provides the best market entry for established international companies.  It is up to international companies to realize their advantages.

Irony of the Starbucks’ Success

Reinvent Coffee Experience or Invent Coffee Experience


Starbucks’ success is that it has created a new market for current coffee drinkers, but the other side of this success is that it is unable to enlarge coffee share in beverage market and unable to attract non-coffee drinkers to coffee.

In twenty years, Starbucks Coffee has become the biggest coffee retail giant in the world with presence in 55 countries.  Thanks to Howard Schultz, the ingenious creator and Chairman of today’s Starbucks Coffee, Starbucks has reinvented coffee experience by providing better quality of coffee, adding espresso drinks and offering comfortable environment in the US.  No doubt, Starbucks has changed the mentality toward coffee and coffee house among many American traditional coffee-drinkers and has turned coffee house into popular and fashionable place.  However, for the amount of publicity it has generated, Starbucks Coffee has little impact on overall rate of coffee consumption in both America and other regions.  Despite Starbucks has gained shares in existing coffee market from the competitors especially from food retails and created new coffee drinking patterns (buying from coffee house), it cannot expand coffee market as a whole and cannot create coffee habits to new consumers, which, unlike Coca Cola, McDonald’s and KFC, will render its difficulties to expand in emerging markets where there is no existing coffee consumer base.

For America, though still the biggest coffee importer of the world, the per capita coffee consumption had been constantly declining over last several decades since its glory era in 1960’s, partly attributed to the bad coffee quality.  By providing better quality of both coffee and coffee house, Starbucks swiftly increases its shares by winning more and more consumers from others.  Nevertheless, we can hardly overlook the fact that the continuing decrease in coffee per capita consumption is in parallel with Starbuck’s growth in the last two decades.  Somehow, Starbucks’ business formula cannot transform its brand popularity and phenomenal growth into coffee consumption growth.

Japan is Starbucks’ second largest market and also has the highest per capita consumption in East Asia.  As happened in America, Starbucks immediately gained popularity in Japan since it’s opening in 1996.  However, also as happened in America, Starbucks’ instant success in Japan gained itself a lot of current coffee drinkers, expanded a great deal of the share in Japan’s coffee market, but is incapable to accelerate the growth rate of coffee consumption there.  When majority of people perceive going Starbucks Coffee as a lifestyle, coffee becomes secondary. 

China is another good example to illustrate Starbucks’ pattern. China’s coffee house market had evolved from coffee-drinking foreigners living in China.  When the coffee was a rare commodity with a considerably wealthy consumer group, the prices at coffee house were expensive and have been kept high ever since.  The coffee prices at coffee house are so high that basically alienated 95% of Chinese from considering coffee house as a place for coffee.  High coffee price is the major hurdle in China’s coffee consumption growth, and someone has to challenge that if to expect any significant growth of new coffee consumers.  Nevertheless, Starbucks inherits China’s pricing mentality since the essence of its business formula is to gain the existing consumer base not developing one.  Starbucks has again successfully accomplished this goal and easily established its supremacy just in five years in China when China’s per capita coffee consumption grows at a turtle-moving speed.

Starbucks’ magic is that it is able to gain more customers from existing coffee drinkers’ pool than to expand coffee market as a whole.  In traditional coffee consuming countries without a strong coffee house tradition, Starbucks benefits consumers for better coffee and environment.  In non-traditional coffee consuming regions, when local coffee business eyed Starbucks for guidance, its business formula may point to a wrong direction in long run although it makes sense for short-term.


For a consumer product in an emerging market with vast potential customer base, the whole point is about how to build new customers.  It requires a different strategy to Starbucks' current business formula.  Among all coffee shop chains, Starbucks belongs to such a very few companies who has the will, brand name, financials and management to establish such a new customer base just like what it had done twenty years ago to the American market.  It is no longer 'reinvent coffee experience', but invent coffee experience in the new land.

Restaurant Franchising In China

-- Franchise out Unprofitability

In China,  the profitable restaurant chains hardly franchise out their stores (company owned instead) or begin to scale back on the franchise; on the contrary, unprofitable or unproven model restaurants are eager to franchise out for short term profit.

