Investment opportunities in the 100 billion coffee market, here is a report | Coffee industry research topic

Text | Xu Zi, Wang Yingfeng

The Chinese coffee market has not been peaceful at all in the past two years.

Luckin Coffee emerged with the power of capital and new Internet strategies, expanding rapidly across the country, challenging the traditional giant Starbucks, and creating a myth of listing in the United States 18.5 months after its establishment. Also relying on the Internet, Santonban, a coffee brand that focuses on the convenience of boutique coffee and the upgrading of instant coffee, achieved the second highest coffee sales in the entire network (second only to Nestle) during the "Double 12" in 2018. At that time, Santonban's Tmall store had only been online for a few months.

Domestic coffee brands are rising, and international coffee brand giants are also pouring into the Chinese market. Japan and Canada's "national coffee" brands have recently opened their first stores in Shanghai. Major food and beverage companies such as Coca-Cola, Hong Kong beverage brand Vitasoy, and Nongfu Spring have also entered the coffee market.

At the same time, the "newcomers" in the tea beverage industry, Heytea and Nayuki's Tea, have also turned their attention to the coffee market and launched coffee drinks one after another.

With many players rushing to join the game, what kind of business is coffee?

36Kr's "Coffee Industry Research" topic and "Qinqin Food Investment" will focus on the research of the coffee industry, break down the commercial and investment value of each segment of the coffee industry, and bring readers more content to discuss in the form of entrepreneurial projects, case analyses, research reports, etc.

This is the first article in this special topic, a coffee industry insight report provided by Qinqin Food Strategic Investment.

China's coffee market started late, but is growing rapidly and has huge potential

According to data from the ICO (International Coffee Organization), global coffee production and consumption were both close to 10 million tons in 2018. In the past eight years, the global coffee production has grown at a compound annual growth rate of 2.99%, and the consumption has grown at a compound annual growth rate of 2.29%. The global coffee market is huge, mature, and has a solid industrial foundation and is growing steadily. However, coffee consumption is unevenly distributed around the world, and consumption is mainly concentrated in economically developed countries and regions such as Europe, the United States, and Japan. According to Euromonitor data, the per capita coffee consumption in European and American countries is at the level of 1 cup per day, and the highest per capita consumption in the Netherlands can reach nearly 2.5 cups per day.

In China, the per capita coffee consumption is only 0.003 cups per day. Compared with the European and American markets, the market is less mature and started late, but China is growing fast and has huge market growth potential. Fortunately, with the market education of international brands such as Nestlé and Starbucks, China's coffee consumption has increased rapidly, with an annual compound growth rate of 23.18% in the past five years , far exceeding the United States, Japan, and South Korea. According to the London International Coffee Organization, the scale of China's coffee market can reach about 300 billion yuan, and is expected to exceed 1 trillion in 2025.

The distribution of the coffee industry value chain is extremely uneven, with the downstream sales link accounting for as much as 93% of the value

Generally speaking, the birth of a cup of mellow coffee requires three stages. The planting and rough processing of coffee beans are the upstream of the industry chain, including planting, picking, rough processing, grading, selection, weighing and packaging, etc., which is the main supply end of coffee beans; the fine processing of coffee beans includes roasting, extraction, etc., which is the middle of the industry chain; the production and sales of finished products such as instant coffee, ready-to-drink coffee, and freshly ground coffee are the downstream of the industry chain, directly facing consumers. In the entire industry value chain, planting and rough processing can only account for 1% of the profit, fine processing accounts for 6%, and the remaining 93% of the profit is pocketed by the sales end.

Roasted coffee beans can be sold directly or further processed into coffee powder, which can then be made into drip coffee or capsule coffee. Coffee powder can be extracted and added to new tea drinks, or made into ready-to-drink coffee or instant coffee. The gross profit margins of these coffee products are basically around 50%-70%. Among them, the gross profit margin of ready-to-drink coffee is the highest, at 70%-80%; while the instant coffee, which has the lowest gross profit margin, can also reach 30%-50%.

my country's coffee market has huge room for growth. The value of coffee beans increases dozens of times after rough processing, roasting and extraction. It is not surprising that various players are pouring into the coffee sales market.

Three waves of coffee

Although there are many players entering the market, and each of them has its own tools to promote the development of new economy and new business, if they want to reshape the coffee industry landscape, they cannot avoid a head-on competition with the giants.

To understand the growth of today’s global coffee giants, we must first talk about the three coffee waves experienced by major Western coffee-consuming countries, represented by the United States.

The first coffee boom occurred between 1940 and 1960, characterized by the instantization and commercialization of coffee. During World War II, the U.S. military distributed instant coffee to soldiers to improve their mental state. Over time, most soldiers developed a coffee addiction. This group of people accelerated the popularization of instant coffee consumption after returning home after the war. During this period, coffee was consumed as a refreshing drink, and people did not pursue the taste too much.

