Product Innovation: Fruit Tea & Soft European Bread Pairing

Nayuki introduced the “fruit tea and soft European bread pairing” as its signature product to the market. Although product pairing has been widely used in the retail industry, it was quite an audacious move for Nayuki to make. Most of Nayuki’s competitors in the industry, including Starbucks and Hey Tea, choose to stay “focused” and stick to one category only, no matter it is coffee or tea. With unique insights into the psychology of Chinese female consumers, Nayuki’s founder Peng Xin, however, considered “Fruit tea & European bread” a great combination that meet “two kinds of needs in a single scenario” and the sales number of the soft bread take up no less than 50% of Nayuki’s total sales nowadays.

Source: Sina Weibo, Nayuki’s soft European bread and tea pairing

Behind the success of Nayuki’s product innovations are its high-quality raw materials and stable supply chain. In order to ensure the quality and distinct taste of Nayuki’s products, Peng Xin and her team have visited and signed contracts with several renowned tea plantations across China and Taiwan. Nayuki has also built its own factories to manufacture fruit in season, which further enhanced the stability of its supply chain.

Aesthetic-Centered Marketing

Although China’s new style tea market is quite a large cake to share, getting a slice of it is not easy considering relatively low barriers to enter the industry and fierce competitions from both local and foreign companies in China. According to the white paper for 2019 new style tea consumptions co-published by Nayuki and 36kr, about half the consumers of new style teas in China belong to the post-90s generation and female consumers take up 70% of the market. Targeting a young and female-dominated market, Nayuki has been taking an aesthetic-centered marketing approach.

Nayuki has been working on a branding project called “Nayuki Cupseum” since 2019, which has been quite successful so far. The concept of the project is to exhibit artworks made by world-renowned artists using Nayuki teacups. So far, Nayuki has held three series of exhibitions which include “Big hugs to you” collaborating with American artist Christopher David Ryan during May 2020, “Being A Cat” with Pepe Shimada and “Ni Hao New Year” with Cinyee Chiu. Apart from the “Nayuki Cupseum” galleries, Nayuki cooperated with the 50th Anniversary of Anderson Lifetime Achievement Award in September 2019, during which every store would exhibit paintings of “The Ugly Duckling,” “The daughter of the sea,” and “Gorrila.”

Source: Nipic, Nayuki Poster

“Marketing isn’t just about advertising. Product development, space design, developing new techniques are all marketing,” according to Peng Xin, the founder of Nayuki. The emphasis on Nayuki’s aesthetic appeal is reflected on its physical stores as well, from lighting, to color tone, to location, all tailored to the needs of young female consumers, such as taking pictures inside the store to publish on social media. The in-store experience seems to be no less important than the quality of the tea itself for consumers. Nayuki is selling more than a cup of tea, but a whole package of experiences from purchasing online, to picking up at the store, to taking a selfie with its beautifully made teacup, which at its core is a reflection of a lifestyle ideal consumers have been longing to have.

Nayuki’s Cultural Appeal: The Arts of Cultural borrowing

Nayuki might strike consumers as a Japanese brand, but it is in essence a local Chinese company that borrowed a Japanese name. This should not come as a surprise as this kind of cultural borrowing is hardly an uncommon practice, especially in the fashion industry. The rising of Nayuki implies the strong influence of the Japanese cultural exports among Chinese consumers. Although tea-drinking culture originated from China and later exported to Japan, the Japanese tea-drinking culture has evolved a system of its own and become quite different from the modern-day Chinese tea-drinking culture. Therefore, taking on a Japanese brand image has facilitated Nayuki’s success by differentiating itself from other local Chinese beverage brands.

Post-Pandemic Age: What to Expect for Nayuki and China’s New style tea Market?

Although the coronavirus has been contained very well in China, consumption patterns have largely shifted from offline to online, which might continue to be the new normal until the vaccines come out. In the meanwhile, new challenges have been raised for the China’s new style tea market and brought new opportunities for Nayuki as well. In response to consumers’ expectations for a higher security standard, Nayuki has adopted a new operating mode that requires no direct human contact. According to Baidu index search frequency data, the search volume for Nayuki peaked in middle of the pandemic on April 1^st, during which Nayuki brought 3,000 free drinks to cheer up the doctors and nurses at the Leishen Mountain hospital in Wuhan.

Data Source: Baidu Index, Search Index for Nayuki from January to August 2020

The pandemic has also rushed China’s new style tea market into digital transformation. During the period when Covid-19 was at its peak in China, Nayuki offered free delivery for all online orders. As a result, the total number of transactions completed on Nayuki’s WeChat mini program have doubled compared to the previous year. However, such transformation requires both financial and technological support, which might imply a reshuffle of the market. Although major companies such as Hey Tea and Nayuki could probably make through the pandemic with enough funding to adjust to the new normal, small beverage stores might find it very difficult and eventually exit the market.

What we can learn from Nayuki’s success

• Nayuki conducted market research to precisely identify their target consumers, then focused their marketing tactics on them. Nayuki has a clear brand positioning that targets 25 to 29 year old women. Nayuki’s marketing campaigns such as the “Nayuki Cupseum” projects and art exhibits with the Anderson Lifetime Achievement Awards are both tailored to satisfy the cultural and aesthetic needs of a young female audience.
• Nayuki differentiated itself from the myriad of other new-style tea brands on the market with its product pairing and store aesthetic. Additionally, the brand borrowed a Japanese name which is unique and stands out.
• The tea-store used an O2O marketing strategy to establish online presence, which was especially useful during the COVID-19 pandemic. Consumers are raising their standards for safety and convenience, which is particularly important for brands to establish online presence during a pandemic. Relying on third-party platforms like WeChat, Nayuki realized digital transformation and made it through the pandemic.

Author: Isabella Li

Learn more about the tea market in China

Listen to 100 China entrepreneur stories on China Paradigms, the China business podcast

Listen to China Paradigm on Apple Podcast

This article The success of Nayuki, the Chinese new-style tea store going global is the first one to appear on Daxue Consulting - Market Research China.

Full transcript below:

Welcome to China Paradigm, the show powered by Daxue Consulting where we interview season entrepreneurs and experienced managers in China about their business and experience in the country. 

Matthieu David: Hello everyone. I’m Matthieu David, the founder of Daxue Consulting and its podcast, China Paradigm, and today, I’m with someone who I think will be very interesting to interview. To give you a sense of who she is, Cotton Ding is from Hunan and started her business at the age of 26 and she has been running a restaurant in Shanghai for 17 years.

I don’t think you have many restaurants in Shanghai which have survived 17 years. You studied at the time which now resonates even more than before. You started in 2003 during the SARS (learn more about the SARS impact on China). At least it was during this year that we had this outbreak of SARS and currently, in 2020, we are late March 2020, we are in the middle of an epidemic in Europe and the US and it seems that we have handled it in China.

You have two venues now. You had three in the past and that’s something that can be very interesting to understand as well; how you did manage all of them. A few numbers about the industry. First, this is the Food & Beverage business in China that has been hit hard by the Coronavirus recently. It’s about 90 million people in all China who lost their jobs temporarily and it’s about – in terms of revenues- 70-80% down for the first quarter (learn more about the impact of the virus on the restaurant industry in China).

So, it has been damaging a lot of the industry, an industry which is about 1.8 trillion yuan for January, last year in 2019 in China. It is a sizeable industry that represents about 6% of the economy. So, coronavirus’ impact on restaurants and bars in China has been affecting a lot of people. It has been hard to navigate. Some companies, large companies, were saying that they had only two months of cash, and if the epidemic was here to stay, they would be out of business. So, running a restaurant in Shanghai during these times will certainly be a challenge, but you have been here for 17 years now, managing a few restaurants and we have a lot of questions for you, Cotton. Thank you for being with us. 

Cotton Ding: Hi everyone, hello Matthieu. Nice to be here.

Matthieu David: What would you say about my introduction? Anything you would like to add or anything you would like to correct?

Cotton Ding: It’s quite a good introduction. I opened Cotton’s in 2003; 17 years ago, and for the past 17 years we have been here. We now have two locations and it was quite a good journey. The interesting thing is that we opened in 2003 during SARS (learn more about SARS impact on Chinese economy) and now we have the Coronavirus and I mean, quarantine. 

Matthieu David: Right now, you are in quarantine because your husband came back from overseas and you have to stay in quarantine with him. China is being very strict about it. I just finished my quarantine.

I’d like to go back to the start. You have been working in a factory in Shanghai 20 years ago, coming from Hunan. Hunan is a province in China that is famous for a few things. Its food is very spicy and it is also was where the mother tongue was born. It’s a big province. I think there are about 60 million people and you came from Hunan to Shanghai to initially work in a factory. Then, you worked as a bartender in Shanghai and you had the idea of running a restaurant in Shanghai when someone asked you, “Oh, you are the owner of the restaurant or the bar? You should do this and that.” Then came to you the idea that you could be the manager. Could you tell us more about the start? 

Cotton Ding: Yeah, that’s quite an interesting one. So, I was in Shanghai in ’97. I was a factory worker. So, I was making about 350 RMB per month. So, I had been working at the factory for about a year and then I went back to Hotan and then in 2000 – 2001 I came back to Shanghai, again and then the story, actually, you already described very well how I started. How I started from

working as a bartender in Shanghai to running a restaurant in Shanghai. So, the small story is that I had just graduated and moved to Shanghai. I know the final draw was Graphic Design and I went back to work as a bartender in Shanghai in a restaurant again. Just after seven months.

Matthieu Davi : Sorry to interrupt. There must’ve been a lot of frustration. You studied interior design and you then found a job as a bartender in Shanghai. Wasn’t that frustrating?

Cotton Ding: Actually, it was very frustrating. I came to Shanghai and I was broken all the way. All my money went to university. My dream was broken because I wanted to be an interior designer, but I couldn’t. So, I took a job to

work as a bartender in Shanghai when I was saving money to go to university and my heart was broken with my boyfriend. So, I can say I was broken all the way. 

Matthieu David: And you found the energy to be about there for 7 months. 7 months working as a bartender in Shanghai and what happened there?

Cotton Ding: So, I think the key point for me or the key turning point in my life was that I decided that I was tired of being broken. So, I decided to find the job I wanted. Then, I would take the job I am doing to be my dream job. So, that’s the decision that changed everything. I loved to work as a bartender in Shanghai and I was good. So, once you change your mind, your life changes. 

Matthieu David: What do you like about it? 

Cotton Ding: Everything. I love the interaction with the customers. I love being behind a bar. So, I always help people. So, behind the bar, it is a stage. Who you are and how you… we are in the business currently with people to connect with them, talk with them and make them feel good.

Matthieu David: I see. It makes sense now that I understand the transition better. You like sociability. You like to interact with people and then it makes sense that at some point you wanted to run a restaurant in Shanghai or have your own venues because you like to listen to your clients and customers and interact with them. I’d like to now give a sense to the new current business situation now because that is usually actually the question I started with.

I went to one of your venues two years ago and I saw the picture of the other ones. It’s beautiful. Inside is beautiful. We see that you like the design, the colors, the lights. There are gardens as well. So, restaurants with gardens. You have a capacity you said, of 200 people for each place. You can go up to 800 if it is booked for an event. Would you mind sharing a bit more about now; 2020? What is the size of your business? Any numbers in terms of team revenues and as we said, the number of seats. You already disclosed it. It is 200 people at each venue.

Cotton Ding: Yes, for both of the locations, they are beautiful and historic and so the capacity is about 200 if we sit down and id there is a party going on; so, we could host around 800 or even 1000 Khotan. So, if you imagine the scope of the businesses we cater about; between both venues about 400 guests per day and on a weekend, we are catering about 800 guests a day and the average bill is about 200 RMB per person. So, you do the math. 

Matthieu David: Okay good. For people who are good at math, they would calculate, but basically, you are about 40 000 if I make a calculation, per day. You would certainly be about 80 000 more every day on the weekend. To make people understand where you are; the location is in Xinhua road. It’s a very good location. I think it is expensive to rent it. You started 17 years ago. So, I believe cost-wise and we understand that now your top revenue is 200 people around 200 RMB per person, on average. What about the cost? I feel a lot of businesses don’t survive ten years or even five years or even a year because of the rent increase. Could you share more about the cost of the rent and how you have been able to manage it over the last 17 years in a very good place?

Cotton Ding: So, the rent increase between both places almost doubled for the last nine years. So, it’s quite a big increase, compared with how much we or our prices increase. We try to house the business. We look at the rent and we try to match the rent to 20% of the revenue. 

Matthieu David: I see. That is a good metric.

Cotton Ding: Yes, if you manage your rent, 20% of the revenue, you are in a very good financial business shape. 

Matthieu David: That’s your goal, right? Your goal is to stay at 20%.

Cotton Ding: Yeah that’s the goal. So, we have to with the increase in the rent. We need to increase our Food & Beverage businesses in China. Push more business. From the beginning, we don’t open for lunch. We don’t open for afternoon tea. So, we open only for 6 pm, right? So, we started to open for lunch from 11:00-14:00 and then afternoon tea. So, you expand your business hours.

Matthieu David: What we are saying for the Food & Beverage businesses in China is that there is nothing more expensive than an empty seat, right? So, that is what you did. You tried to have someone in a seat all day long; for lunch, for afternoon tea, and so on.