Restaurant franchising in America is an evolving concept in the past 80 years, established on market competition, gradual business development, business opportunities and visions of its leaders such as Ray Kroc, William Rosenberg and Fred De Luca.  The franchisers gain from franchisees out of franchise fee, annual fee, real estate, materials supply, and some of obvious advantages in overall buying powers, higher customer recognition, better location and so on for their company own stores.  To become a franchiser, it requires to show the record of profitability and duplicability.  For franchisees, most of them would make profits or have better chance to succeed than running on their own concept.  In general, it is a reciprocal relationship between franchiser and franchisee in the US.  

Restaurant franchising in China is mostly an abstract concept because of short history of China’s commercialization.  Nevertheless, China has the most franchises in the world.  Even more interesting scenario is that the profitable restaurant chain hardly franchise out their stores (company owned instead) or begin to scale back on the franchise; on the contrary, unprofitable or unproven model restaurants are eager to franchise out for short term profit.  Therefore, the relationship between two is a zero-sum game and will not last long for any meaningful brand building.

Franchising system is a mixed product of legal system, modern logistics & information, food production, corporate management, and consumerism. At this stage, China's legal system can not provide a fair playground for a franchise system in addition of too many governmental regulations becoming impractical for small-medium size companies to implement; the sizable food production is still immature and is export-oriented; consumerism is just starting to take a foothold in this emerging market; logistics evolvment can never follow up with unruled and unpredictable urbanization orchestrated by governmental bodies. Corporate management for food business is far behind what America had in its 1950's.

How would the franchisers make money from the franchisees in China?  

Real estate is bizarrely high and inflexible for any franchiser to buy/rent property and then rent to their franchisee.  McDonalds’ and Tim Hortons models don’t work in China.  Annual fees are hard to collect within China’s legal system.  Therefore, most of franchisers can only make long term profit from selling material goods, which requires franchisers to establish food processing factories, a huge investment in itself and a distraction from focusing on their core restaurant business. The legal system in China is most unimplementable to restrict franchisee from buying outside of agreed supply channels.  This would deteriorates the profit of franchisers and certainly seeds the problem for quality of foods in follow.  

The franchise fees and construction/consultant fee in the initial stage become the most reliable revenues resources for a franchise.  No wonder China is full of the opportunist franchises looking for quick money when more established restaurant chains shun away from franchise.  Opportunist franchise don’t care if franchisee make money.  In China, McDonald’s don’t franchise, and KFC only franchises to remote areas.

Management capability is always a big problem across all sectors in China’s restaurant and retail business.  Management is how one can build a strong brand, how to innovate the products for market needs, how to build the confidence in the franchisees to stick with the company, how to take the initiatives for the next step.  In China, because of general opportunist environment, most of restaurant chains look for quick gain and very likely run by the family.  Management development is viewed as a tool not as backbone.  

The opportunist mentality overwhelms China’s restaurant sector (also China as well), which can be a good chance for international company looking for long term establishment in China.  One interesting scenario is that many of top restaurant chains are founded and run by women in China.  So many men, when they have certain success, would use the money to invest on quicker money machine, such as real estate, manufactures and so on.  

In China’s restaurant franchising system, it has no market leader, and not even a success story to be as a reference.   The staggering development of franchise sector would certainly slow the management development and professionalism in restaurant business, innovation, and most importantly, supply chain and food production business.  In the coming decade, consumer service will play a more and more important role in China’s economy.  It would be interesting to see how China’s restaurant chain will evolve in the coming years.

Playwright in Beijing - A Little Bit Of Coffee Culture

Playwright in Beijing

(Frank Gagliano, China Journal）

……

And will the Chinese audiences gasp, as I did, when Joe first mentioned the idea over coffee and goodies at the Paradiso Coffee?

PARADISO

-- and over cigarettes, of course. Joe is a smoker. And smoking is allowed in the Paradiso Coffee. (Smoking is allowed in all restaurants in China)

The Paradiso Coffee is a student hang out on the campus of Peking University, located under the Centennial Hall. The Centennial Hall is a huge building with an imposing square in front of it and houses two theatre spaces, one with 2,167 seats and a smaller 300-seat house.

