March 16 2003 (FriedlNet.com) - Traditionally a stronghold of jasmine, oolong, green, black and myriads of other fragrant kinds of tea, the Chinese mainland is becoming more and more attuned to the rich flavor of the coffee bean, driven by the urban savvy rich and an increasingly wealthy middle class more receptive to Western taste. Per capita consumption is still extremely low in the Middle Kingdom, and there is plenty of room for expansion. Although grooming the tea-crazy country for Robusta and Arabica coffee will be no easy task, efforts in neighboring and equally tea-hyped Japan have shown that it could just be a matter of time before China also rolls out the welcome mat for the soothing and rich waft of freshly ground coffee beans and fresh brewed coffee.

Coffee Beans

Domestic production of coffee in China has skyrocketed over the past half a decade with increased development of the nation’s coffee-growing regions. Whereas most coffee had to be imported during the 1980s, increased homeland acreage and productivity has helped reduce the influx (see below at Trade). In 1997, the mainland produced only 3,573 tons of coffee; by 2000 output had increased to 11,568 tons (nearly 193,000 60-kg bags), according to the Chinese Agricultural Yearbooks. United States Department of Agriculture (USDA) estimates for the year 2001 put output at around 13,000 tons.

A Reuters news blip from 2001 cites Brazilian consultant Joao Staut as telling a coffee conference that China produces about 300,000 (60-kg) bags of coffee annually - translating into 18,000 tons. On the demand side, he noted coffee beans the country needed for coffee product processing totaled about 500,000 bags a year, or about 30,000 tons, leaving room for imports.

As for the acreage needed to produce so many tons of coffee at home, an International Coffee Organization (ICO) report from 2000 estimates there to be 76,000 hectares of land in the provinces of Yunnan and Hainan used for producing an average of 30,000 bags of coffee a year. Data from the China Agricultural Yearbooks differ somewhat, put existing coffee acreage in these 2 provinces in 2000 at 23,709 hectares - up from 7,400 hectares in 1997.

Together, Yunnan and Hainan provinces produce virtually all domestic coffee. Rugged Yunnan is by the largest producer, bringing forth more than 95% of the country’s coffee via the Arabica coffee grown in its highlands. Wads of foreign funds have been invested into this province to increase productivity and acreage over the past few years, with Swiss-based Nestle having hitherto sunk 50 million RMB ($6 million) into agricultural technical assistance for Yunnan coffee growers, thus pioneering the local production of the country’s first high-quality Arabica coffee. Nestle purchases large quantities of coffee from Yunnan for its factory in Guangdong (see below), having bought up about 3,000 tons in 2002, reports the Chinese Economic Information Center, an affiliate of the State Development Planning Commission.

A distant second, Hainan produced only 419 tons of coffee in 2000, making up 4% of the country’s output. The island produces Robusta coffees, typical of areas with a tropical climate. The flavor of Robusta coffees is usually less mild than that of Arabica coffees.

Coffee Products

Despite imports and the expansion of domestic production, per capita coffee consumption on the mainland remains extremely low compared to other countries. A report by the USDA cites a 2000 report estimating annual roasted coffee consumption for all of China to be only around 1,200 metric tons – equal to less than 1 gram of coffee consumed per head per year. Split up regionally, the report estimates Beijing residents to consume 300 tons a year, Shanghai 400 tons, and Guangzhou 200 tons.

By comparison, annual per capita coffee consumption 2000 was a whopping 11.26 kilograms in Finland, 6.72 kilograms in Germany, 4.07 kilograms in the United States, 2.38 kilos in the tea-loving United Kingdom, and 1.31 kilos in Ireland. Even Fiji had a higher rate, with 150 grams consumed per head per year.

Surprisingly, Asian neighbor Japan – once a pure tea-drinking country – had a rate of 3.17 kilograms per person per annum at the turn of the century, mainly due to decade-long promotion activities by coffee companies and associations to make the drink popular with the island populace. To get a feel how far the country has come, back in 1965, per capita coffee consumption in Japan was only 300 grams per year.

The same trend could be reproduced in China, if concerted efforts are made. In the words of the International Coffee Organization: “The experience of Japan shows that even a traditional tea-drinking country can switch to coffee when its level of development approaches Western levels. However, as was the case in Japan, a strong promotion campaign by both private companies and exporting countries would no doubt help to bring about a substantial increase in coffee consumption in China.”

