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When coffee shops want to enter into a new market, its competition with substitute, bakeries and tea shops, should be taken into consideration. Hence, the article will analyze the market for coffee shops in Hangzhou with a brief description of the current development of coffee shops, bakeries, and tea shops. The report will employ three dimensions, that is, the way to attract customers, the way to improve profitability, and the location, to have the basic knowledge of the market.

In terms of coffee shops, the development is in an escalating rise. Firstly, there are more coffee shops founded in Hangzhou. It is about 37,183 coffee shops in 2012 compared to 15,898 in 2007, with an increase of 99.9%. The main aspects that influence the popularity are high quality of food, high quality of drink, and the environment. Secondly, in order to attract customers, coffee shops in Hangzhou have been localized based on the interests of the natives, for example, more alternatives are added in the menu. The tea is provided in McDonald’s coffee shops and ice rice-dumpling is serviced in Starbucks, which is not seen in other countries. Also, coffee shops participate in the activity of group-buying to popularize themselves among customers. Thirdly, coffee shops employ creative strategies to improve the profitability. In order to moderate the low turnover rate, they enhance the product price to ensure the high profitability. Besides, customers will have more choice for coffee shops will create more attractive dishes, such as noodles during the lunch time. It is estimated that 20 to 30 dishes would be sold per day. Then, coffee shops select their location surrounding CBD and Technology Park to attract business employees for they are inclined to spend their leisure time in the coffee shop. Hence, coffee shops in Hangzhou has experienced enhancement with different measures taken.

With regard to tea shop, change is also witnessed. Firstly, the number of tea shops has been from 48.842 to 50.9842 between 2007 and 2012, with an increase of 4%. It customers are mostly travelers and the elder with a relatively low consumption. Secondly, tea shops adopt new measures to attract customers. They diversify themselves with a motif in each shop. For example, Taiji Teahouse is famous for its tea ceremonies and Qingteng Teahouse is well known for its refreshment and its splendour. The value of the traditional tea shops has been improved with creative additional service. Thirdly, their Ways to improve the profitability include the enhancement of price for each cup of tea due to the added value from the performance of tea ceremonies or the improvement of the environment. Moreover, because of the difficulty of parking near a shop, tea shops provide parking lot for customers. It attracts consumers with cars effectively. Lastly, tea shops also select city centre and University Park to attract customers. However, such shops have been changed from the traditional tea shops to a new form of leisure tea shops, such as Yicha Yizuo. Such shops provide leisure and ease without the traditional feeling with diversified drink and choice of fruits. They may integrate the western food and the eastern culture. This kind of tea shops attract more young customers

The competition between coffee shops and tea houses is fierce. The coffee shop entered into Chinese market with a large expansion in 1990s. Some of coffee shops sell the local tea to customers. However, tea shops strategically position itself as a place for business discussion for high-end customers.

When it comes to bakeries, there is also improvement. Firstly, bakeries enrich their alternatives of bread and cakes. The diversification of products attracts customers to enter into the shop. Besides, shops would launch a new kind of bread or cake to popularize themselves among customers with an image of innovation. Sometimes, they will have activities for sample eating for free. Secondly, in order to improve profitability, they add coffee and drink in their menu and increase the price. Besides, they launch a new choice of package of bread and coffee at breakfast time. Thirdly, the majority of bakeries open their branches in the city centre with chairs for sitting and chatting. Besides, there are branches in the University Park, small but full of romantic feeling. Therefore, bakeries are also taking measures to compete with coffee shops and tea houses in Hangzhou

It can be concluded that the substitution between coffee shops and bakeries is high for both of them enrich their choices in the menu and enhance the environment.

To summarize, the competition among coffee shops, tea houses, and bakeries is serious. It can be concluded from the measures they take to improve their competition. However, it can be implied that the service they provide is increasing the same. Hence, if a coffee shop wants to compete in such a market, it should consider the strategy that facilitates its competitive advantages.

Written for Daxue Consulting China Market Research