You enter the Paradiso Coffee by going round the back of the Centennial Hall and down an outside flight of steps. When you go through the doors, the Coffee is on the left; on the right is a steep staircase going further down to an even lower-level restaurant --just one of many restaurants on the campus.

By the time I return to the US, I will have eaten excellent full-out Chinese meals at six restaurants on campus; there are at least twice, or maybe three times, that many non-fast food, major eating establishments on the Peking U campus, that cater to even nonstudents in the area.

The Paradiso Coffee is a large Starbucks-styled space (with un-Starbucks-styled cheaper, per-cup, prices). As you enter the Paradiso Coffee you spot the coffee bar at the other end of the room.

Clean, warm atmosphere.

Simple, clean-lined furniture; small, round, blond, wood-like plastic topped tables and chairs, for the most part; some booths; some stuffed, dark-covered arm chairs; to the right, the room, with more tables and chairs, extends farther back; some food cases with pastries, sandwiches, snacks; the coffees range from an "Americano" to a latte to a Cappuccino to an Ethiopian blend I tend to favor; teas, cold drinks.

There are posters on the wall of the Italian film classic, Cinema Paradiso. Also, enlarged poster-sized photos of New York scenes are prominently featured on the walls near the large windows, where you can see the feet of outside passersby; one of the posters has a New York scene with the twin towers still standing.

The music loops are constantly playing and filling the room's atmosphere with vocal and instrumental music that ranges from rock to pop to easy Llstening to Chinese pop to old-time jazz, to classical, to foreign artists, including my favorites, Jacques Brel and Edith Piaf. The music is always a little too loud.

Two baristas, Cindy and Tiantian run the place, augmented by two boys (baristos?). Sweet Cindy seems to be in charge (more about her later).

Chinese students, foreign students, campus visitors, sit alone, studying, working on their computers or putting tables together to socialize, study in groups and often, each coffee drinker is on the "Ubiquitous," cell-phoning or text-messaging away; the ring-tone music always cutting through the music in the Paradiso ether, no matter how high the canned-music's volume. Many students can be seen sleeping over their books or laptops, or curled up on the stuffed chairs or sofas, scattered about.

On occasion, The Paradiso is used for a magazine photo shoot or a shoot for a television series.

Often there's some Young-Love kneeing and canoodling going on in some of the corner booths.

There is always time to appreciate the stunning Chinese student beauties making their Paradiso entrances and exits.

Listen to the foreign students, from all over the world, studying the Chinese language, as they sit, talk and create an interesting music of their own; and as they mingle and counterpoint their native languages with the four tones of the fiendishly difficult Chinese.

Lots of one-on-one goings-on; of language-coaching and group reviewing for test preparations.

The Paradiso Coffee is comparatively new on campus this semester and is not open during the winter "Year-Of-The-Pig" holiday-week when I arrive in February. (That's why Joe Graves and I meet at a Starbucks off campus, that first holiday week). By the time I leave to return to the States, the Paradiso Coffee becomes the place to meet. Eventually, I will have an all-day meeting at the Paradiso with each playwriting student.

A little taste of Coffee culture for me.

Just about every morning I meet with Joe at the Paradiso Coffee. The weeks he needs to go to Macau and Taiwan to lecture and perform his one-man show, RAVEL'S SHAKESPEARE, leave a morning-routine hole in my Peking U life (my wife will join me for the last month at PKU).

The talk ranges from the work on BIG SUR and the maddening Peking U obstacles that often derail a rehearsal to problems I'm confronting in my adult conversation classes, to sharing with him the tongue twisters I'm developing for those same classes, to talking American politics and how surreal all that seems to viewing Bush-era madness from China, to making arrangements with Qing to get acupuncture when my lower back starts spasm-ing, to a lot of smutty Graves/Gagliano sophomoric talk from two aging fantasizing sybarites -- and to stopping whatever we're doing to chat with the passersby who stop by our table.