Cotton Ding: Yeah and the ones that we did very well were for brunches. So, I think the one in the year that we had just opened, we had very few customers for brunch and now our brunch is active every day and every weekend. So, this year due to the coronavirus’ impact on restaurants and bars in China, what we try to do is open for brunch every day. So, that again, the business hours and we tried to do it. If the formula is working, then you push in more.

Matthieu David: I’m not getting it; the link with the coronavirus’ impact on restaurants and bars in China. You open for brunch every day now, including the weekdays because people don’t have to go to the office, right? 

Cotton Ding: Yeah, even during the weekdays we are open for brunch now. Before we were only open for brunch on Saturday and Sunday and Saturday and Sunday we are always full. We already have 200 guests, just for the brunch. 

Matthieu David: Very interesting. That’s why I am liking your story. You can innovate step by step with key changes like this. Like the coronavirus’ impact on restaurants and bars in China is happening. People have more free time because they don’t go to the office during the weekday, right? They are not authorized to commute too much, to go too far or whatever. So, let’s do brunch every day and that is very, very interesting learning.

Cotton Ding: Yeah and what we are doing now is that we are trying to do it in a new way. So, delivery was a disaster before. We never really paid any attention to delivery and then this year we tried to go to delivery. The number is still very small, but it is increasing every day. So, we see the effort.

Matthieu David: I’d like to go into delivery and online later on more deeply, but first, I’d like to finish on the revenue and cost. So, you said about 20% for the rent and what about the team? You said that the rent has doubled over ten years. To be honest, I am not that surprised and I feel even you matched quite well the increase because I think my apartment over ten years, it may have more than doubled or it has doubled, I would say as rent, but I would have expected that a place like you would have more than doubled.

So, that’s not something I am very surprised at. You said that you were making 450 GMB in ’97 and so I believe that the salaries may have increased even more for Food & Beverage businesses in China. Would you mind sharing more about the cost salaries ad what do you have to do? What do you have to pay when you buy people in the restaurant business? To give more insight and background stories, I remember talking to people in Beijing. I used to work in Beijing. They told me that they have to pay for the rent for the workers, they have to pay for waiters and waitresses, they have to pay for the chauffeur and to find the dormitories and to provide them and of course, there is a salary. Would you mind sharing a bit more about what your costs?

Cotton Ding: Compared to the number of how much the salary we paid to now, it has increased by 400%. 

Matthieu David: Sorry, 400 times? So, plus 300%? Four times, right?

Cotton Ding: Yeah, four times. When I first started in food and beverage in 1998, my salary was about 500 and in 2003, if you hire someone you pay about 1500 RMB and now, you cannot find anyone below 5000, I think. 

Matthieu David: When you say 5000, you say with taxes and so on or it is net for them; net 5000?

Cotton Ding: It is net. 

Matthieu David: Do you provide accommodation?

Cotton Ding: We provide a dormitory. We provide a food allowance and so the salary structure of what we have is very flexible. We have a basic salary, but we also have a bonus and other benefits.

Matthieu David: I see. Are there other costs we are missing here that are viable costs for the food you buy, the drinks you buy, and so on? Are there other costs we are missing except for the fixed cost?

Cotton Ding: We always talk about it… the fixed cost is always different from the salary, right? So, that’s a fixed cost and the food and drink cost is between 21%-31%.

Matthieu David: Wow you are very precise. Why 21-31%?

Cotton Ding: Different restaurants have different price structures and it depends on how well you look after the costs.

Matthieu David: Okay, interesting.

Cotton Ding: So, really very well managed restaurants. They could go for the drinks, down 21%. That’s what we talk about. Very good managers of the restaurant and if you go to 31%, you’re still okay, but over 31%, it’s difficult for business. You don’t have any margin.

Matthieu David: I see. I think one of the difficulties of managing a restaurant is to make sure you don’t waste food (learn more about waste food in China). You don’t waste your drinks. When you open a bottle of wine, you make sure to finish it because you cannot re-use it the day after. Would you mind sharing how you manage your inventory and purchasing every day when you are not sure of how many people are going to come and how many will order? 

Cotton Ding: Okay, we talk about managing a lot. I remember a few years ago people asking me, “How do you manage so many people?” We have around 50 food staff and actually, around 30 casuals and so my answer is always, “No, I don’t manage it at all. I really don’t like the word ‘manager’. I would more say the style of how I empower people.” So, in my business, we talk about the cost and I allow them to decide. The Chef knows. After one week he knows how many fish per day we sell and what is the most popular and what is the ingredients we use. They understand it better than me. So too, with the bartender because he is the one who manages the daily operation.

Matthieu David: I see.

Cotton Ding: We have a procedure for running a restaurant in Shanghai. We have checklists. We have minimal storage for each item, but people are the key ingredients in this process.

Matthieu David: How do you make it happen? How do you empower them because the difficulty or I mean the idea is nice and I think a lot of entrepreneurs want to do that but implementing it is hard because it is hard to make everyone aware and responsible for the fate of the company? Is it that you do a profit-sharing model? Is it because of you… is it the way you interact with them? You let them speak. How do you do it?

Cotton Ding: There are a few ways. I mentioned about salaries earlier and so, not everybody has a fixed salary, of course. You have a basic salary, but then you also have a bonus and an incentive. So, when business is good, your income is better and so, everybody is striving to have better good business because if business is good, then everybody’s income is better and the same with chefs. So, if the cost is lower, they have also a better bonus. 

Matthieu David: I see. Would you mind sharing about how sizeable the bonus can be? Are we talking about +10%, +20%, +5% for them on a monthly basis?

Cotton Ding: So, the bonus should be, structural you have a basic salary and then there is a 30% difference in a good month and a bad month. 

Matthieu David: It is very sizeable. Which month is good, for instance? Is it December? Is it February?

Cotton Ding: The best month are September, May, and October. So, when the weather is good, we have good business because we really depend on the garden. So, when the weather is bad, then the business is not so good.  

Matthieu David: You said you motivate your team by a bonus. So, for profit-sharing, you look at the revenue, manage the cost and in some way, you give them a percentage. It is interesting because it is exactly what we do, actually, in our company. What else do you do to create this team spirit where people are willing to share and contribute and so on?

Cotton Ding: We have a company culture training and so every year, if we have a new team member, I make sure that with me they go through the company culture training. So, for me, I don’t’ believe people will work for me forever, and also, I don’t believe they will work for me. They work for themselves and a better future and I am a provider of a good platform for them. So, they use it and once they are ready, they could start running a restaurant in Shanghai. They can take off. So, that’s our atmosphere at Cotton’s.

Matthieu David: I see, interesting. I am not sure opening a restaurant now is in some way as reachable that when you did in 2003?

Cotton Ding: What I see is that when people work for somebody else, it is a different feeling than it is to work for yourself. For everyone in Cotton’s, they feel they are working for themselves. It is a very different working atmosphere.

Matthieu David: There is a saying from people from Wenzhou saying that they would prefer to sleep on the floor and have their own business than working in a company for someone. It seems that it’s a little bit your mindset rally, to master your own destiny and your own life and your own business if I’m correct?  

Cotton Ding: Yeah and also it is a friendly working environment. You interact with people and that is what we try also to do. 

Matthieu David: I’d like to talk a little bit about what has happened in January, February and march in China and what is happening now in the rest of the world and the coronavirus’ impact on restaurants and bars in China. So, I’d like to talk about it with two perspectives. The first one is a Chinese perspective to understand what happened and the second one is an inspiring perspective to inspire people in the West and all over the world, actually; business owners and restaurant owners on how to manage and if they could manage it the same way in their own country. I’d like to share a few numbers.

So, as we said, the food and beverage industry is about 6% of the GDP in China so it is sizeable (impact of the coronavirus on the F&B industry in China). It is about 9 million people who have been laid off during that time. It has been very strongly impacted. We have seen the same in the West. The weight for different segments, for instance, for fast food (learn more the about fast-food industry in China). 62% of the restaurants were shut down at some point during the epidemic. Coffee shops were like 83%, bars were like 66% and basically, we are talking about two thirds to 80% of shut down for a few weeks and some for a few months. I’m talking about Wuhan.

China is specific because it’s very digitalized. Delivery is working. I mean, I don’t know how you would say it, but it is very common to get delivered and you have digital payment very widespread. So, in some way, it will be different than Europe and the West. Which is not as developed on those elements. Would you mind sharing about how you manage those hard times and the coronavirus’ impact on restaurants and bars in China? What decisions did you make when you knew it would be hard and you knew you would be shut down?

Cotton Ding: We sat down actually, January 2004 and there was a new one out and I knew we would not be open for the whole of February. So, we’d be closed for 5 weeks and we opened on 1 March and so now, we have been open for one month now. So, the moment I heard about this outbreak, I panicked. I really was… I couldn’t sleep and I was really worried about my business because I know that in 2003 during the SARS, 35% the Food & Beverage businesses in China didn’t survive. They closed their doors forever. I know something very big is coming and we should be in survival mode. 

Matthieu David: Seabay, a very big restaurant chain very openly communicated in the press saying that they have three months of cash if they are still closed and I was very surprised that I saw a lot of people buying Seabay online. I think it was a very smart move, actually, from the manager to say, “We only have three months to survive” and I feel the deeper boat online and got delivered through Seabay. Would you mind sharing a bit more about the actions you made because the restaurant was shut down, but does it mean that delivery was shut down as well?

Cotton Ding: The Food & Beverage businesses in China were shut down and our delivery was also shut down. So, basically, we closed for 5 weeks. Seabay was alright and most restaurants only had three months’ cash to run. Since we are a business for 17 years and also, our business is very seasonal. We have summertime very good business and wintertime, very slow business.

So, in our business, we have money saved for a rainy day. We have a little bit extra cash saved because we know that business is not always good and we save cash for two reasons. One is we save for a rainy day and the second one is that we save if the opportunity comes, maybe we move to a new location and so when the business is good in the summer, we always try to save. We don’t spend it all. We always try to save and I think that is something which we have been doing for ten to fifteen years and this is something we saw last time and this time, we have a better chance to survive, long term.

Matthieu David: I heard an interpretation that February is a low season and I am speaking for a lot of Food & Beverage businesses in China because people don’t work. I have a sense of that has a bit softened the coronavirus’ impact on restaurants and bars in China; the economic impact. Is it correct?

Cotton Ding: Yes. Indeed, February is always slower. So, when we predict cashflow we already in February we won’t generate a lot of income. So, we already saved for February. 

Matthieu David: It is as if the crisis in Europe or the US would happen in August where actually a lot of companies are closing and business is very slow. I feel in some way, that has softened the coronavirus’ impact on restaurants and bars in China. What about the after-crisis? So, let me understand. You shut down for 4 weeks. No business at all. Nobody could join your restaurant and you couldn’t deliver either. You had to pay your rent, you certainly had to pay most of the salaries.

What about 1^st of March and the month of March? What did you see in the habits of people? How did it change? One learning we have is you said earlier that you implemented brunch all over the week so that because people don’t go to the office anymore because they work in a more remote way, they would come actually, in the morning to your restaurant or they would look for a place and in a coffee shop, I think it took time for Starbucks to reopen fully. So, coffee shops may not have been opened as well. What else has changed in terms of consumer habits, in terms of the way of running a restaurant in Shanghai? You mentioned as well delivery. You did more delivery. Would you mind sharing it?

Cotton Ding: We always used to be an evening business. So, revenue was always like 80% or even 90% and now, we already notice in the day time; brunch time has increased. Basically, since March our brunch business is better than last year in the day time and so we increased our brunch business and people feel more… after time people don’t feel… people don’t want to go out. In the day time when the sun is out, the people fear going out for brunch and going out to have a coffee. So, we have to really push our brunch. That’s the one thing we did and for delivery, but we still are working very hard. Delivery is not there. Before, it was 0.1% and now maybe we have 0.5% of our business, but it still couldn’t pay the bill.

Matthieu David: Why do you say couldn’t pay the bill, because delivery (learn more on food delievery in China) in some way, you just shared a percentage of the revenues with a delivery platform. Is it because they take 10-15% that is damaging so much your margin that you cannot be profitable?

Cotton Ding: Because of our business model, I think. Our business model is still… it is not only food, but it is the social perspective. People can always have a burger and a sandwich at home, but the social aspect cannot be taken away.

Matthieu David: I see, so the drinks basically, right? When you socialize, you consume drinks and alcohol and this is where the margin is higher than food. When you deliver only food, you may have a lower margin.

Cotton Ding: Yeah. 

Matthieu David: Okay, I’ve got it. What about working with a platform? How do they work? What do you have to consider when you work with those platforms and who much margin does it take you?

Cotton Ding: So, with Ele.me, last year they take 18% and this year they took 20%.

Matthieu David: Okay, they increased.

Cotton Ding: Yeah, the same with shoppers. I think shoppers also do 20%.

Matthieu David: It’s huge. 20% of revenues, right?

Cotton Ding: Yes. It is very big and the service took 20% and Shoppers has them encouraged. So, if you are doing more delivery in percentage, then they will come, but we are still in this 20% range. 

Matthieu David: Does it change because of the weather? I heard from someone who managed coffee shops that… the coffee price point may be lower than you so we are talking about 10, 15, 20 RMB. She has to pay more when it is raining. Is this the case? 

Cotton Ding: No, it is the same, basically. 

