Today’s consumers’ demand for coffee includes three levels: physiological needs, emotional needs, and social needs. Instant coffee can only meet physiological needs, while freshly ground coffee can provide a better taste, which not only meets the initial physiological needs, but also further meets emotional and social needs through exquisite production and provision of scenes.

With the development of China's economic income level, coffee consumption patterns are constantly changing and demand is increasing day by day. From the initial Nestlé instant coffee, to the booming offline boutique coffee shops, to the rise of new coffee retail today, coffee consumption scenarios are expanding rapidly.

Today, consumers’ demand for coffee includes three levels: physiological needs, emotional needs, and social needs. The higher the level, the smaller the audience and the higher the average customer spending.

Instant coffee can only meet physiological needs, while freshly ground coffee can provide a better taste. It can not only meet the initial physiological needs, but also further meet emotional and social needs through exquisite production and providing scenes.

With the popularization of coffee culture, freshly ground coffee with better quality and able to meet higher-level needs has gradually attracted the attention of the Chinese people. The huge market has attracted capital from all walks of life to compete for it, giving rise to a variety of coffee business forms.

Traditional Coffee House

The outstanding advantage of traditional coffee shops is that they can use physical stores to provide scenes to meet emotional and social needs.

Take Starbucks as an example: it provides a "third space" besides work and family. Relying on stores to provide consumers with space for business negotiations and leisure life, as well as a refined life experience brought by high-quality services, it satisfies consumers' pursuit of elite status and has become a symbol of life taste in the hearts of most white-collar workers.

The stores are not absolutely standardized, but will partially meet the needs of local consumers, sell various peripheral products, or use various promotional methods to allow consumers to fully experience the coffee culture and integrate into the Starbucks environment. At the same time, select stores are opened in first-tier cities to attract high-end and in-depth coffee users by upgrading stores, thereby strengthening the company's brand sense and grade.

• Advantages: Strong consumer experience, easy to form a sense of brand belonging. Working hard on supporting facilities and service processes may not necessarily increase profit margins in the end, but it can increase competitive differences.
• Disadvantages: Physical stores have high operating costs due to high costs for barista training and salaries, and the fact that stores are generally larger and located in business districts.

Convenience store coffee

Convenience stores are mainly concentrated in crowded areas such as CBD, business districts, subway stations, and many of them operate 24 hours a day, using promotional activities to improve their cost-effectiveness, providing fast-paced office workers with a cup of freshly ground coffee that is time-saving, convenient and not too expensive, helping them to cheer themselves up and face work pressure.

Although convenience store coffee cannot be considered boutique coffee, it has become a popular consumer product due to its convenience, speed and affordability, making it easy to drink a cup of coffee.

From a more direct profit perspective, freshly ground coffee, like other fresh foods sold in convenience stores, can both attract customers and generate considerable gross profit.

According to China Business News, in terms of products alone, the gross profit margin of Starbucks coffee is close to 90%, while that of convenience store coffee can reach over 50%.

In the future, the dense number of convenience stores will to some extent squeeze out the market of traditional low-priced coffee shops.

Internet takeaway coffee

In China, food delivery is a mature business, and food delivery coffee is an important incremental market. The preliminary infrastructure construction work has been basically completed. Food delivery companies such as Ele.me and Meituan have established efficient instant delivery logistics systems. The popularization of mobile payment has made the food delivery coffee business a natural success. Food delivery coffee does not need to pay high store and personnel costs, and the smaller and more flexible food delivery coffee has greater profit margins.

Internet coffee brands represented by Luckin Coffee and Lian Coffee use online cashless ordering + takeaway delivery/self-pickup and other methods to allow consumers to quickly drink good coffee with high cost performance.

Focus on the development of online-driven Internet gene:

• Weakened store attributes : offline stores are not commercial storefronts in the ordinary sense, but sites that are only responsible for production and distribution, and the site area, personnel and machine configuration can be dynamically adjusted according to the number of online orders.
• Light social model : We need to make full use of WeChat and O2O life platforms to transform traffic thinking, and use new media marketing methods such as new customer rewards and fission red envelopes to promote products.