In the five years Joe Graves has been the Artistic Director of the Beijing Institute of World Theatre and Film, he has cast many students in his productions. His first casting call elicited 4000 requests to audition -- that's right, 4000 (for his production of Gozzi's, The King Stag)! The students adore Joe and seek him out, whenever they can. Jane, for example, stops by our table. Jane is a graduate PhD student (lovely, charming, sweet, studying the Linguistics of Character Development in Drama). Her spoken English is perfect. Joe embarrasses her by praising her acting ability.

Jane lives some distance from the Peking U campus, so, when she arrives daily on campus, she sets up office in the Paradiso Coffee and can be found there, laptop before her, whenever she is not in class. For most of the term Jane is feverishly preparing for an important examination. I will discover that most students will prepare for important examinations while I'm there (like, every week, it seems), and this will make life difficult for our BIG SUR rehearsal schedules.

Jane introduces me to the world of linguistics, where theories on drama and dramatic character (Jane's linguistics' focus) seem to dovetail with mine. I invite Jane to attend my playwriting class, if she has the time.

I am beginning to understand in more depth the lure of the Coffee House centers of creative camaraderie that were often the centers of artistic and political and social life in Fin De Siècle (and early 20^th Century) Vienna and Paris and Berlin and Prague. Would I, while I'm at Peking U, hold court while chairing an all-day-long table, where a Chinese Picasso, or a Chinese Cocteau, or a Chinese Gustav Klimt, or a Chinese Arthur Schnitzler, or a Chinese Madam Alma Mahler – with five of her current lovers perhaps -- pulling up chairs, regularly stop by and, over an Ethiopian brew, rage with me against whatever Establishment shackles are currently crushing our creative balls?

I'll tell you this: Before heading for China I had become a tea drinker back in the good old US of A -- mainly English Breakfast tea with milk and "Splenda" sugar substitute. At Peking U, in Paradiso, I've become a coffee drinker again.

Reverse Wrongful Coffee Image and Stimulate Consumption In China

This article was written for International Coffee Organization in 2004 in order for ICO to take appropriate coffee promotion in China.  After six years, it has still been true and unchanged.   If international companies and China’s domestic entrepreneurs do not take necessary steps to understand this market, it may take much longer for coffee to popularize and everybody will fight harder in a very slow growing and small market.

FACTS:  Relevant information

One important scenario has to be pointed out – European and North American countries have popularized coffee differently from East Asian region.  In 17^th century, English called coffee houses “Penny Universities”, which unfolds the underlining characters of coffee: Inexpensive and Brain Stimulating.  Coffee houses were social integral places for all classes.  When Nestle, Starbucks, espresso drinks, TV ads and brand marketing were basically non-existing, coffee had conquered one country after another just because of its natural characters.  In Europe and North America, coffee played an important part to their economic growth and coffee houses gave the birth to the first stock market and insurance company.  In East Asian countries, the same phenomena, which repeated so many times in history, never happen.  Instead to play as a social integrator, coffee houses with its high prices, unavoidably served as a social divider in Asian countries. 

Coffee Business has been staggered in China

1. Historical low price of green coffee bean does not benefit Chinese consumers. High retail price has suffocated China’s coffee market growth. 
2. Fundamental misperception about coffee and opaque marketplace in China causes a huge price hike from green coffee bean to retail vendors. 
3. 5% of highest income class and foreigners are over-exploited and spoiled by coffee shops when majority of consumers are left out.
4. Surreal coffee market boom: high public profile, slow growth and low market share in beverages market.
5. International and domestic coffee farmers, Chinese consumers and China’s coffee businesses are all suffering from high retail price.

Coffee’s Identity Crisis in China – “COFFEE IS FOR LUXURY LIFE STYLE”

There is a widely accepted view about Coffee among Chinese, that is coffee is for luxury life style.  This is a misperception and has direct impact on both China’s coffee business community and its consumer groups.  Because of the misperception, business community cannot identify who their customers are and thus fails to develop workable coffee business models and effective marketing strategies.  In turn, it unintentionally denies the vast majority of consumers the opportunity to acquaintance with coffee.