Matthieu David: Yeah, we understand that you change your opening hours and what you offer to be more balanced throughout the day; one thing. Another thing, running from the Coronavirus and change in consumers. The second element is more delivery which is a bit obvious in China because it is so well-organized and so easy to deliver. Does it mean that Shoppers are bringing you new clients or is it your own clients go to the platform to buy from you?

Cotton Ding: Maybe a little bit of both. I don’t really know the number yet. The database is still in the back office, but I think it is all clients.

Matthieu David: Okay objectives should be also to bring new clients and that is why they may justify the 20% which is pretty high.

Cotton Ding: I agree. It is helpful in the future because we have not been working with them for very long. We still only tried to push for last month. So, it’s still too short to say.

Matthieu David: You mentioned in one interview in the past, that you have been able to go through a lot and without being hit by license violations, development, etc. Would you mind sharing about the big mistake that restaurants are making, that shut them down, not only businesses? So, we understand if you don’t make a profit you have to shut down. That is the case for many businesses and now what about a license violation that you say, the open development. Are there three common threats to Food & Beverage businesses in China?

Cotton Ding: I am more conservative when doing business because there are so many elements for a business to fail. For me, before I sign a contract, I need to make sure we could have the proper license. So, this is something that I will not risk. 

Matthieu David: Is it hard to get it? Why do people manage their restaurants wihtout it? Is it hard to get?

Cotton Ding: Yes, it is. It is hard to get. 

Matthieu David: Why is it hard, because it takes control, it takes time and it is expensive?

Cotton Ding: It is difficult because you need food and drink license, then they’re also very strict on the location size, but I think it definitely was worth it to go through all the troubles. Of course, it was a lot of trouble. It took one month, two months, three months to get a proper license for my Food & Beverage businesses in China, but always get a license because the law stops business and the risk is too high not to have that.  

Matthieu David: Yeah there is a misconception between the West and I mean, the West toward China and business in China. A lot of Western people still think that China is not very regulated, but actually, you have a lot of regulations and you have to follow them in China. You have taxes and salaries. You have social insurance to pay, which is not small even compared to Europe. It is actually comparable to Europe and that is a misconception. Do you feel the same?

Cotton Ding: I think maybe before 2010 or back in 2003 it was a cowboy country. There were a lot of grey area. People could get away with running a restaurant in Shanghai without a license, but this is a risk matter for each individual and after 2010 after the world expo, if you don’t have a business license you are shut down. 

Matthieu David: One thing I’d like to dig in more is especially because you have a background of interior design. You insist on some articles on having your own identity. So, I understood that you have your own identity with your team? You have your own values. You have your own culture and you have developed it. What about the identity towards the customers; the people who join for lunch, for lunch and now, brunch. Would you mind sharing about the identity over the last 17 years and why you have built this identity? Is it because of yourself? Is it because of actually, the contact of the customers? Is it because it is working and you have found an opportunity?

Cotton Ding: You have been to Cotton’s and so both Cotton’s are located in historic homes, basically. So, you don’t feel like you are going to a restaurant. You feel like you are going to your home; maybe your grandma’s home. So, that is the idea I try to create is we go to a friend’s home. We go to a friends’ living room. So, this ambiance is what I try to create. 

Matthieu David: I see and you do it yourself for the interior design and so on or do you hire people to do that?

Cotton Ding: I have a designer that I work with from England. We have been working together for all my projects. So, Peter; a good friend of mine. He understands what I want very well and we work together to create a living environment, a home away from home. That is what I always tell Peter. 

Matthieu David: What changes have you followed in the identity of the brand since 2003? I believe it has changed. In one article you said that in 2003, let’s say 90% of your clients were foreigners and I mean now, the date of the article is a few years ago. You had 40% of local people from Shanghai. I believe that is affecting also the way you communicate your identity; your brand identity. Would you mind sharing about your clients, how they have evolved, and how it has evolved the identity? 

Cotton Ding: Well, when we just opened it was like almost 100% for foreign communities. Now, we have about 55% foreigners and then we have 45% of the Chinese community and they are very important. So, with the new clientele and a new community. So, we have to design the menu to also appeal to them, even the way of service. 

Matthieu David: Very interesting. Can we dig deeper into it? What are the elements that had to change?

Cotton Ding: Definitely we had a lot of different juices. We had various different teas. We need also in the menu the Asian favorite. So, a few Asian dishes to be added in there for the clientele.

Matthieu David: Spicier, compared to… Chinese would feel like French food very untasty because it is not spicy enough, for instance. What do you feel you had to adapt and not only because it is Asian only, but because the effect of Western food and the enjoyment of Western food is different?

Cotton Ding: So, for most clients, they come to Cotton’s and they come here not to eat Chinese food, but they come here actually for less than food. They like original Western food. So, I think they are clear about their ingredients and so where does the tea come from and that is something. They come for Western food and to try different ingredients, I think.

Matthieu David: I am curious about yourself and the way you are running a restaurants in Shanghai. You said that it is mostly for dinner in the past. Does it mean that you were staying in the restaurant and then sacrificing all your evenings to the restaurant? How do you manage your life with a business which is the opposite of a personal life because you have to be there when people have free time and so you don’t have free time when the rest of the world has free time? How do you manage that?

Cotton Ding: I think that’s the nature of the the Food & Beverage businesses in China. Everyone in food and beverage; you know, we never have Christmas and we love our Chinese New Year. We are working. We rarely have holidays and when everyone is on a happy holiday, we are working. I love it. I’m not a morning person. 

Matthieu David: It is interesting. I think that is something we don’t see, but you choose business as well when you start a business which may fit also who you are. You are a morning person or if you are an evening person. If you are a person who likes to socialize or if you are someone who likes more technical things and not too socialized. Is that also a choice you have to make and be aware of when you start a business, right?

Cotton Ding: I agree. I think so. I think you have to understand who you are and what is your nature and the best quality or passion you can offer. If you do something that is against it, it is difficult, right?

Matthieu David: Yeah, it’s not only about the product and the profit, right? It is also about the fitting of your own way of life because if it fits, you will thrive and if it doesn’t fit you will suffer from it and it’s already hard to start a business.

Cotton Ding: I believe a business is not a job. It is not like, okay, you go to work 09:00-17:00. It is a lifestyle, for me, I don’t really consider myself going to work or an off day. You are working 3-4 hours and so it is a lifestyle you create for yourself. So, it is better to be suited.

Matthieu David: I have a few questions to end the interview. I believe we sent them to you earlier. What books or it could be books, it could be movies, it could be poems; whatever has inspired you in your entrepreneurial journey? It could be meeting with people, but what has inspired you the most?

Cotton Ding: Yeah, it is interesting because I really love reading and I read a lot. So, the last time we spoke there were many categories and so for me, what has inspired me is when people enjoy what they do. That is also empowering.

Matthieu David: If you had one book to recommend to emphasize this element, to do what you love and by the way, the name of the third venue you have; Litchi, was coming from Yun Gu Fei, which was one of the concubines of the emperor a long time ago and you got the label, Litchi, from the south of China. It was very expensive at the time. So, I see that from what you do, you try to find a route to give the sense to find something which is a bit more with substance. So, would you mind sharing with us one book, if you have, which is representing or embodying what you just said or two books, if it easier?

Cotton Ding: Wow, I have tried to find something. Okay, let me just… give me a second. I just pulled out a book from my bookshelf. The strategy of War. Robert Greene. For me, I think this is a very good business book. I believe in a way, life is a war, and business is a war, too. To really be able to win the battle, you really need to understand your own strengths and also your opponents. 

Matthieu David: What do you fight for because when there is a war, we fight for something? Is it for making your mark in the world? What do you fight for?

Cotton Ding: I believe what we fight for, of course, is to overcome the Coronavirus. To survive, to be here, and to make a difference. To keep intact for whoever works for you; like your staff and then also give a positive impact to your customers to be remembered as this is something that we fought for; to be remembered, not forgiven.

Matthieu David: To be remembered. Interesting. What do you read to be up to date about business in China? For instance, we are in a world that is changing fast. Myself, I am reading tech Crunch, for instance, to understand about technology. I am reading the New York Times to understand more about the world. I am reading the Morning Post to know more about China. What would you read to know more about China and your industry? Would it be your WeChat groups? Would it be LinkedIn? A lot of people tell me that, but it could be…

Cotton Ding: If I tell you the answer you are going to laugh at me. I read WeChat. 

Matthieu David: Yeah, but actually that’s something I found out. A lot of people say WeChat and LinkedIn for some reason. The reason is that you have your own group which focuses on a topic. I believe you have groups about food and beverage and restaurants and then you can interact with your people who provide you information to say is it true? How did you do it? You cannot do that with a journalist. You cannot do that with a paper and finally, you get the news quickly because when something happens, you know it and it’s now. Journalists may take a few weeks to react.

Cotton Ding: Yeah that’s very true because we have a lot of different groups; a restaurant group, a customer group, supplier group, management group, and the communication is very fast and direct and you have really a close connection with your customers.

Matthieu David: True. One thing I see as a danger is that I am seeing some people spreading fake news and false information and so, I am balancing it a little bit of Google search, sometimes to make sure that it is really something issued by the government because sometimes I feel there is a little bit, especially during the time of the Coronavirus, when we have to act fast and there is a bit of fear everywhere. They get fake information.

Cotton Ding: Yeah, I saw it during the Coronavirus. Everybody is trying to send information and that creates panic and it creates unnecessary panic and then people all react. I was finding fault with that because of panic; there is no good outcome that comes from panic. We could only do what we could manage and especially in this difficult time. We have to be positive. 

Matthieu David: Exactly. My conclusion is that critical thinking that is the ability to be critical in screening information and to use critical thinking can be key; more and more key and more and more important in the coming years, to make sure that when there is information that looks a bit weird or surprising to be able to know that, “This one I need to be able to check.” About China, what books would you suggest to foreigners to read about China? What would you recommend? It could be a book. It could be a movie as well, but what would you suggest foreigners read, to watch, to do, to know more about China?

Cotton Ding: The book is called Dark Heart and a Thick Face. It is a business book on how to understand how to do business and all the Chinese philosophy and how to do business in China.

Matthieu David: By whom?

Cotton Ding: I can’t remember the author, but the name is called Thick Face and a Black Heart.

Matthieu David: Thick, like a bit fatty, right?

Cotton Ding: Yeah.

Matthieu David: What productivity tool do you like most to use? We understand that we use WeChat, but WeChat seems to be an unproductive tool because it takes too much time. Sometimes you wonder what to doon WeChat. Do you have some productivity tools? I am especially interested in this question because I have a sense that you are very good with your numbers. You say 45% is our local customers 55% are foreigners. Someone who does not look at numbers will always say it is 50/50 or half-half. You come up with very precise numbers. So, what do you use as a productivity tool or digital tool to understand your business and to be productive?

Cotton Ding: I don’t use many tools. Because basically, I spend most of my time in the restaurant and so my back office is quite bad, but now thanks to the Coronavirus, I have time during quarantine to understand the numbers. 

Matthieu David: That’s a very good point. This time of shut down, you can worry a lot and spend your time worrying, but you can also look at your numbers and think about what is next or what changes you can make. By the way, after the Coronavirus crisis, have you seen more business or less business?

Cotton Ding: I will say that this will be a very good year. I am quite positive about 2020. I know we had a very tough start, but I am still quite positive for this year.

Matthieu David: About March? What about March? Was it better this March than last March?

Cotton Ding: No. My business is 50%.  

Matthieu David: I see because some people argue that people have been home for one month with only sad news and so they would like to go out, to do things, to meet with people, but it is still not the case, right?

Cotton Ding: Not yet. It is much more positive. I saw that maybe April, people were already going out and celebrating and now because it is not only happening in China. It is also happening globally. So, if we could go back to normal, that is already positive.

Matthieu David: If you had extra time to do something else, what idea would you like to work on, or what business, or what may be action you would like to dedicate more of your time to?

Cotton Ding: For me, it will be always Cotton’s. That is something I know. So, just focus on things you know and get better. 

Matthieu David: So, really focused. That’s one other rule of success, right is to focus.

Cotton Ding: Focus. So, I think this year maybe I could be better. I may even because of this Coronavirus, we may even have a different opportunity to open a new one. We don’t know, but we keep our eyes open.

Matthieu David: Do you think you have an opportunity because rent is going down? Do you see that rent is going down or is it that people consume differently so you believe that they may behave differently?

Cotton Ding: I think the rent is going down. 

Matthieu David: Okay, it is very clear?

Cotton Ding: 10 or 20% should be expected. There’s a lot of empty shops out of there now.

Matthieu David: I have two last questions. I really love this question and I really would like to have your view on it. Over the years; 17 years of managing your business, what has been more surprising for you to see happening in China? I was very surprised by how people got used to paying digitally (learn more about the China’s digital transformation). When I arrived in China 10 years ago, for instance, people were paying cash when they got deliveries. What do you feel has been very surprising to you; a success over the years in China?

Cotton Ding: One thing is about popularity. I remember in 2003, my opening I had to send out 1000 mails to let people know that I opened and now, we just use WeChat to say, “Okay, we have a party. We have a promotion.” So, I think the way people communicate is amazing. It is amazing how efficient, how immediate and how can you reach data from abroad. That is something that like really blew my mind, I think. 

Matthieu David: Perfect. What have you seen as a failure in China? It could be a business or something in society that you have witnessed and you wouldn’t have expected it to fail?

