Why China’s fierce cafe market is stirring up product innovation
Coffee and tea outlets will inch up at a CAGR of 1.4% from 2023 to 2027.
Multinational and regional cafe chains have grown rapidly across Mainland China over the last two decades, with coffee and tea outlets inching up 1.4% over 2023.
However, intensifying competition is accelerating product innovation and triggering price wars among these operators. As per-outlet revenues are squeezed, the expansion spree is expected to taper off, according to several analysts at GlobalData.
GlobalData said as the top-tier cities become saturated, more café chain operators, including Luckin Coffee and Starbucks, are expanding into smaller towns.
“Luckin Coffee, a domestic food tech company, stole the lead from global giant Starbucks China, opening its milestone 10,000th outlet in China in mid-2023. Starbucks China is hot on the trail, striving to expand its network to 9,000 stores by 2025. Besides the two market leaders, a host of local and international dine-in, takeaway, and delivery chain operators, including Hey Tea, Coffee Box, Pacific Coffee, and Manner Coffee, are expanding their footprint in China,” Kiki Wu, China Senior Business Development Manager at GlobalData China said.
With China’s top cities like Beijing and Shanghai filled with coffee and tea shops along with rental costs surging, operators are eyeing smaller cities and towns to expand. Wu said that café operators also face competition from direct-to-consumer brands, such as Saturnbird Coffee and Yongpu Coffee; convenience store brands, such as Convenience Bee Coffee, Family Mart Coffee, K-Coffee, and 7/11 Coffee; and vending machines dispensing ready-to-drink coffees.
The intense competition in China’s coffee market is also stimulating product innovation. According to GlobalData, local operators are more agile, responding rapidly to changing consumer preferences.
“For instance, through a partnership with domestic beverages giant Kweichow Moutai, Luckin Coffee launched The Moutai Latte, a low-alcohol latte infused with Moutai baiju, an iconic local spirit. Millions of cups of Moutai Latte were sold at its launch, and the drink attained viral popularity on social media sites. Such unique offerings are designed to attract 50% of Chinese consumers whose product and service choices are often or always influenced by how enjoyable or unique the product/service is. Not to be left behind, Starbucks recently opened its China Coffee Innovation Park at a cost of $220m to digitize its supply chain and accelerate its sustainability initiatives in China,” Bobby Verghese, Consumer Analyst at GlobalData said.
The intense competition has also triggered a price war, with domestic operators rolling out special discounts and price promotions to expand their consumer base.
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“Though inflation has not been a concern for China as it has in the rest of Asia-Pacific, such budget-price offerings are gaining appeal among Chinese consumers in light of the economic slowdown. This ties in with GlobaData’s consumer survey finding, wherein 42% of Chinese respondents say their spending on coffee & tea shops is quite/very high. However, a long-term price war can take a toll on operators' revenue and profit margins, particularly for large-scale café operators, whose unique selling point lies in their premium dine-in experience,” Wu explained.