Started with Japan, the earliest and still most developed Asian country, coffee has been distorted as luxury drink with its unreasonably high prices.  It takes Japan near 90 years to popularize coffee when still low in per capita consumption among coffee bean importing countries.  Japan is the look-up guy in Asia and sets the trend to its neighbors especially to its former colonies such as Taiwan and South Korea.  Taiwanese are the major investors on coffee house chains in China, such as Starbucks and Shang Dao Coffee. 

Coffee is marked with high price and branded as luxury in everywhere in China. 

Surreal Coffee Boom in China When Chinese Cannot Afford Coffee

Starbucks and blossom of new coffee shops in China’s major cities creates a surreal impression of coffee boom.  There are new coffee shops opening in Beijing and Shanghai everyday.  Nevertheless, almost all coffee shops fight for 5% of highest income class and foreigners in a few major cities.  There is a market vacuum for 95% consumers.  Green coffee bean import has been on decline in recent years based on ICO data.

Average Chinese cannot afford a cup of smallest size coffee at coffee house per day.  For instance, Starbucks Beijing prices small size coffee (8oz) for RMB 12 yuan, which is equal to US$1.5 (same as sold USA).  When average Chinese urban income is RMB 8000 yuan per year, 55% of salary would be spent to drink a small cup of coffee per day.  The income in Beijing and Shanghai are higher than average but still not even close to afford it.  A typical Beijing taxi driver has average gross monthly income of RMB 2000 yuan and a Starbucks barista makes RMB 1000 yuan.  Although Starbucks by no means is the most expensive coffee house in China and give slight higher salary than its competitors, we can be sure that Starbucks’ barista cannot afford Starbucks coffee.

Maybe China has 1 billion people; maybe Beijing and Shanghai alone have more than 30 millions in population; maybe China’s economy is growing fast; maybe there are more than 5 coffee shops opening in Beijing and Shanghai everyday; maybe China is the biggest potential coffee importer, but the truth is that majority of Chinese just cannot afford a cup of coffee everyday.  If the situation continues, it will also take China 90 years to popularize coffee.

Leadership Vacuum in Coffee Business Community

So far, international coffee companies have difficulty to develop China’s coffee market and are unlikely to provide leadership and direction either.  With more than 300 years of coffee history, western coffee giants know better how to gain more market share in a mature and coffee-drinking society than to develop an immature one.  They know better about marketing than coffee.

As the first major player in China, Nestle owns soluble coffee market.  Nestle has produced popular TV and media ads by targeting at a group of so-called ‘young middle class Chinese’.  However, that class of Chinese basically never exists and in reality if they would exist, these healthy neat family-oriented young Chinese couples couldn’t be possible to be the hardcore coffee drinkers either.  Without understanding the true characters of coffee and China, any kinds of campaigns may generate a lot of buzz with little effects.  In addition, without coffee shops and other means to start people drinking coffee, it is really hard for soluble coffee to expand its market.  Considering how many years for soluble coffee to win Japanese market, do we all want to wait for that long for China’s market?

Starbucks has increased the awareness of coffee house more than anyone else in China and in the world.  By providing better quality and environment, Starbucks has a good reason to hit big in USA, but requires a different strategy for China’s market, something that KFC has done quiet successfully in China.  As a trendsetter, Starbucks would also do more harm than anyone else.  Starbucks Beijing may never make much of money for years, and Starbucks Shanghai’s success is hardly exemplary and sustainable.  Its strength is in management, brand name and financial mightiness.  However, for a primary market like China, a little bit entrepreneurship is critical to advance the market.

International Coffee Organization had done generic coffee promotion in China in 1997-2001.  Nevertheless, coffee festivals and design and fashion award hardly worked because the consumers didn’t understand the drink and couldn’t afford coffee at the first place.  Concerts, festivals and award even in the name of coffee diverted the focus from coffee to, again, life style.  In addition, these expensive concerts and fashion awards just reaffirmed the misperception of coffee and luxury life style.  History shows the grass-root is always the best way to popularize coffee.  Chinese won’t start to drink coffee because Vanessa Mae or any acclaimed celebrities drinks or endorses coffee.