Cotton Ding: I remember when I was very young, I remember Friday and I was like, “Wow, that is very good business” and they were so busy, but they didn’t make it in Shanghai.

Matthieu David: Which one? Which business?

Cotton Ding: It’s called Friday.

Matthieu David: What is it about?

Cotton Ding: It’s a restaurant.

Matthieu David: Okay. Oh, is it Thank god it’s Friday?

Cotton Ding: No, not this one.

Matthieu David: was from overseas ?

Cotton Ding: Yeah, so you are surprised to see a brand that really is successful overseas, but you are thinking as well that you are really happening in China, but it is somehow, past tense.

Matthieu David: My conclusion on brands that enter under China is that they need to really on the core community which knows them from overseas, but they also have to reinvent their brand. Some brands which are famous in the West are not known here and they have to redo again. They can only rely on people who have studied and worked overseas as Chinese or foreign people. So, it’s a whole new job for them.

Cotton Ding: Yeah and also you see the goods like the ones which maybe I don’t want to give all the names, but the ones who are really popular ten years ago and now they are quieter in the background. I think this is because they stop seeing the market anymore. They fail to change with the market. 

Matthieu David: Thank you very much for your time. It was very interesting. I learned a lot. I think people listening to us have learned a lot as well. I hope the crisis is going to be resolved soon. I think China is in a good way and I share your optimism at least for China. I hope you enjoyed it and I thank everyone for listening. Take care and stay safe. 

China paradigm is a China business podcast sponsored by Daxue Consulting where we interview successful entrepreneurs about their businesses in China. You can access all available episodes from the China paradigm Youtube page.

Do not hesitate to reach out our project managers at dx@daxue-consulting.com to get all answers to your questions

This article China Paradigm transcript #99: Business management in a crisis workshop: Running a restaurant in Shanghai is the first one to appear on Daxue Consulting - Market Research China.

Since the 2008 melamine scandal, the domestic milk market in China has had a hard time gaining the trust of consumers. This scandal hurt all players, including Mengniu Dairy and Yili Group, which are the leaders of the Chinese dairy industry. The crisis has also influenced milk consumers in China to purchase milk and dairy products from foreign brands, putting domestic milk producers at a disadvantage.

Even though the evolving consumer perception of milk in China has facilitated the growth of import and consumption of foreign milk firms, domestic milk firms in China still have dominated the milk market in China. Moreover, according to MarketLine, regarding the overall performance, from 2015 to 2019, the milk market in China has seen steady growth. Thus the market is anticipated to grow in the future.

Analysis of China’s milk market

Size of China’s milk market is gradually expanding

Chinese consumers are turning on to the nutritional benefits of milk products. It is predicted that sales of milk in China will increase from 11.95 billion RMB  (2018) to 12.83 billion RMB (2022), with a 1.7% annual growth rate. Thus the market size of milk in China has been growing steadily.

Data source: MarketLine, China’s milk market value  

Consumption of milk in China has grown four-fold since 2012

Due to the influence of traditional dietary habits and limits of economic development, in 2012, each person consumed only about 6.39 kilograms of milk per year. That was only about 1/3 of the consumption of an average Indian consumer and 1/10 that of a western consumer. Moreover, the consumption of powder milk in China ranks at the top among all countries in the world.

In 2020, the consumption of milk in China has increased remarkably. The consumption of milk per capita is projected to reach 28 kilograms in 2020 and 41 kilograms in 2030.

Data source: Qianzhan, Sales volume of the milk market in China  

Data source: Qianzhan, Sales value of milk in China 

Domestic brands regain trust, imported milk in China faces fierce competition

According to IBISWorld, due to the preference of milk consumers in China and demand for middle and high-end milk, import volume has increased steadily. With rising import volume and average prices, the import value of milk in China reached $5.47 billion in 2019, with a YOY growth of 7.6%.

Since domestic Chinese milk brands have dedicate to enhancing the quality of milk they are replacing some import products, which has led to a declining proportion of imports in the domestic demand of milk market in China. As a result, in 2019, imported milk represented 7.5% of domestic demand for milk in China, which decreased from 10.1% in 2014.

Data source: IBISWorld, Import partners of milk market in China (2019)

The price of milk in China is gradually increasing

Overall, the price of milk in China has a rising trend. The increasing price attributes to the rapid growth of consumption of milk in China and the condition of upstream supply chains.

Data source: ruzhipincy & chyxx, Price evolution of milk in China  

UHT milk is the most popular milk among Chinese consumers

The product segmentation of milk in China is mainly categorized into liquid milk and powdered milk. They are similar in terms of nutrients while different in terms of taste, form and price. Powdered milk consists of the process of dehydration and evaporation, which helps preserve it. Even though it loses its flavor during the dehydration process, it perfectly matches with smoothies, tea and filtered coffee. On the other hand, fresh milk contains more nutrition than powdered milk does and has a better taste.

Liquid milk is the largest segment. According to MarketLine, UHT milk is more popular with milk consumers in China, in contrast to  western consumers who prefer fresh liquid milk. 

The milk powder segment in China targets both adults and infants. According to Nielsen China, online and offline milk powder sales reached 1.8 billion RMB and 1.5 billion respectively in 2018. Specifically, according to IBISWorld, the infant milk powder segment has been experiencing rapid growth and highly profitable. The market size reached 175.5 billion RMB in 2019 and is expected to reach 216.3 billion RMB by 2024. With the implementation of the two-child policy, demand for infant milk powder is increasing rapidly.

Consumption of milk powder for adults, especially for families, has been rising steadily. Online shopping has facilitated the growth of this segment. The milk powder for adults in China is in the early stage of the product lifecycle by considering its market scale and profitability. Hence the market size of this segment remains stable as milk consumers in China lack product awareness.  

The supermarket is the most important distribution channel in China’s milk market

According to IBISWorld, Supermarkets are the largest suppliers of milk and offer the most extensive product range. Regarding food wholesalers, the majority of milk brands in China sell their products in local regions. They often establish wholesalers in the target province and are in charge of recruiting and managing distributors in tier-two or three cities. Regarding food retailers convenience stores, the revenue generated from these channels has experienced continuous growth. Other markets, including online shopping, have been developing rapidly in recent years. Milk consumers in China purchase milk from online shops due to its convenience and low prices.

Data source: IBISWorld, Distribution Channels of Milk Market in China (2019)

‘Safety’ is the number one concern of Chinese milk consumers. Consumers from different regions and segment groups in China consume milk in different ways.

Regarding Chinese consumers’ attributes of milk, consumers from developed areas value “safety first” while consumers from less developed regions value quality and brand. In general, both of the groups value safety certification, shelf life, nutrition, taste, brand organic, etc.

Families are likely to purchase a large amount of milk on the weekends and prefer fresh milk; office workers and students prefer buying liquid milk with paperboard packaging in the morning.

Milk packaging in China

Regarding the packaging of milk in China, paperboard, plastic and glass are common materials. Domestic milk firms in China mainly outsource both paperboard and plastic packaging to foreign firms such as Tetra Pak, PrePack and SIG Combibloc. Paperboard packaging is normally used in preserving both UHT milk and fresh milk. It helps preserve the quality of the milk. Thus the quality is less likely to go bad easily and can preserve more than six months. Plastic and glass are used in preserving fresh milk. The size of the packaging is mainly standardized as 250 ml.

Photo source: Zhihu, Packaging of milk in China

Chinese prefer to purchase milk in smaller packaging than westerners do. Owing to the habit of some milk consumers in China, it is convenient for students and office workers to carry a single serving size of milk with them. Secondly, the established supply chain and logistics in China cannot support the transportation of fresh milk perfectly. Hence milk with paperboard packaging is more prevalent in the milk market in China as it can preserve for an extended period and does not require a sophisticated logistics system to preserve the quality.

Does being lactose intolerant stop Chinese from consuming milk?   

Even though research shows that Asians, including Chinese, are mostly lactose-intolerant, it does not affect the sales of milk in China significantly. According to Zhihu, their consistent milk consumption can be explained by:

1. Consumers perceive that a small amount of milk would not aggravate the discomfort of lactose-intolerance, and this might is another reason why packaging milk in small portions popular in China.
2. Some people do not even realize they suffer from lactose-intolerance since their symptoms are not obvious.
3. Some of them perceive that the ingredients of Chinese milk are adapted to eliminate the effect caused by lactose-intolerance, that is, ingredients such as water and chemicals are added to dilute the lactose.

Brand analysis of China’s milk market

Domestic Chinese milk brands are making a return after being tarnished by scandals

Among the top 10 dairy milk companies, 9 are local brands. Mengniu, Yili, Guangming, Wangzai, Wandashan, Weita Milk and Chenguang are the top seven Chinese domestic brands with two producers originating from Taiwan and Hong Kong. Founded in 1999, Mengniu is the largest dairy milk company in China. It possesses over 20 branches in 15 provinces and exports its products to the US, Canada, Mongolia and South-East Asia. Although it maintains a good reputation, not even Mengniu can escape from the melamine scandal. As a 2008 Olympic Games sponsor, Yili, the second-largest dairy company, has explored a new way to market its product and overcome the scandal.

In 2020, Mengniu and Yili have further consolidated their leading positions in China’s milk market, with more than 30% of market share. Both firms have developed differentiated milk products to capture market share aggressively.

Data source: Euromonitor, Company Shares of Milk in China (2019)

Yili has focused on high-end milk products   

Regarding milk products of Yili, even though the company has developed a variety of milk products, it aims to focus on its high-end segment. Its representative product, Yili and Satine, according to Euromonitor, earned the third (7.4%) and fourth (6.7%) place respectively, in the brand shares of milk product (2019). Satine is positioned as the high-end brand as Yili has significant investment across different business units. Shuhua is a lactose-free product and targets lactose-intolerant consumers. School milk targets students and solely sells to schools in China while QQ Star targets kids in China. Wei Ke Zi is the flavored milk product.   

Photo source: Yili, Milk Products of Yili

Mengniu has adhered to the product differentiation strategy

Likewise, Mengniu has developed various milk products to tailor to different competing with Yili. According to Euromonitor, Mengniu and Deluxe are the pure milk and earned the first (7.9%) and second (7.4%) place respectively, in the brand shares of milk product (2019). Deluxe is the high-end pure milk product. Future Star targets kid consumers in China while Xin Yang Dao targets lactose-intolerant consumers. Mengniu has also developed flavored milk such as Zhen Guo Li and Nai Te. Zhe Zhi Niu Lai (This cow) is the milk product that targets university students in China. Mengniu has also expanded its product lines to fresh milk (i.e. Shiny Meadow and Green House) which Yili has yet to focus on.

Photo source: Mengniu, Milk Products of Mengniu

Influence of COVID-19 and future trends

The outbreak of COVID-19 has affected lots of industries, including China’s milk market. The pandemic has affected each business unit of the milk’s value chain in China.

The value chain of China’s milk market goes through the process of feed manufacturing, milk production, delivery, processing, packaging, distribution, and lastly, retail. Regarding the upstream business, the pandemic has affected the production of

As the situation is gradually recovering in China, so does the milk market. The government in China has implemented particular policies and subsidized the business involved in the milk’s value chain. These actions have sped up the recovery of the milk market in China.

Fresh liquid milk is the future trend

In 2019, the trend of “freshness” has emerged in the milk market. Key industry players such as Yili and Mengniu have started to invest in fresh milk significantly. The outbreak of Covid-19 may foster the growth of this trend since the National Health Commission of China recommends drinking milk. The government sector has suggested that drinking milk is an effective method to strengthen the immune system. Moreover, milk consumers in China have consistently perceived drinking milk as a means of calcium supplement and skincare. Thus it helps to cure osteoporosis and facilitates growing height. As more and more milk consumers in China value nutrition, taste and freshness, nutrition-added fresh liquid milk is likely to be the future trend in China’s milk market.

Photo source: Sohu, Nutritious and fresh liquid milk sold in small cartons in the Chinese market

Creative product packaging can draw consumers’ attention

In comparison with traditional promotion tools such as advertising and direct selling, creative product packaging is a cost-effective tool to promote products and is popular with young consumers. Hence more and more companies have gradually applied this tool.

Photo source: adquan, Creative product packaging of New Hope Group’s milk 

New Hope Group has applied the creative product packaging successfully on its flavored milk. With this co-creation strategy, New Hope Group has collected a list of mottos via social media in China and printed them on the packaging. Meanwhile, the company has designed cute images that are popular among Chinese consumers. These mottos reflect the current Chinese culture and humor of self-depreciating optimism, or passive acceptance of negativity. They are relatable and effectively tease young people’s lifestyles in a lighthearted way.  

In conclusion, China’s milk market is experiencing a steady growth in market size and revenue. Domestic milk brands have occupied the majority of the market share. Currently, the dominant milk product in this market is long-life liquid milk. Nonetheless, with the changing consumers’ perception and improving logistics, fresh liquid milk is projected to be the future trend in this market. Moreover, creative packaging is a useful promotional tool to appeal to milk consumers in China effectively.

Author: Amelia Han

Listen to 100 China entrepreneur stories on China Paradigms, the China business podcast

Listen to China Paradigm on Apple Podcast

This article The milk market in China: consumers’ perception of nutrition has sustained the growth of this sector is the first one to appear on Daxue Consulting - Market Research China.

