The coffee shop war is in full swing, Nestle says instant coffee also has a chance to explode

(Photo source: Panoramic Vision)

Economic Observer reporter Aruhhan: Since Luckin Coffee started to target Starbucks, the fierce battle for physical coffee shops has begun. Instant coffee, which was known to consumers earlier than physical coffee shops, has also sensed the potential for industry growth and intensified industry competition. On the morning of May 23, at Nestlé's office in Beijing, the person in charge of the coffee business told reporters that Nestlé is trying to further share the market dividend through innovation in its instant coffee business, which it is good at.

How big is the development potential of the Chinese coffee market? Nestlé's coffee business department has conducted a long-term insight into the market and consumers. According to their observations, the average annual coffee consumption per capita in China is only 6 cups, while in Europe and the United States, and even in neighboring Japan, the average annual coffee consumption per capita can reach more than 300 cups. "This includes statistics of all sub-categories such as instant, ready-to-drink, and physical stores. There is no doubt that the coffee market has a large capacity," said Li Ting, marketing director of Nestlé's coffee business in Greater China.

In the domestic coffee market, Nestlé is the leader in instant and ready-to-drink beverages. According to Li Ting, mass-market instant coffee is the sales pillar of Nestlé's coffee business unit. However, this category, which entered the Chinese market in the early 1990s, urgently needs to adapt to new consumer groups and consumption changes. Like many food and beverages, they need to study how to capture the hearts of young consumers.

According to Nestlé's survey, coffee's market penetration among young consumers is still lower than that of the 36-50 age group. In 2018, coffee's penetration rate among consumers aged 15-20 was 29%; 33% among those aged 21-25; and 37% among those aged 26-35. The penetration rates of coffee among those aged 36-45 and 46-50 were 42% and 43% respectively.

Li Ting concluded: "Young consumers believe that drinking coffee is cool, but compared to the effect of coffee invigorating people, young consumers are more in favor of coffee as a beverage, so they have diverse requirements for flavors." Another report from Nestlé shows that taste is the most important driving force for consumers to choose coffee products on e-commerce platforms. According to sales data in 2018, the annual sales volume of multi-flavor coffee products has grown rapidly, with an increase of nearly 70%, and young Chinese consumers are most interested in trying new and unique flavors.

Based on a lot of research work, Nestlé's instant coffee category recently launched a specially blended series of instant coffee. This series will occasionally launch cross-border flavors to attract young consumers. For example, the latest season's products focus on the cross-border "fruit + coffee", and some flavors of coffee have been changed from the past hot water brewing to direct cold water brewing.

"Compared to the special coffee in physical coffee shops, the price of a cup of this product is less than 2 yuan," said Li Ting. The fierce competition between physical coffee shops such as Starbucks and Luckin Coffee has indeed affected other categories such as instant and ready-to-drink, but the impact is currently positive. "Outdoor physical stores have led to an increase in the attention paid to the entire coffee category. As for the instant coffee category, we are targeting cities below the third tier, which is the main battlefield of Nestlé instant coffee, which is different from physical coffee shops."

Nestlé is a well-known global coffee manufacturer with a history of more than 80 years in the coffee business. With the continuous evolution of the coffee industry, Nestlé has actually built a brand portfolio in the coffee category. In addition to Nestlé Coffee and Nespresso, Starbucks is also one of Nestlé's coffee brands.

Just last year, Nestlé spent $7.15 billion to acquire the permanent rights to sell Starbucks retail and catering products outside of coffee shops worldwide, which does not involve Starbucks store business. The transaction has been completed, which further consolidates Nestlé's position in the global coffee market.

Li Ting further introduced that as the potential of the Chinese coffee market is released, Nestlé China's coffee business will occupy a more important position in the world in the future. "For example, the new product launched this time is 100% locally developed and launched globally for the first time. Now many markets in neighboring countries are asking us for formulas, packaging designs, etc. The Chinese market is likely to lead other countries in the future."