Nestlé is a classic representative of the first coffee wave. In 1938, Nestlé launched the world's first instant coffee. Taking advantage of the dependence of soldiers on instant coffee during World War II, it quickly spread to many parts of the world after the end of World War II and became a popular mainstream drink. In 1988, Nestlé entered China and opened the door to the Chinese coffee market. According to a research report by Euromonitor, Nestlé is currently the world's largest coffee company, with a global market share of more than 22%. In the domestic coffee market, Nestlé ranks first in the instant coffee segment with a market share of 28.5%, and has nearly 70% market share in the ready-to-drink coffee market.

The second wave of coffee appeared from 1966 to 2000, represented by heavy roasting and coffee chain. Influenced by the coffee culture of Italy and Nordic countries, American society began to care about coffee beans and roasting methods, and more coffee drinks began to appear. Drinking coffee became a comprehensive experience that included enjoying coffee and socializing. Italian coffee shops that used coffee shops as a carrier and emphasized the "third space" became popular.

As a classic representative of the second wave of coffee, Starbucks, founded in 1971, proposed the concept of "third space" in 1983, leading a wave of trends. The third space means that Starbucks coffee shops are not only places to sell coffee, but also provide social scenes for customers, focusing on the comprehensive experience of coffee + social interaction . Starbucks entered the Chinese market in 1999. While introducing the concept of the third space, strict procurement standards, continuous innovation of products and a direct sales model that guarantees service quality have allowed it to occupy a place in the Chinese market. Today, among the 100,000 coffee shops in the freshly ground coffee market, Starbucks is the only one with a market share of 51%.

The third wave of coffee began in 2003 and has continued to this day . It is characterized by light roasting and fine brewing . Coffee is no longer an ordinary drink, but like red wine, it begins to pay attention to the origin, variety, picking month, altitude and processing method. Roasting pays more attention to showing the original flavor of coffee beans, and hand brewing has become the mainstream. Products surpass experience and have once again become the core element that consumers value most.

In the third wave of specialty coffee, Blue Bottle Coffee is one of the important promoters and major players . It commercialized handmade coffee and started large-scale operations. Different from Starbucks' "third space", the store atmosphere created by Blue Bottle Coffee is a place to enjoy coffee. It wants you to talk to the barista and only talk about coffee. However, due to trademark issues, Blue Bottle Coffee has never entered the Chinese market.

Coffee Industry Investment Opportunities

Coffee giants all rose to prominence by taking advantage of the situation. In the current melee in the domestic coffee market, new entrants must grasp the development trends of the industry and seize opportunities to break out of the siege.

New consumer products

Product innovation in coffee is an important driving force for further increasing the popularity of coffee in China and improving consumption levels. In 2017, Nestlé acquired Chameleon Cold-Brew, the largest organic cold-brew brand in the United States, to develop the emerging cold-brew coffee business. Bulletproof has endowed coffee with the function of "helping with weight loss" and invented bulletproof coffee, which has attracted more consumers. The nitrogen coffee developed by Starbucks tastes more refreshing than cold-brew coffee, and has gained a group of consumers in the summer who have no habit of drinking coffee in other seasons.

New consumption scenarios

With the growth of the domestic coffee market and the accelerated pace of life, consumer demand in home and office settings is becoming increasingly prominent.

In 2018, JAB, the world's largest coffee group, launched the boutique coffee e-commerce website TRADE to conduct an online boutique coffee retail business trial, hoping to attract household consumer users.

In home and office scenarios, in addition to the boutique instant coffee Santonban, there are also coffee brands such as Yongpu and Shicui. Some content e-commerce companies such as the Penguin Food and Drink Guide of the Foodie Research Institute and Daily Food Diary have also launched their own coffee products.

Santonban, founded in 2015, is an online boutique coffee company that focuses on home use. It has expanded the drinking scene of boutique coffee and lowered the threshold for drinking boutique coffee. On the other hand, with the deep penetration of drinking scenes at home and at work, the penetration rate of home coffee machines has a very broad space. For white-collar coffee consumers, there is another better choice, which is the self-service coffee machine. Its convenience, high quality and low price all attract white-collar workers with rigid needs.

From the perspective of the entire industry, investment opportunities will focus on "the quantitative and qualitative increase of coffee consumption" and "the comprehensive optimization of the coffee industry chain"

To further stimulate the potential of the domestic coffee market, we need to focus on both the quantity and quality of coffee consumption. Especially in the context of the third wave of boutique coffee, we need to do a good job in coffee chains that focus on selling space, boutique coffee chains and emerging coffee product brands, improve product quality and stimulate total consumption. On the other hand, the overall optimization of the coffee industry chain will also be a growth point. We need to establish standardized coffee plantations, large-scale coffee roasting factories, promote self-service coffee machines and office coffee services, and provide consumers with better coffee and a better experience in every link.

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