60% of Chinese families eat soup every day, meaning about 500 million bowls of soup are consumed nationwide every day, 320 billion bowls of soup every year. The average person consumes 4.6 bowls of soup per week. That is to say, the magnitude of the soup market in China is enormous, dynamic, and recession-proof.

Overview of the ready-to-eat market in China

Soup is one of the most popular ready-to-eat foods in China. As people’s lifestyles change, the demand for ready-to-eat food is expected to grow faster than in the past five years. There is a growing demand for ready-to-eat food, especially for middle-income and high-income consumers, who can afford higher prices. Meanwhile, the ready-to-eat soup market in China reached a new high during COVID-19. On the one hand, the epidemic has led to the offline consumption of leisure snacks to be interrupted and forced consumers to shift to online shopping; on the other hand, ready-to-eat food is accelerating to become a powerful consumption supplement for the catering industry.

Ready-to-eat soups are healthier and tastier alternatives and the convenience of instant soups supports these consumers’ fast-paced lifestyles. Factors such as high availability, less cooking time and travel friendly packaging push the development of the ready-to-eat soup market.

China Dominates the ready-to-eat soup market in Asia-Pacific Region

The expansion of the instant food market will further support the growth of the ready-to-eat soup market in China. Manufacturers are using various methods to increase their share on the ready-to-eat soup market in China. This include distributing innovative products, strengthening their presence in new markets or regions, as well as their base in existing markets.

Market size in China peaked during COVID-19

Under the influence of Covid-19, ready-to-eat food is quickly growing in China. Since February 2020, data shows that the overall sales of ready-to-eat food on Tmall have increased nearly sevenfold from a year earlier.

It is expected that by 2020, the business of soup market in China will reach US $4.818 billion in revenue. The average revenue of soup segmentation in China in 2020 will be US $3.33 per capita. In terms of volume, China’s per capita consumption of soup food will be 0.5 kg in 2020.

Source: Statista.com-Revenue in the soup segment in China (Forecast adjusted for expected impact of COVID-19), June 2020

According to data from the ecommerce PinDuoDuo, sales of more than 1,000 products including fresh fruits, ready-to-eat food and leisure snacks exceeded 100,000 during the “Not closing for the Spring Festival Campaign” in 2020. According to Tmall international, ready-to-eat food has become the new choice for ‘staying at home’.

Korean instant rice, Vietnamese instant noodles with salted egg yolk, Japanese vegetable miso ready-to eat soup and Australian whole wheat instant cereal are all popular dishes for home diners. The data shows that sales of imported instant noodles rose 12 times year on year, while ready-to-eat soup and instant rice rose more than 80% year on year.

Consumption upgrade in ready-to-eat foods

Since 2013, the consumption of instant noodles in China has seriously declined. In recent years, Chinese people pay more and more attention to their health, so ready-to-eat market in China is also forced to either upgrade or lose consumers. This trend in consumer preference contributes to the rise of premium ready-to-eat foods.

In line with consumption upgrading, the large traditional ready-to-eat food companies have successively launched premium ready-to-eat products, ‘original soup’ instead of seasoning powder and ‘meat slices instead of dehydrated meat. Ready-to-eat food has got rid of the marketing message of ‘make you full’ and is moving towards ‘nutritious, delicious and convenient’.

After the outbreak, ready-to-eat food may become a daily consumer product

Ready-to-eat food will be one of the six annual food trends for 2020, according to Tmall’s 2019-2020 national taste data released at the end of 2019. Sales of semi-finished food rose 111% year-on-year in 2019. Sales of ready-to-eat foods such as ready-to-eat soup and self-heating hotpot grew by more than 50% on Tmall.

The epidemic has helped shift the nature of ready-to-eat food from a popular trend online to a daily consumer product.Therefore, if the ready-to-eat industry and enterprises can grasp the changes in consumer demand after the epidemic and promote the ‘return’ of health value from a strategic perspective, they will surely achieve the greater development after the epidemic.

Competing brands in China’s ready-to-eat soup market

Source: taobao.com – 5 flavors of ready-to-eat soup from Su Bo

Combined with the ranking and evaluation of soup brands on Chinese e-commerce sales channels and Chinese brands ranking websites such as Paizi10.com,Qiang100.com and Sougou Guide, the following brands in the ready-to-eat soup market in China are summarized.

Chinese ready-to-eat soup brands

SuBo (苏伯)

Source: taobao.com – Spinach egg soup from Su Bo

‘SuBo’ is similar to the pronunciation of ‘soup’. It originally comes from Shandong Province. The brand is one of the best performers in the soup market in China in terms of overall performance. It is not only a popular Chinese soup brand in China, but also in Europe, America, Japan, Southeast Asia and other countries. Today, the ready-to-eat soup of this brand is sold in Chinese supermarkets, fast food chains, high-speed trains and on the Internet.

XinMeiXiang(新美香)

‘Xin Mei Xiang’, a company from Hubei province, produces and sells ready-to-eat soup, cooking package, freeze-dried fruit, dehydrated seafood, meat, vegetables and other products. ‘Xin’ means new, ‘Mei’s stands for beautiful, while ‘Xiang’ goes for appetizing.

The products are exported to the United States, Japan, South Korea and other countries. The company has several freeze-drying production lines and vacuum freeze-drying technology to give the customers innovative and appetizing experiences.

Xiao Yao Lao Yang Jia（逍遥老杨家)

This Chinese soup brand name means free and unfettered Mr.YANG. This brand, from Henan Province, is famous for its ‘Hu La Soup’. ‘Hu La’ soup is a famous kind of local cuisine in Henan province which is made with pepper, chili, and bone soup. ‘Hu La soup’ differentiates itself with its spicy taste.

Source: Taobao.com – Hu La soup from Xiao Yao Lao Yang Jia

A Yi Bo（阿一波）

A Yi bo Food Industry and Trade Co., LTD., originated from Jinjiang City, Fujian Province, was established in 1990. It is a well-known brand of nori, and a large enterprise specializing agricultural products deep processing and focusing on the production of Marine green food. In terms of instant soup, Nori ready-to-eat soup from A Yi Bo has an outstanding performance on Taobao sales.

Source: paizi10.com – Nori egg drop soup from A Yi Duo

Li Ziqi’s flagship store on T-mall（李子柒旗舰店）

Li Ziqi is a KOL who makes short food videos. With more than 25 million followers on Weibo, 38.9 million followers on Tiktok, and more than 11 million on YouTube, she is known as the “The expert of oriental food and lifestyle”.

Source: Youtube.com – The youtube homepage of Li ZiQi, Chinese food KOL

Li Ziqi’s flagship is her online food store (most of which are ready-to-eat food) on T-mall, which sells a variety of delicacies including a variety of ready-to-eat soup.

According to the total sales data of 21 products currently sold in Li Ziqi’s flagship store, the e-commerce wholly-owned news calculated that its total sales volume exceeded 1.3 million, and the total sales value reached 71 million RMB.

Haifusheng（海福盛）

Established by Xinsanhe (Yantai) Food Co., LTD., Haifusheng brand is specialized in the R&D, production and sales of high-end ready-to-eat food, such as instant soup, instant porridge, instant noodles, instant fruit and other ready-to-eat food.

Tian Li (天利)

Tian Li Food (Xuzhou) Co., LTD., founded in September 2009, is invested by Hong Kong Tian Yi International Group Co., LTD., located in Xuzhou, China. The company takes arctium burdock as the main raw material to form a green deep processing industry of agricultural and sideline products, among which the Wu Xing vegetable soup is deeply loved by the public. (The Wu Xing, also known as the Five Elements, is a fivefold conceptual scheme that many traditional Chinese fields used to explain a wide array of phenomena, from cosmic cycles to the interaction between internal organs and from the succession of political regimes to the properties of medicinal drugs. The “Five Phases” are Fire, Water, Wood, Metal and Earth.)

Han Chang (酣畅)

Han Chang brand was founded in 2010. As a professional brand of western food, it has been focusing on western food for 7 years and advocating the life concept of “Eating stylish western food and living a good-quality life”. The brand’s ready-to-eat western thick soups, such as mushroom cream soup, chicken corn soup, borscht, are popular among Chinese soup consumers.

Super Hi(超级嗨)

Super Hi, a brand from Sichuan province, has flagship stores on JD.com and Taobao. The brand began selling self-heating products, with popular categories such as self-heating rice and self-heating hotpot. The products have been well received by Chinese soup consumers. The chicken soup and duck soup from Super Hi have been recognized for their original taste. Since the Spring Festival 2020, the online orders of Super Hi have increased by 200%-300%, which is remarkable.

Source: Taobao.com – Chicken soup from Super Hi

Foreign ready-to-eat soup brands in China

Jia Le家乐 (Knorr)

Founded in 1838, Jia Le (Knorr) is the world’s No.1 condiment brand owned by Unilever. Its products are sold in more than 100 countries and are consumed by 320 million people worldwide. The products from the brand Jia Le (Knorr) has always been committed to producing high-quality products and bringing fresh and delicious ingredients to consumers. Its breakthrough innovation in flavoring products not only satisfies the taste of global consumers, but also adds endless fun to the gourmet life.

In 1993, Jia Le (Knorr) came to China, launching Jia Le chicken powder, leading to a new concept of health. Subsequently, in order to continuously satisfy the taste of Chinese soup consumers, Jia Le introduced other soup powder products and sauce products. In September 2007, Jia Le launched Thick soup Bao, a kind of ready-to-eat soup in China, which opened a new page for the seasoning market of the Chinese catering industry.

Chinese ready-to-eat soup consumer characteristics

Chinese soup customers have a higher degree of trust in brands

Brand is what Chinese soup consumers value most when choosing soup. The branded soup gives people a much greater sense of security than non-branded soup. Also, word of mouth plays an important role in consumers’ choice of ready-to-eat soup.

Young “Zhai people” in China are bursting out with great consumption potential

The expression of Zhai people (宅人群) refers to men and women who depend on the internet to meet their daily needs without leaving their homes. Also, people who don’t like to go out except for work and prefer to stay at home are described as ‘zhai’. These people usually rely on food delivery services, but because of the COVID-19 outbreak, ready-to-eat food has become their first choice.

On the other hand, with 240 million single people, the ‘single economy’ in China is flourishing. Also, people living alone also have a greater need for ready-to-eat food. This group of consumers will become the new target group of the soup market in China. Moreover, ready-to-eat soup fits this demographic’s spending habits.

‘Healthy’ has become the new rigid demand for the soup market in China

With the further enhancement of health awareness, ‘healthy’ has become the new rigid demand. The health-related products, knowledge, content and activities have attracted more attention of Chinese soup customers.

Author: Qing Zheng

Learn more about China’s ready-to-eat market

Listen to 100 China entrepreneur stories on China Paradigms, the China business podcast

Listen to China Paradigm on Apple Podcast

This article The ready-to-eat soup market in China reached a new high during COVID-19 is the first one to appear on Daxue Consulting - Market Research China.

Matthieu David interviews Gennadii Bochkar and Chen Feng (Fiona) partners and Co-founders at BIBIMI Group with 10 venues in Shanghai. Situated between the fast-casual and casual dining experiences, the BIBIMI group manages 10 venues successfully and planning to open new spots and even night clubs. But how do they manage such a managerial workload, what principles do they rely upon when building a new venue and how important is social media for their business? Find out the answers to these questions and more on this new China Paradigm interview.

• 4:48 Current size of BIBIMI group and revenue
• 7:19 Brief group history
• 15:06 What was the vision of scaling from Bites&Brew to the BIBIMI group?
• 16:54 Fast casual and casual dining – why is the BIBIMI group in between?
• 20:31 The Beginning – was money raised to start or to grow the business?
• 22:02 What were the investments required to scale the business?
• 27:54 The principles involved in building a new concept for a restaurant
• 31:46 Leveraging social media for building new restaurant concepts
• 38:17 How does BIBIMI group’s competition look like?
• 41:02 Did the coronavirus outbreak affect the BIBIMI group’s business in a positive way?
• 43:47 What economy of scale strategies can BIBIMI group employ in the future?
• 46:18 It’s all about having a great backend strategy
• 47:52 What software does the BIBIMI group rely upon in their day to day business?
• 50:48 What are Fiona’s responsibilities within the group?
• 53:43 Is the interior design service internalized or externalized?
• 57:37 Paying back investors – a BIBIMI group timeline
• 1:01:00 How does Fiona handle Gennadii not being involved in the business full time?
• 1:03:10 What books have inspired Fiona in her entrepreneurial journey?
• 1:06:12 What books have inspired Gennadii in his entrepreneurial journey?

The relevant episodes

We believe, that China, with 20% of world population and as the second world economy, is impacting every single business, small to big. That is why it is a new paradigm. How does China impact your business is the ultimate question we will answer through those podcasts.

China paradigm is a China business podcast sponsored by Daxue Consulting where we interview successful entrepreneurs about their businesses in China. You can access all available episodes from the China paradigm Youtube page.

This article China Paradigm 112: Opening 8 Shanghai restaurants & clubs in 4 years based on data and tactful branding is the first one to appear on Daxue Consulting - Market Research China.

Suspicions of fraud had already been hanging around for several months after the investment firm Muddy Waters released a report based on 11,260 hours of store traffic video. The report highlights Luckin coffee’s fraud by cross-checking actual orders and customers, and the company’s bottom line.