According to a statement from Nestle back in 1999, if per capita consumption were to rise to the levels seen in Hong Kong, sales figures in the Middle Kingdom would be 3000% greater. The process would take some time though, says Staut, as the Japan’s traditional tea culture took 15-20 years to catch on to the coffee drinking habit. Staut noted that if the 40 million people in China that earn over $3,000 per year consumed 1 kilogram of coffee per year, that would translate into 650,000 bags of coffee; and if the 180 million who earn $1,500-$3,000 also consumed the same amount, that would mean an additional 2.7 million bags.

Sensing the potential of the Chinese market, swashbuckling Swiss-based Nestle took the lead in promoting coffee to the mainland’s 1.3 billion residents, having become king of the mountain in the fledgling market. According to the China Markets Yearbook 2003 (available on this site http://www.friedlnet.com/0021-005.html), Nestle’s first and largest venture in China - Nestle Dongguan Co. - raked in 767.4 million RMB ($92.7 million) in revenue in 2001, earning 176 million RMB in profits. The Dongguan venture, now solely owned by Nestle, has been making coffee in the country for 10 years. All in all, Nestle has to date invested 6.7 billion RMB ($807 million) in China, opening 21 plants across the nation.

The China Markets Yearbook 2003 reports Kraft’s China venture – Guangdong-based Kraft Guangtong Food Co. to have seen 167 million RMB in revenue flow into company pockets in 2001.

Kraft’s Maxwell House and Nestle’s Nescafe instant coffee brands together munch up at least 70% of the Chinese market, reports the ICO, with Nescafe being the dominant brand. Roasted coffee sold in processed, pre-package form – as can commonly be found in most shops in Western coffee-loving countries – is still rare in China, often only found in higher class supermarkets and stores. Instant coffee is the most popular mode for coffee consumption on the retail level.

Specialty Coffee Shops

Coming of age in the Middle Kingdom is the specialty coffee shop, a Western equivalent to the beloved Chinese teahouse. Going out for a cup of coffee and a little chitchat has become trendy and fashionable with white-collar workers, students and the rest of the emerging middle class in China, especially those aged between 20-50 years old. Last year, a survey conducted in China’s larger cities revealed that 24% of those aged 41-50 years old and 18% of those aged 20-30 years old often sip a coffee, the Guangzhou Daily newspaper reported.

Leader in the field of specialty shops is Seattle-based Starbucks, which is quite merrily expanding across the country’s larger metropolises and raking in the dough. The company was the talk of the town a few years back when it even opened up a shop right smack dab in the middle of Beijing’s sacred 600-year old Forbidden City. Pursuing a strategy of opening up many shops in one area – many of which operate at a loss but nevertheless succeed in driving smaller rival coffee shops out of business – Starbucks is planning to expand its stores in north China to 50 this year. The chain came to China in 1998, and by 2002 it had expanded to 50 outlets in Beijing and Tianjin (together 26 outlets), Shanghai (21), and Hangzhou (3).

Oblivious to the Starbucks onslaught, many other overseas specialty shops are trying their luck. Taiwan-based Barista Coffee has teamed up with the Taiwan-based Want Want Group to try the mainland market via Shanghai. Japan’s Manabe is also testing Shanghai with a mix of regular outlets and franchises.

An important factor influencing domestic specialty shop coffee consumption is price, with the 12 RMB needed to purchase a coffee at Starbucks simply too much for the ordinary Chinese citizen. Most Chinese will opt for a tea that costs a fraction of the price (or even costs nothing in many restaurants), unless shops offer some perks to lure potential coffee-drinkers in (such as free Internet).

Trade

According to a USDA report relying on China customs statistics, China imported 8,854 metric tons of coffee (not roasted and not decaffeinated) in 2001, worth $5 million. Largest suppliers were Vietnam (8,102 tons) and Indonesia (637 tons). At the same time, 11,131 tons worth $10 million were exported, with Germany (2,390 tons) and Vietnam (6,312 tons) being the largest markets. The massive 2001 export flow tilted the coffee trade balance in China’s favor, as the previous year (2000) only saw 2,963 tons worth $4.9 million shipped overseas (versus 4,738 tons of imports worth $4 million). Not roasted and not decaffeinated coffee makes up the lion’s share of coffee trade flows with the Middle Kingdom, with imports and exports of other kinds of coffee being negligible.

China’s coffee import dependency has been greatly reduced during the past decade due to efforts to boost domestic production. Although imports have been increasing gradually over the past few years (up from 4,713 tons in 1997), the annual volume is still much smaller than the annual average of 14,000 tons imported into the country during the 1980s.

Tariffs on coffee imports are going down, with World Trade Organization commitments calling for the 2002 tariff rate of 12.8% to come down to 10.4% in 2003 and reach 8% in 2004.