Local coffee business community is loose, sporadic and directionless in China.  Although there are many entrepreneurs, it is difficult for them to identify market when market itself is quiet muddy.  Coffee shops dilute coffee business by adding too many side businesses such as foods, fruit plates, spirits, music band, ultimately luxury environments and so on.  They are in bad need for knowledge and information about coffee and also need business guidance and substantial helps to develop their own coffee business models.  It is absolutely critical to realize that the local Chinese business community knows the market better than anyone else.  Once if they find ways to win rest of 95% consumers into coffee, it can definitely set a new record of coffee consumption worldwide.

Coffee and Coffee House

Coffee is a SPEICAL drink.  It stimulates people’s brain so to be more focused, excited and creative, extends their working hours and doesn’t hurt people’s health at the same time, not to mentioning it tastes bitterly sweet and smells like heaven.  Coffee is also quite inexpensive when coffee farmers have been on the verge of bankruptcy for years because of low green coffee bean price.  In addition, coffee is an addictive drink, which keeps loyal consumers.  Based on first hand observation and research, whoever has chance to drink coffee 3 times a week for two continuous months is addicted to coffee.

All in all, the economic trend since 400 years ago shows that the maximizing brain utilization becomes important to develop personal wealth and intelligent.  History also shows ‘inexpensive’ coffee stimulates the brain; the active brain creates wealth and the wealthy people drink coffee.  East Asians and even some international coffee giants may forget history and take the coffee cycle backward.

Coffee’s popularization has always been grass-root.  Coffee house, since early in the history, has served the purpose to promote coffee.  Before consumers are accustomed with coffee and move onto soluble or ground coffee, they need get chance to drink and feel the effects of the coffee.   All coffee cultures gain momentum from coffee shops.  Once momentum is generated, the market can grows like snowball rolling down from mountain.  Coffee shop can be seated place or just coffee carts and stands.  The point is to let people start to drink coffee, which cannot be done by soluble or ground coffee.

Coffee is a special drink with special effects on human body that play important parts on today’s society.

China’s Consumers Are Ready For Coffee

Tea has become a scapegoat for unsuccessful coffee promotion in China.  It is heard so often that ‘China is a traditional tea country and coffee has no market here’.  During 80’ and 90’s in China, the first group of coffee shops was born to meet the needs of foreigners living in China (normally they are richer than Chinese).  Coffee shop business has since evolved around foreigners and Chinese new riches.  Ordinary Chinese basically have no chance to enjoy all the benefits of coffee and coffee house.  Soluble coffee is really not something to start coffee drinking habit. 

A study has done on China’s illegal immigrants working in construction sector in the United States.  Most of these constructors are poorly educated and born in the peasantry.  The study results show that a majority of construction workers are faithful coffee drinkers and add less milk to coffee everyday.  Chinese today are as acceptable to coffee as Europeans 400 years ago or Arabians 500 years ago. 

In China, there are no marketing campaigns from tea industry; there are no dominant tea companies to rival with international coffee giants such as Nestle and Starbucks and there is nobody fighting in the name of saving tea from coffee invasion.  Everyone says coffee and coffee house are good thing to happen.  One of the best excuses for people who cannot afford coffee house is coffee may be harmful for the health.

 

Snowball effect

The best coffee promotion is to let people drink coffee and more coffee.  Anyone who drinks coffee more than 3 times a week for 2 continuous months wins the ticket to coffee club.  Therefore, coffee shop openings and intense marketing have to be around the places where the same group of people will revisit everyday such as universities, office buildings and so on.  This can bring the marketing and promotion to the best result.  When one WHOLE group of people becomes loyal to coffee, the snowball is formed and rolling down the mountain to expand its own consumer groups. 

Coffee already has a high profile in China.  Measurable and pinpointed generic promotions in harmony with private sector’s marketing campaigns will effectively increase public awareness and, more importantly, consumption. If any companies can adopt more direct, continuous, measurable and detail-driven promotions on specific group of consumers, another beautiful coffee story will be born in China.  