Source: Luckin Coffee stock price, Luckin’s stock plummeted from $50 to $3.82

As a result, Luckin Coffee stock price plummeted from USD 50 to less than USD 2 in a matter of months. But does this may not mean the end of Luckin. With such a low stock price and a high tech eco-system, there is a possibility to extend the rein of Luckin. Hence, we speculate who could buy the company that once was capturing Starbuck’s share on the coffee market in China?

The fantastic story of an internet company selling coffee

Luckin Coffee is an internet company. Coffee is the product sold by this company which operates more like other Chinese tech startups than a coffee shop. Indeed, Luckin Coffee digitalized and standardized the operation of an offline retail business.

Concretely, Luckin coffee users order through an application and pickup in store, a vast contrast from the large, cushy relaxation areas of its competitor Starbucks. Luckin coffee’s business model is based on new retail in China. This means that the online shopping experience of buying a coffee is supplemented by offline actions of going into a store and being served by a real employee.

Source: Luckin app, Forbes, Luckin Coffee’s business model embodies new retail in China through on app orders needed to be offline picked up

What else defines Luckin coffee as an internet company is the classic cash-burning process to quickly acquire users and scale-up. This method enabled Luckin Coffee to raise the right amount of money to promptly establish thousands of stores across China before going public by a USD 640 million IPO in May 2019 on the Nasdaq. Another interesting finding is that the company’s IPO documents insist on Luckin Coffee’s new retail business model, rather than on its F&B products.

Following the IPO, the company quickly raised USD 1.1 billion in January 2020. The same month, the company made the headlines by becoming the first coffee chain in China. Thanks to its highly praised business model, the company now exceeds the number of Starbucks stores, with more than 6,500 locations.

But the story was too good to be true. Right after the IPO, the company is reported having fabricated financial and operating numbers.

Luckin Coffee’s fraud highlights a fundamentally broken business

On January 31, 2020, short-seller Muddy Waters published an 89-pages anonymous report, claiming that the company had falsified financial and operational figures. Not only claiming that, the report says Luckin Coffee “was a fundamentally broken business that was attempting to instill the culture of drinking coffee into Chinese consumers.”

The report says the number of items sold per store per day was inflated by at least 69% in 2019 3Q and 88% in 2019 4Q. According to the writers, they employed 92 full-time and 1,418 part-time staff to record traffic in 620 Luckin Coffee stores. The data accumulation is impressive, with the collection of thousands of receipts, as displayed below.

Source: Muddy Waters’ anonymous report

Faking in-store order numbers

According to the investigation document, Luckin coffee’s fraud would likely have started occurring around November 23, 2019, when the company started to inflate its own app online order volume.

As all orders are placed online and retrieved from the store, a sequential order number appears on the receipt (such as when ordering at McDonald’s). Therefore, paying attention to these numbers could give a clear idea of how many orders have been placed per day for a specific store.

However, this method cannot be used if Luckin intentionally jumps and skips numbers during the day to purposely distort the tracking results. This is exactly what happened, as evidenced by this screenshot in the report.

Source: Muddy Waters’ anonymous report, Wechat screenshot evidences the inflation of Luckin Coffee’s order volume as one of the methods to manipulate operation figures

Shortly after the revelations of the report, Luckin published a press release to deny the allegations. The company evoked the strength of its business model, combined with the booming coffee market in China: “Luckin Coffee firmly stands by its business model and is confident in benefiting from the strong growth of China’s coffee market in the future.”

The fact that Luckin Coffee’s stock price didn’t drop after the publication of the report, until Luckin’s own internal audit, shows strong trust from the investors in the company’s business model.

But was the magic business model of Luckin Coffee enough to prove that the business could ever reach profitability?

Were Chinese people even ready to drink more coffee?

Data from the International Coffee Organization (ICO) show that the coffee market in China experienced strong growth between 2007 and 2015. But for the past few years, growth has stalled, especially since the players which target the core functional coffee demand are well established and more numerous (Starbucks, Costa Coffee, McCafé).

Source: International Coffee Organization (ICO) 2018, Unroasted coffee beans consumption in China

Coffee consumption is driven by culture rather than economic development

Increasing disposable income does not mean that their small consumption of coffee will explode overnight. Obviously, the coffee market in China was a boon for those who managed to capture the emerging demand in the 2010s (Hello Starbucks). In fact, the global coffee consumption comparison across countries indicates that coffee consumption per capita level is primarily driven by culture rather than economic development.

Indeed, China’s coffee bean consumption per capita is not only significantly behind developed countries such as Japan but also way lower than developing countries such as Vietnam.

More Westernized developing countries such as Vietnam (a former colony of France) and the Philippines (a former colony of Spain and the US) have high coffee consumptions. By contrast, in countries with strong tea cultures, such as China, India, and Sri Lanka, coffee consumptions are low.

Therefore, it’s no wonder that Luckin Coffee burned billions of investors’ dollars without meeting the expected success.

Source: International Coffee Organization (ICO) 2018, Per-capita Coffee cups consumed across Asia

Time for a Business turnaround in China

Even if Chinese people only consume 7 coffee cups per year, they do like coffee. Luckin coffee’s scandal does not contradict this. Rather, it highlights the fact that burning billions won’t make people drink coffee even faster. However, if Chinese people won’t drink more coffee, they will drink more tea.

While the number of tea stores demonstrated a continuous growth trend, the number of freshly brewed coffee stores declined from 121,000 stores in 2016 to 105,000 stores in 2018. Hence, the coffee supply network coverage is not the issue. There is just not enough demand yet.

Data source: Meituan, 2019 Chinese Beverage Industry’s Development Trend Report, The growing number of tea stores highlight the strong growth of the tea market in China

Following these observations, Luckin Coffee did try a business turnaround by starting a new type of product called Luckin Tea in May 2019. But business turnaround in China requires more than starting a new range of products.

Daxue Consulting’s China business turnaround expertise

In order to help a client build its business turnaround in China, Daxue Consulting developed a four-step plan, beginning with an audit of the situation. It consists of identifying where the brand had potential improvement and re-orientation needs. It includes distribution screening (data-collection through Store-Checks in China), brand image, and positioning in its competitive frame (through Benchmark). The following steps include consumer research, marketing activation portfolio, and monitoring plan.

It turns out this article briefly tackles step 1 of daxue’s business turnaround consulting service in China. We identified where Luckin has potential improvement – in tea – but we still need to assess its tea competitive frame.

Could Luckin Coffee’s future be with tea products?

Tea is an entirely different market from coffee. Nowadays, the tea market in China is made up of ‘new style tea 新式茶饮’ which is made of fresh tea leaves and concentrated liquid, such as milk or cream. It also includes topping like jellies, tapioca pearls, and fruit. Hence, while demand is not the limiting factor for the tea market in China, the main challenges lie in supply chain management and in-store production.

Source: Daxue Consulting report, The Tea Market in China

Could Luckin Coffee’s future be with Luckin Tea?

Part of a more aggressive turnaround strategy, Luckin Tea was separated from Luckin Coffee as an independently operated brand in September 2019. However, Luckin Tea in-store production and supply chain management is designed for Coffee products, which are fundamentally different from the new-style tea products.

In a China Paradigm podcast interview, Martin Papp, co-founder of PAPP’S TEA told Daxue Consulting young Chinese are going to Starbucks because they can’t find a tea location that fits their lifestyle. They want a more modern, fashionable, and cool tea brand. And while Luckin Coffee and its spin-off brand Luckin Tea are focusing on digital and financial engineering, HEYTEA appears to be focusing on thrilling their customers via its product development.

This new-style tea brand has lines out of doors in China and proven demand for their fresh flavored elaborated teas. While Luckin Tea products are basically made of blended NFC juice, frozen fruits, and artificial pigment, HEYTEA’s products have an uneven texture with distinct layers of tea, fruits, and hand-made cheese milk topping.

Source: Luckin Coffee, HEYTEA, could Luckin Coffee’s future be with Luckin Tea?

HEYTEA also has extensive capabilities in continually refreshing the menu with new product introduction. It is something quite far from Luckin Tea, whose in-store standardization process leaves little room for product customization.

Could Luckin Coffee’s future be with HEYTEA?

Let’s summarize. Luckin Coffee grew up like a tech company using investors’ money to open more than 6,000 outlets – more than Starbucks – without ever reaching profitability.  The company has been accused of faking its financial and operational figures, which turned out to be true. As a result, Luckin Coffee’s stock price plunged and will soon be delisted from the NASDAQ stock exchange. In a last attempt, Luckin Coffee created Luckin Tea, which turns out to be no more than a desperate move to capture new-style tea lovers with a tea that cannot fall in this category of products.  

On the other hand, HEYTEA is thrilling Chinese customers. The brand is growing based on its traffic, not investor capital, just like Starbucks did in China. The brand has 400 stores, regularly taken by storm by tea lovers. In fact, HEYTEA is Starbucks’ most interesting competitor now. Simply because we saw that it has a tailwind that neither Starbucks nor Luckin Coffee has – a significant, proven and enthusiastic demand.

Should HEYTEA buy Luckin Coffee?

Moreover, HEYTEA is recently moving into coffee. They quickly adopted a Chinese new-retail business model as Luckin did, merging pickup stores and their ordering app called “HEYTEA GO.” The brand is now growing on Luckin Coffe’s field, which previously tried to grow on HEYTEA’s one. The strong difference between the two is that HEYTEA succeeded in its ‘home’ market while Luckin Coffee is slowly dying on its.

Source: EqualOcean, HEYTEA GO pickup stores, could Luckin Coffe’s future be with HEYTEA?

Then the question comes naturally: Should HEYTEA buy Luckin Coffee?

HEYTEA is already doing great at creating popular products that thrill Chinese consumers. But unlike Starbucks, it still doesn’t have a quality footprint of good locations across China. Therefore, according to Jeff Towson, “The next logical move is for HEYTEA is to find a partner to scale up on the real estate aspects.”

Could the tea brand buy Luckin? It could. It could get HEYTEA +6,000 locations in a snap. However, according to Mike Vinkenborg, project leader at Daxue Consulting: “Part of HEYTEA’s mystery is their lines. If the brand becomes too mass, it may lose its level of mystery.”

Still, we could easily imagine HEYTEA buying Luckin Coffee. The new-style tea brand could use it as a strong asset to develop its coffee branch by only selecting a few thousand premium quality Luckin Coffee stores to further threaten its biggest rival, Starbucks.

If Luckin Coffee’s future is uncertain, HEYTEA could be interested in buying the broken business. If not, possibilities are endless for other hot drink businesses to take over the brand. And if not again, let’s see if Luckin Coffee’s business turnaround in China can strengthen its capabilities to turn off rumors of bankruptcy.

Author: Maxime Bennehard

Curious to learn more about China’s tea market?

Check out our official report on the tea market in China!

See our China paradigms episode with a tea entrepreneur

This article Business turnaround in China: What is the future for Luckin Coffee? is the first one to appear on Daxue Consulting - Market Research China.

Why China’s street vendor economy suddenly boomed

The long-time enemy of the proper city image

Street vending is not a newly coined word. In 2010, there were over 20 million street vendors registered, and this number could reach 35 million if unregistered ones were included.

Over the several past decades, “street vending” had always been synonym of “dirty, cheap, low quality”. It was the target of elimination in urban planning, and sometimes led to guerilla-like hide-and-seek, between strict city administrators and unrooted vendors.

The reasons for this severe, if not inhuman treatment include three layers of considerations

Firstly, the quality and authenticity of the products sold on street were not guaranteed or certified. There were often counterfeits which hurt the consumers’ rights, yet the vendors were not traceable and thus could not be held accountable after the transaction.

Secondly, the fluid public activities were threatened. Since the street vendors weren’t registered or certified, the locations of their operations were not predetermined according to city planning. In addition, some vendors made loud broadcasts about their products, which was a source of annoyance to many. These posed risks on a city’s basic function and on habitants’ daily activities.

Last but not least, litter of street vendors damaged the beauty and hygiene of the city. Since the random locations were not under the vendors’ responsibility, it was difficult to incentivize vendors to clean up before they changed location. What’s more, if the town hall was not as harsh in eradicating street vending activities, there would be more people taking their chances, putting the city order in jeopardy.

To sum up, it was a highly informal and grey economic sector where self-employed people, good-intentioned or not, bypassed the regulations and were at the mercy of passers-by and police.

The Post COVID-19 high unemployment rate provoked the sudden endorsement of street vendor economy in China

With China’s economy hurt by the COVID-19 and the GDP growth rate being uncertain, boosting employment is a natural path to revive economy. The Prime Minister Li Keqiang mentioned more than 40 times in the opening of 13^th National People’s Congress in May 22th that his priority is to promote employment.

Keqiang is particularly concerned with the bottom-of-pyramid, poor population. According to National Bureau of Statistics of China, there are about 600 million people living with a monthly disposable income of only around 1,000 RMB, equivalent of $4.2 per day. While China is reaching a comprehensive construction of a moderately prosperous society by the end of 2020, the income inequality is still a serious issue. The top 20% is accumulating fortune at the fastest pace, and the bottom 20% is barely lifted out of poverty.

Data source: National bureau of Statistics of China, Annual disposable income in China by class

With the economic slowdown, the number of unemployed urban dwellers reached a record high after years of decrease. Many lost jobs or suffered from a salary cut due to COVID-19. Not to mention, the bottom-of-pyramid population whose livelihood was threatened even more.