However, coffee culture is still developing and customer stickiness is not sufficient. A large number of preferential subsidies have led to a large demand for brand funds, affecting the company's profitability. If the subsidies are cancelled, the price-sensitive consumer groups may turn to other products for substitution.

New retail model

In order to meet the ever-changing needs of consumers, the new retail model uses big data and other technical means to upgrade and transform the production, circulation and sales process of goods, deeply integrate online services, offline experiences and modern logistics, and reconstruct the three basic elements of retail:

• People: Online and offline purchases are integrated, consumer behavior is online, and precision marketing is carried out based on in-depth user portraits;
• Goods: Warehouses are moved down to lower floors, making the supply chain of goods and services more efficient and transparent;
• Field: Break the limitations of time and space to achieve unlimited consumption scenarios.

China's highly developed mobile Internet ecosystem provides both necessary and sufficient conditions for the development of new retail. In 2019, China's mobile Internet users reached 1.3 billion; on the other hand, China's time-limited logistics services have basically matured, and young consumer groups in first- and second-tier cities have developed the habit of using takeaway services frequently.

Focusing on the coffee industry, the online model has large traffic, while the offline store experience is strong. Online users tend to form more stable consumption habits, while offline consumers will consider distance and time costs. Extended working hours and faster pace of life are the important reasons for the demand for takeout.

Online marketing costs continue to grow, and high attention requires continuous investment. From a psychological perspective, the online-driven interactive model meets consumers' curiosity and herd mentality, and relies on WeChat's huge social ecosystem to have strong penetration.

Offline stores can meet intuitive and emotional needs, which is conducive to building customer stickiness.

Online and offline are intertwined, and tradition and the Internet are jointly promoting the development of new coffee retail. For traditional brands, Starbucks launched the takeaway service "Starbucks Delivery"; convenience store brands such as FamilyMart and 711 have also begun to cooperate with takeaway platforms.

Luckin Coffee built its own APP and mini program to grasp comprehensive order data and conduct big data analysis to fully understand customer preferences. It also proposed the concept of "infinite scenarios" and opened different types of stores to meet users' diverse scenario needs.

Among them, there are flagship stores and leisure stores that meet users' offline social needs, as well as quick pick-up stores that serve business people, and takeaway kitchen stores that meet customers' delivery needs. Through differentiated store layouts, Luckin Coffee will achieve full coverage of various demand scenarios in consumers' daily life and work.

The number of stores has now reached 4,910. The rapid opening of stores has not only expanded Luckin's market share, but also been the main source of its revenue growth. According to its third-quarter report, Luckin's revenue increased by 558% year-on-year to RMB 1.49 billion, and the average sales per store was RMB 449,600, an increase of 79.5% from RMB 250,500 in the same period last year.

The popularity of coffee in China is relatively low, and urban working groups are the absolute main force of coffee consumption in my country. According to data from the National Bureau of Statistics, the country's urban employed population was 434 million in 2018. The demographic dividend and urbanization development are the main driving forces for China's future consumption growth.

Data source: National Bureau of Statistics of China, Organization for Economic Cooperation and Development (OECD)

According to the per capita disposable income in 2018, China is more than 9 times higher than the United States and more than 6 times higher than South Korea. The price of a Starbucks large latte in China is $4.57 per cup, while in the United States it is only $4.45 per cup.

If calculated based on the U.S. average consumption of nearly 400 cups per person per year, Chinese consumers would need to spend a quarter of their income on this, which is obviously unsustainable. Therefore, there is limited room for future increases in coffee prices in China, and the main room comes from increased consumption.

Summarize

China's freshly ground coffee market has just started. Existing brands continue to develop, and local brands are beginning to rise. In the future, it will attract more market participants and competition will become increasingly fierce.

For new Internet retail coffee companies, through appropriate subsidies and preferential treatment, they can give full play to their unique characteristics of high quality, high cost performance and high convenience , so that more people will like coffee, develop consumption habits, and thus increase market share.

This article was originally published by @kanesony on Everyone is a Product Manager. Reproduction without permission is prohibited

The title image is from Unsplash, based on the CC0 agreement