China’s Coffee Market: Waiting for the Tipping Point or Pushing for it

(Paul Wang, hwang35388@gmail.com)


Average Chinese drinks 2 cups of coffee per year, which means majority of Chinese almost never drink coffee since over 3 million of foreigners in China is the major clientele of coffee consumption.

In 2009, China’s per capita coffee consumption is less than 0.02 kg, and less than 0.035 kg for its metropolitan demography, in contrast with the US’s 4 kg, Japan’s 3.5 kg, Korea’s 1.5 kg, and Russia’s 1.5 kg.  Any medium size roaster in the US would roast more coffee than the entire consumption of China today.  The tipping point for China’s coffee popularization has yet to be reached due to its economic and political factors and also due to the lack of unconventional thinking in coffee promotion and strategies by most of players.

Coffee Popularization Pattern in Asia

The evolving pattern of China’s coffee market is, by and large, following the footsteps of its Asian predecessors, Japan, Korea and Taiwan.  Historically, for the US and most of western countries, coffee popularization was always a grass-root movement, evolved side-by-side with political changes and economic development. For many occasions, coffee houses were the birth place to business invention, political movement and new science.

On the contrary to their western counterparts, the maturing process of Asian countries’ coffee-market is always couple steps beyond their economic development. In the time before the tipping point, the coffee consumption was led by foreigners, and coffee house was served as leisure cafe by the local elites, the rich and the foreigners.  The most notable characteristic of this type of coffee market is that it has very high coffee price in their coffee house, which happened to Japan half century ago, and is happening in China now.  For a medium size black coffee (12oz), the average price in China is sold 2.2 dollars, which is more than the average in the US, when per capita GDP in China is only one tenth in the US.

A Phenomenon: Always a Tipping Point for Coffee Consumption Growth in Asia

In Asian countries, at least in the past 100 years, the coffee consumption growth would be standstill for decades, and then in a sudden, the coffee consumption starts to fly.

The tipping point of Japan’s coffee consumption happened in the late 1960’s.    Between 1965 and 1980, Japan’s annual coffee import jumped by 6 folds[1]; soluble coffee led the consumption growth. Korea’s per capita coffee consumption increased 6 folds between 1982 and 1992[2].  Taiwan was more gradual, but its annual coffee import also increased 3 times between 1988 and 2008[3].

The similarity among these three countries is that their coffee consumption growth was very much stalled before the tipping point, somewhere below 0.1 kg per capita for decades.  Then, at a tipping point, coffee consumption suddenly picked the steam, shooting up exponentially.

If this phenomenon would also be the case to China as it appears already to be, it means China needs decades for any meaningful coffee consumption growth.

International Coffee Giants in China – Waiting for the Tipping Point or Pushing for It

Nestlé is the first international giant to experience China’s coffee market.  After 30 years in China, it had met merely a little success.  It became the biggest fish in a small pond.  As said of a Nestles’ manager in Beijing, for Nestle coffee, China’s total market size is not even compatible with Russia’s, another non-traditional coffee drinking country. 

Another example is Starbucks.  With 200 stores in China, Starbucks Coffee has already saturated China’s obvious market clientele, especially the foreigners and the elite group.  For its continuous growth, it is necessary for Starbucks to look deep into the heart of China’s market, identifying niche positions, targeting specific market group, leveraging its brand power and management depth, and utilizing its vast variety of sales vehicles.

Without the comprehension of market reality and subsequently taking unconventional initiatives, China’s coffee market could spend another ten years or more in standstill. It is a wishful thinking that China’s coffee consumption would suddenly increase just because of its high flying GDP.  The grass root of coffee popularization has been the soul of coffee promotion for hundreds of years.  For any business has an interest in China’s coffee market, it needs to decide if it wants to wait for the tipping point as everybody else, or lead the tide to push toward it, which will set the future market leader in China.

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[1] Graph was cited from the presentation “History of Japan’s coffee market and Outline of the 3 neighboring countries market situations”, All Japan Coffee Association , 2010

[2] Analysis derived from the data by World Resource Institute, “http://earthtrends.wri.org/text/energy-resources/variable-294.html”

[3] Analysis derived from the data by International Coffee Organization, “http://www.ico.org/new_historical.asp”