Data source: National bureau of Statistics of China, Rising unemployment in China

Under this context, the Civilization Office of the Central Communist Party Committee has explicitly excluded occupying the road as one of the civilized city assessments by end of May. Suddenly, everyone became interested in China’s street vendor economy and wanted to profit from it.

On Baidu index, the blue line shows the search index of “Street vendor economy”, which soared in early June. It is accompanied by the search of “new policies of street vendor economy”, as people enquire about the legitimacy of this potential opportunity.

Source: Baidu index, search of Street vendor economy skyrocketed

The business case for China’s street vendor economy

The benefits of the street vendor economy

The items sold by the street vendors are usually low-unit-priced daily necessities, such as clothes, food, beverage, fruits, electrical appliances, nothing too fancy or high tech.

The obvious value created by street vendors are therefore two-fold. On the one hand, the vendors enjoy an additional stream of income, however unpredictable. On the other hand, the habitants living in the neighborhood have an easier access to daily necessities. Street vendors, therefore, contribute to the resolution of the famous supply chain issue in fast-moving consumer goods: last mile delivery.

The deeper value created by street vendors are also two-fold. Firstly, the nominal unemployment rate will drop, meaning that the human capital is put to use. Secondly, the local consumption heavily curbed by COVID-19 will be somewhat revitalized, largely thanks to the convenience of night markets.

The Prime Minister Li Keqiang stated in a press conference of the recent National People’s Congress held in May, that there are 200 million people in China working in unofficial, self-employed mode, and that the government has to support them by lifting unnecessary limitations. He publicly praised Chengdu for creating over 100 thousand job opening by setting up 36,000 street vending stalls legally. Zhou Tianyong, Director of China Center for Strategic and Policy Studies under Northeast University of Finance and Economics, estimated that 50 million jobs could be created with the promotion of China’s street vendor economy.

The inherent drawbacks of the street vendor economy

Will street vending be effective in reviving Chinese economy?

The shortest answer is no. The Chinese economy has three major drivers: investment, exportation, consumption. The China’s street vendor economy is not in any way even comparable to them. It is, however, a mechanism to alleviate unemployment for certain cities and a way to earn the next meal for the unemployed.

A longer examination looks at whether it is a profitable business, worth giving it a try

First of all, it is not a scalable profession. The vendors are required to literally start from scratch every day in one physical spot, limiting their marketing reach. Even if the town hall allows for street vending, it only gives permission to certain streets on certain hours. Usually, the street vendors are only allowed to operate in the evenings when the public roads are least occupied and can thus serve as a night market. It is therefore difficult to build up a large customer base or a brand. Without the trust from loyal customers, the range of business street vendors can aspire to is limited, often to food and beverages, fruits, books, toys etc. .

Then, street vendors are hardly meaningfully differentiated. They are usually the retailer, not the manufacturer, so whatever they can source, others can too. As they are spared of the rent on the public roads, the entry barrier is practically non-existent. This gives rise to high and almost perfect competition and erodes profit margins for everyone.

Finally, the legal environment still poses uncertainties. The central government officials haven’t given a unanimous direction on this issue and local policy makers are still pilot testing. While there are 27 cities publicly endorsing the street vendor economy, their policies are to be unpolished and subject to change. This uncertainty prevents people from investing too much upfront. Yet without investment, it is even more difficult for the unemployed to create the much-needed differentiation to make ends meet.

At its core, street vending is an elementary business model, existing way before the advent of mobile payment and e-commerce. It is therefore fundamentally difficult for street vending to reclaim important market share away from its enhanced counterparts of retail.

A successful future of China’s street vendor economy depends on public and private collaboration

Key success factors for street vendors

As it is a basic retail business, the 4Ps in the marketing textbook can serve as a guideline. The Product has to meet the essential needs of the local community, be it food or entertainment. The Promotion techniques such as portfolio bundling or discounts have to be perceived as meaningful. The Price and Place are the key purchase criteria, so competitive sourcing plays a big part. Those key success factors cannot be ignored if people want to participate in street vendor economy.

Furthermore, street vendors have to comply to the hard and soft regulations imposed on them. They’ve lost the trust in the eyes of government’s officials in the past by being short-term oriented. Now it’s their chance to show compliance and discipline, by making it easier for the city to manage them. Being a responsible and respectful player will benefit themselves in the process.

A dependable public policy stance

An important question for the government is whether it regards China’s street vendor economy as an end in itself or only a means to an end. If the local government only regards street vending as an expedient tool to boost employment and economy, without putting in place a legal framework that protects street vendors from precariousness of the profession, the future will not be bright. If one day the economy recovers in China, the employment rate climbs up and suddenly the street vending is again the enemy of an impeccable city image, millions of street vendors could be outlawed again.

Local circumstances vary and will largely determine whether and how street vendors are endorsed

Chinese cities are too diverse in terms of economic development and strategic positioning to adopt the same measure. Beijing the capital, shouldering the responsibility of national dignity, doesn’t take kindly to the prevalence of street vendors. Shenzhen the mega-city with the highest GDP per capita, is also cautious with the adoption of street vendor economy. Shanghai, on the other hand, blends the street vendors in its famous night market, while meticulously setting the obligations and rights of the self-employed vendors.

On Weibo, China’s biggest microblogging platform, street vendor economy reached over 630 million views in just days. The highest participated topic related to it is “warmed up but not in fever”. Over 33 million netizens expressed balanced view on China’s street vendor economy, supporting the “city by city” approach.

Source: Weibo, China’s street vendor economy has 630 million views

For local decision makers, it could be an opportunity to regulate this grey sector that shadowed the China’s street vendor economy for such a long time. Several measures could be put in place. First, register all the street vendors for a better management. Second, limit the time and space for street vending activities. Third, set up quality control measures to protect the consumers and keep hygiene. Fourth, take advantage of the internet to facilitate application, registration and tax issues.

Before, the government has been very harsh on the street vendors. As local policies gradually take shape, a more nuanced management system could benefit not only the unemployed, the community, but also the human image of the government in the eyes of the public. In fact, this is exactly what the local governments are doing. A more human but clearly defined boundary has been set for a better management of street vending activities. Transparency, accountability, order, convenience and entertainment are woven harmoniously in China’s new street vendor economy.

There is a possibility for a win-win future of China’s street vendor economy, which would allow it to once again become a part of China’s nightlife.

Author: Della Wang

Learn more about Chinese consumption after COVID-19

Listen to 100 China entrepreneur stories on China Paradigms, the China business podcast

Listen to China Paradigm on Apple Podcast

This article China’s street vendor economy: A band-aid or permanent solution for post-COVID-19 unemployment? is the first one to appear on Daxue Consulting - Market Research China.

China is also an exporter of coffee. In 2017, China exported $237 million of coffee beans. As of June of 2019, China has exported around 1.4 million 60-kilogram bags of green coffee beans. Export of green coffee beans shows a stable growth, as quality is improving.

Data Source: qianzhan, China’s export of coffee beans

On-trade sales of coffee mainly go through three types of establishments: coffee shops/cafés (independent and chained), Internet cafés and fast food restaurants. Currently, both in the instant coffee market and China’s coffee shops chain market, foreign brands occupied a large amount. It happens due to lack of domestic coffee brand in the coffee bean market in China.

The coffee commodity chain in China is still developing

Dry processing is simple to operate and is the most traditional and cheapest coffee bean processing method. It is the most common method in China. The deep processing of coffee includes roast and ground coffee processing. This way is the most suitable for making espresso, which is the type of bean most used in Chinese coffee culture. With the rapid growth of coffee beverage consumption, many manufacturers across the country are currently actively working on the coffee processing industry. Such companies as Dehong Hougu Coffee Company, Hainan Lishen Company, Baoshan Orchid Company, Yunling Coffee Company are focusing on building commodity chain that will let them to be competitive in the coffee bean industry in China.

The assistance of Nestle and Starbucks

China’s primary coffee growing region is in Yunnan Province, accounting for 98% of production in the coffee bean market in China. Nestle had established agricultural assistance services across Yunnan and has since been the largest single buyer. Another international lead firm, Starbucks, followed Nestle by established its own sourcing operation in Yunnan in 2009. Nestle operated several collection stations across Yunnan, while Starbucks also established a smaller-scale farmer support center.

Source: ResearchGate, China and the changing economic geography of coffee value chains, ‘Main coffee production areas in China’

Starbucks plans on roasting facilities in China

There are few roasters in China compared to in Western coffee-consuming countries. However, their number is growing due to the increasing popularity in coffee and demand for more specialty coffee companies. There are big commercial roasters in China that focus mostly on mass production for instant coffee. Alongside this, there are also single-shop roasters that often aim for higher quality and roast on a small scale.

In 2020 Starbucks China announced that it will invest about $130 million in China to open a roasting facility in 2022. The project is set to handle Starbucks’ largest roasting capacity, including a roasting plant, warehouse, and distribution center. It will strengthen the coffee industry in China. Beyond roasting, once in operation, the park will integrate green coffee bean warehouse management and processing. With plans to co-locate a highly automated and “intelligent” distribution center that will become the heart of the Starbucks distribution network in China. The facility also will serve as a training ground for coffee roasters.

Coffee bean market in China is entering a stage of rapid development

Increased demand for coffee beans

The demand for coffee in the Chinese market grew in the past five years.  At present, the Chinese coffee market is entering a stage of rapid development. According to statistics, the per capita coffee consumption in China was 6.2 cups in 2018. In 2019, China’s per capita coffee consumption was about 7.2 cups. As coffee consumption is rising in China, the demand for coffee beans will also grow.

Data Source: Prospective Industry Research Institute, ‘China’s per capita coffee consumption’

In 2019 the most consumed coffee types among coffee drinkers in China  were single origin, espresso (including espresso drinks like Americanos and lattes), and cold brew. That is why espresso beans in China make up a large part of coffee bean exports to China.

China’s coffee bean imports have been on an upward trend

In the past four years, China’s coffee bean imports have been on an upward trend. From January to November 2017, China imported 110,000 tons of coffeebeans.

QYResearch predicted that coffee bean export to China will grow to 124,000 tons in 2020. In terms of origins, the biggest supplier of coffee to China is Vietnam. In 2018 the export volume of green coffee beans to China was 84,300 tons, and the export volume of roasted coffee beans and instant coffee powder was 28,800 tons. The slight decline happened in 2018 has rebounded in 2019.

Data Source: Zhiyan Consulting, ‘Exports of green coffee bean and roasted coffee bean to China’

Vietnam, Indonesia, Malaysia, Brazil, and the US are the key countries in coffee bean exports to China. In 2017 Vietnam accounted for almost half of all imports. Based on these origins, and information from external sources, Robusta is the most common imported coffee to China. Robusta is also known as espresso beans in China. However, imports from Colombia and Central America have been increasing significantly in recent years, growing at over 25% per annum. Now it makes up around 5% of the total.

Data Source: International Coffee Organization, ‘Coffee bean exporters to China’

Coffee bean industry in China: the quality is improving

China produces 138,000 metric tons of coffee beans annually. However, although China’s coffee production is high, it is difficult to directly associate coffee with China. This is because the coffee beans in Yunnan used to be of low quality, mostly used as raw materials for instant coffee. However, China already can produce good quality coffee beans.

Yunnan coffee plants is the key producer of coffee bean in China

A French missionary brought coffee to Yunnan province in the late 19th century, marking the crop’s introduction to China. Nestlé also arrived early in Yunnan to encourage the cultivation of coffee. Hogood Coffee, the largest domestic instant coffee maker, appeared in 2007. It has been responsible for cultivating much of the coffee in the Dehong region. In 2013, Yunnan Coffee Traders became the region’s first dedicated specialty coffee exporter. In 2018 they were the largest exporter of Yunnan specialty coffee in China. Much of the Yunnan coffee is exported to Germany and Japan.

Other centers of coffee bean market in China are Fujian and Hainan. Fujian and Hainan mainly grow Robusta. However, the domestic production is too small and these espresso beans in China are usually coming from Vietnam.

Coffee bean brands in China

Illy: A market leader in China

Italian roaster illycaffé has been in China for 15 years, in that time establishing itself as a clear market leader in the coffee bean market in China. It accounts for 30 percent of the imported roast and ground coffee segment in China. With a long and celebrated history as an innovator in the coffee industry, illycaffé is perhaps most famous for its signature blend of nine varieties of Arabica coffee selected from the best harvests in the world. Along with the introduction of new products, illycaffé is taking its products to the market through several channels. The company works with more than 1,000 clients in China in the hotel, café, and restaurant segments. In addition to this, the company’s Italian-style café franchise Illy Caffe has three outlets across the country, and there are another nine illycaffé retail outlets providing full range of Illy products – beans, ground coffee, and capsule machines.

Lavazza: Premium coffee grounds in China

Yum China Holdings has entered a joint venture to develop the Lavazza coffee shop concept in China. As the first step, a Lavazza flagship store in Shanghai, has opened its doors to customers in Asia. Recently, the Lavazza Group has embarked upon a process of international development aimed at tapping into new markets. Meanwhile, Yum China has made encouraging advances into China’s coffee market. In 2019, this brand sold 130 million cups of coffee to Chinese consumers. More than just the classic Italian espresso, Lavazza employs a variety of roasting and extraction techniques, introducing unique coffee creations to China for the first time. Bel Paese Coffee is an exclusive line-up created for the Chinese market, offering a “unique journey of tastes from across the different regions of Italy.”

Rwandan coffee enters China’s market

Rwanda was the first African nation to join the Alibaba-led Electronic World Trade Platform. Organized by the Alibaba group, the online event aimed at promoting Rwandan coffee which is available on the Chinese e-commerce market. Event featured coffee from Gorilla Coffee – a brand from Rwanda Coffee Company, promoted to about 20 million fans that were following online. By the time of buying, up to 3000 pieces (about 1.5 tonnes) of the coffee were bought online in a space of about 1 minute. Besides, as a result of the agreement, Rwandan coffee is available on Alibaba’s platforms. Coffee lovers in China also can access the product through Tmall.

Prospects of the coffee bean market in China

Due to growing middle class in China and the popularity of coffee among younger generation, coffee bean industry in China has a great potential. Forecast predicts that the average annual growth rate of coffee consumption in China will reach 15% in 2020. 

Data Source: QYResearch, ‘Annual growth rate of coffee consumption in China’

With the improvement of the living standards in China and the recognition of coffee culture, it may stimulate domestic coffee consumption. Forecast shows that the size of China’s coffee market will reach 217.1 billion yuan in 2025.

Data Source: qianzhan, “China’s coffee industry market size forecast’

As the size of coffee market in China is growing, it offers boundless potential for coffee bean industry. In the future China can become a major coffee-consuming country. Due to the growing gap between supply-demand in domestic coffee market, foreign producers increase a variety of exported coffee beans to China. Furthermore, with the constant improvement of domestic living standard, the consumption and demand of coffee will expand rapidly.

Learn from a coffee shop entrepreneur in China

See our report on the tea market in China

This article The Coffee bean market in China: Where does China import beans from? is the first one to appear on Daxue Consulting - Market Research China.

To enter the biscuit market in China, there are three key elements to aware of:  nutrition, packaging-design and taste.

China’s snack market overview

According to a report by the Ministry of Commerce, the total output value of China’s snack industry increased from 424 billion yuan to 2,215.6 billion yuan, with a compound annual growth rate of 17.9% between 2006 to 2016. The report predicts the total output value of the snack industry will increase to 3 trillion yuan by 2020. There are four reasons contributes to the future positive outlook.

First is increased consumption power due to China’s economic development. Second is the even spread of the production factories in China. This helps meet consumer demands in different regions, as snack preferences vary from region to region. The third factor is the diversified sales channels. Other than offline department and retailers, e-commerce is well-developed in China to serve the consumers. Nearly 30% of the sales of online food are snacks. According to CNBD 2020’s online snack sales report, Tmall is the main platform that consumer purchase the snack. The growth rate of snack sales in Tmall is faster than the growth rate of snack sales in Taobao. Biscuits and bakery products have relatively low sales compared to other categories. However, it also indicates the biscuit market in China has huge potential to grow.

According to Mintel, the CAGR of China’s biscuit market from 2011 to 2016 was 11.93%, much higher than the 2.17% in the US. The market of biscuits cookies and crackers grew at annual rate of 4.6% from 2013 to 2018. Total sales of biscuits in China will exceed $11.8 billion by 2023. Accordingly, the market grows at a stable rate over the previous period and will continue to expand both its volume and revenue.

Fierce competition from both domestic and international players

There is a wide variety of flavours in the Chinese biscuit market, primarily savoury biscuits and sweet biscuits (cookies). Flavour-coated (chocolate or strawberry) biscuits, filled biscuits, Wafers, and some other different forms share the market simultaneously. Functional biscuits with less sugar or special advantage for health have a rapid growing market. Though we’ve already numbers of brands and products in such complicated market, we still have a chance to enter the market as it stably grows with rising demand for healthy goods. (See also: Our Sensory Research Methodology)

Chinese biscuits market has a distinct characteristic which is that the domestic products have more sales volume while foreign ones have more sales value. Domestic products are cheaper and few of them prioritize packaging, but they have a large mass base in the market, which keeps their sales volume at a stable level. Local brands such as XU FU JI (徐福记) and Hao Chi Dian (好吃点) originate in the Pearl River Delta economic zone. Foreign products pushed in Chinese market strongly with solid investment. They have a higher price and quality as well as more attractive package. Smart distribution strategies accompanied by a premium image of brands also help to increase their sales. Since its market entry, Danisa became one of the most popular choices of gifts in holidays, taking 2% market share.

In 2018, Munchy’s launched its first online shop via JD. By taking advantage of the rapid growth consumer in e-commerce in China, Muchy’s has been very successful as a foreign biscuit brand in China. Recently, imported biscuits grow quickly as nowadays people can get access to them easily online without going abroad. In brief, domestic brands and foreign brands have competed throughout the years, while the imported biscuits have a quality and packaging advantage.

Nutrition and packaging design are the selling point

A healthy lifestyle has spread widely among Chinese people so that they pay greater attention to what they eat every day. The high amounts of sugar in biscuits drive health-minded consumers away. Thus, the changing concept gives the birth to the functional biscuits which have less sugar and more health benefits. Several companies made the use of this opportunity to launch so-called healthy biscuits and enjoyed great success in the China biscuits market.

Two biscuit brands in China that used health to gain market share

Hougu biscuits firstly launched by Jiangzhong Pharmaceutical Co. Ltd claims to contain hericium erinaceus (a fungus used in traditional Chinese medicine) with advertising says that this nourishes the stomach. Therefore, Hougu biscuits are becoming widely accepted. Many consumers buy the biscuits not only for themselves but also for their elders who are not the target customers of biscuit brands in China. Another wheat cracker without sugar launched by Silang Co. Ltd has also gained great popularity as it can help digestion. Surprisingly, diabetics can also eat this kind of biscuit because it has no sugar. It’s even a good choice for people who want to lose weight as it can give a sense of fullness so as to suppress appetite. So, it is no surprise when these healthy biscuits first appeared, people rushed to buy them. Eying their success, other companies promoted their own healthy biscuits to follow the trend.

However, we still have a lot of developing space under this category. For different crowds, specific functional healthy biscuits can be developed. For instance, children need nutritional biscuits to grow healthy. The elders prefer the biscuits full of micronutrients good for bones.

Young consumers appreciate attractive packaging

Despite the ingredient and quality of the biscuit, younger generation consumer value the packaging design of the biscuit. For instance, millennials tend to buy a brand such as Shiroi Koibito (白色恋人), Akaibohshi (红帽子) and Jenny Bakery （珍妮小熊）because of the fancy packaging. Any entrant of the biscuit market in China who can grab the selling point of wellness and well-designed packaging will sure become the dark horse among biscuits producers.

Image: Jenny Bakery’s packaging design

Image: Shiroi Koibito’s packaging design

Entering the Biscuit Market in China: the flavors of success

When it comes to biscuits, the first question jumps into the mind is that “does it taste good?” The flavour preferences of Chinese are vastly different from westerners. Apart from those functional biscuits, Cranberry Cookies sells best on Taobao.  The biscuits with milk or chocolate flavours follow as the second-best sellers. Chinese people tend to prefer crisp textures over soft when it comes to biscuits and cookies. In addition, some special flavours like yogurt, shallot  (green onion) and tomato are also favorites among Chinese.

Regional flavour preferences

Localization is always important for a company who wants to enter the market. For instance, east coasters tend to favor more sweet taste whereas the people live in the middle of China such as Sichuan and Hunan prefer salty and spicy food. Only knowing clearly about consumers’ taste can lead to great sales of the products.

Chinese biscuits market still has great potential especially for the foreign brands who can localize to the flavor and nutrition preferences.

Listen to 100 China entrepreneur stories on China Paradigms, the China business podcast

Listen to China Paradigm on Apple Podcast

This article The Biscuit Market in China: Localizing flavors and nutrition to gain market share is the first one to appear on Daxue Consulting - Market Research China.

Overview of China’s coffee market

The Coffee market in China has been steadily climbing for years. In 2019, the market scale of coffee in China reached US $10  billion, which only US $7 per person. Chinese coffee consumers are mostly in tier-1 and tier-2 cities, as lower tier-city consumers become familiar with coffee, the market has potential to explode.  If China’s per-capita coffee consumption matched that of Japan (at US $237 per person annually) China’s coffee market would reach $330 billion US, which is a lot of room to grow. Hence, the coffee market in China is promising to explore.

[Data Source: chyxx “The Market Scale of Coffee in China”]

Since 2006, Costa Coffee, the British coffee shop chain has entered the Chinese market and expanded dramatically. Based on the Starbucks model, with the implementation of Coffee shop just nearby Starbucks stores, its ambition is to make China become its ‘second home’, having one-third of the market share of coffee shop market. Costa Coffee has the particularity to have his own roastery with their proper blend in every store. The giant has since more than 3,800 stores globally.  

However, Costa only has 293 China stores as of mid-2020. The possible reason may be the aggressive competition among those famous chain coffee brands. Starbucks leads the coffee market in China.

See also our piece on the Coffee shop market in China

In 2017, Costa China’s parters of Southern China withdrew its shares. Thus, Costa China and Costa’s parent company were able to totally control China’s southern market, preparing for Costa’s expansion plan. However, in 2018, Costa was adopted by Coca Cola with 3.9 billion pounds (around 5.1US dollars). James Quincey, the CEO of Coca Cola, contended that the company desired to create a drink portfolio catering to customers. Costa can bring Coca Cola to explore the hot drink market and build a robust coffee sale platform, while Coca Cola can create more opportunities for Costa to develop new service. After Coca Cola acquired Costa, Costa started to make some innovations to improve its position in the coffee market in China.

Strategic Approach for Costa Coffee to Enter China’s Market

In order to differentiate Costa Coffee from its strong competitors such as Starbucks, Costa Coffee relies largely on local Chinese retailers. One of the recent moves included an agreement signed with the Beijing Hualian Group, a nationwide retailer. Costa Coffee also gives many authorities to its partners; as more it gives authorities, more the operations are efficient.

Costa Coffee conducts a strong analysis of the local market and is open to change its offer according to its region and the taste of the people in that region. This strategy leads many Chinese consumers to give feedback saying, even in Shanghai and Beijing, Costa coffee tastes slightly different. Ye Xiaobo, the store manager of Costa Coffee 1912, said: “Starbucks are more casual like the way Americans do while as for Costa Coffee, is more traditional, rigorous with more focus on the utensils”.

Costa Coffee also noticed that Chinese customers tend to be more comfortable sitting in a more private space while drinking coffee. Costa Coffee has been focusing on a smart way of arranging tables and chairs so that every customer will feel more at ease.

Like its competitors, Costa also embraced the localization strategy by adding iced green tea to stores in southern China and a hot beverage in northern China.

Overview of its Long-Term Business Plan in China

Compared to Starbucks’ 16-year-presence in China, Costa used only 8 years to reach 25% of the total market share. The only problem is that having too many partners to share its profits can be risky in the future. Thus, how to build an efficient platform where each party has a fixed say and how to create a system to prevent future conflicts remains to be considered.

Costa Coffee Club

Costa coffee in China is directly competing with the American coffee maker “Starbucks” who have seen a lot of success in China with a strong local strategy, with an emphasis on the consumer experience factor.  Such as his main competitor the British Coffee brand is proposing a loyalty card for app or android phones, the member can gain points every time-consuming at the shop in order to get free coffee or other goods.

How to launch a new product in China’s coffee market

In September 2019, Costa initially launched its portable instant coffee in the U.K, gaining 6 percent market share in a short time. Later, on March 25th, 2020, Costa’s instant coffee appeared in China’s coffee market, marking its formal layout in China’s instant coffee market and the beginning of its ‘omi-present’strategy, making products for the home in addition to coffee shops. This coffee is available in online platforms, supermarkets, and other distribution channels, mainly in tier 1 and 2 cities. Costa’s overseas market CEO said China was an essential market for Costa, and considering modern consumers’ fast pace of life, Costa targeted the instant coffee market to adapt to customers’ requirements and develop new growth points for Costa under the competitive coffee market in China.

Image source: sohu.com, Costa Coffee launches instant coffee in China

Cooperation with Onecup to kick-start China’s at-home coffee market

Recently, it is reported that Costa united Onecup to produce customized coffee capsules with Costa’s formulation. Meanwhile, similar coffee will also be accessible in Costa’s stores. Although Costa has many stores in China, it aims to make its products available everywhere. Particularly, NCA’s global data unveiled that the average person consumed 2.06 cups of coffee a day. That comprised 1.37 cups at home, 0.24 cups at workplaces, 0.25 cups at restaurants and cafes, and 0.2 cups at other sites. Most coffee around the world is consumed at home. Their cooperation can allow more people to enjoy Costa’s high-quality coffee, triggering more consumption of its coffee.

Daxue Consulting expertise

With many years of experience in the coffee shop industry, Daxue Consulting can help you enter the Chinese market and develop your brands to reach millions of consumers. From online surveys to mystery shopping, our consultants in China can give you a full tour of the Chinese market and determine what is the best strategy for your brand. To know more about the Chinese coffee market, do not hesitate to contact our dedicated project managers by email at dx@daxueconsulting.com.

Learn how to run a coffee shop in China

This article Costa Coffee in China: Becoming omni-present in China’s coffee market is the first one to appear on Daxue Consulting - Market Research China.