Long term success requires localized taste innovation

Foreign brands such as Starbucks have played to their international strengths and found huge initial success riding on a welcome wave of ‘xiao zi’ sentiment. But how long can this last? The longer a product stays in a market the less foreign it becomes, the novelty is soon lost.

This is not to say Starbucks is only a flash in the pan foreign success. One only need look at the success of Nike, themselves first quantified a foreign luxury, yet through grassroots campaigns and clever well adjusted marketing they gave themselves an image of ‘Chinese cool’. For foreign coffee brands to achieve this they will require a good understanding of local tastes, which combined with innovation will lead to secured long term growth.

In observing or predicting the changing tastes and palates of the Chinese consumer, by and large, products are introduced from the east – not the west. Whereas foreign brands will tend to have a historical legacy appealing to stirring capitalist sentiment, it’s the product innovation of Taiwanese and Japanese coffee (& food) brands that will more deftly appeal to the taste requirements of the Chinese consumer.

Source Majiscup

Watch out for pan asian innovation

Chinese tastes are varied and Taiwan’s Café 85’s ‘salt coffee’ is a good example of this. The addition of sea salt provides the medicinal value so sorely missed in coffee and found in tea, whilst its unique taste provides an interesting talk point. This sort of product innovation coupled with the continued cravings of all things from Taiwanese pop culture, has seen a strong market entry from Café 85.

One shouldn’t be left aghast at this notion, the Taiwanese have set the trend for tea innovation across China and HK. Their famous bubble tea has gone on to spawn countless new taste inventions. Whilst these drinks may trend in and out of fashion in places like Hong Kong, in China these drinks and the chains that retail them, such as Happy Lemon, remain hugely popular. Yet, what of the more traditional Chinese teas?

Tea Dilemma

Tea is huge part of Chinese life and culture, to quote enoVate staff member Sunnie Qin, “tea is a crystallization of Chinese civilization”. If this is the case then why is it that British brand Lipton is the market leader in China? The answer certainly doesn’t lie in quality or foreignness, the simple answer is marketing and distribution.

In fact one might say it is the very cultural weight of tea in China which has held back it’s growth. The numerous strains, varying medicinal properties and regionalised differences mean that while many Chinese people have a deep understanding of tea – there are very few local brands to recall.

Lipton, as well as Twinnings, marketed themselves as plain FMCG’s – emphasising convenience and packaging. This matured and calculated business model, proves quite convincingly that branding and convenience can triumph over quality and history, if marketed correctly.

Source P.J.S.

Predictions

The coffee industry will continue to grow and as more young people start drinking it for different reasons or in its varying forms, we have already seen a move from a simple beverage choice to becoming a fan of coffee.

As we have already started to see in the garment industry, manufacturers are moving out of their supply chain shadow and looking to brand themselves. What will be interesting to see is the medium by which Chinese companies manage this branding. We already know the importance of the Starbucks social space over the qualities of it’s coffee in China, so how and to whom companies such as Dehong Hougu Coffee Co. market themselves will be of key importance. It is only in this way that they can avoid the foreign brand dominance, as in tea industry.

Although it won’t have the growth factor of coffee, tea can still be repackaged.  Once again the social space is of great importance and whilst coffee shops grow in number, a preference for tea houses still remains, particularly outside of tier one cities.

What we will see is a divergence in two social environments of the tea house and the coffee shop, perhaps reflecting wider changes in Chinese society. Places retailing coffee reflect the growing ‘xiao zi’ (upper-middle class) sentiments in tier one cities but more modern tea houses, like Wu Fu,  appeal to those of a ‘xiao kang‘ (middle class) lifestyle, which permeates much more thoroughly through the different tiers of the country.

For further enquiries or information about the tea or coffee market in China, please contact info@enovatechina.com.

Located 180 kilometers southwest of Shanghai, the city of Hangzhou is home to beautiful scenery, 6.4 million people, and from our street team surveys, many youth Chinese tea drinkers. The Hangzhou youth mentioned brands such as Longjing, Guanyin, Pu’er Tea, and Nestle as their tea brands of choice. They also mentioned that Longjing, the British Royal Flower Tea and Pu’er Tea offered high quality drinks. Compared to our Shanghai street team surveys, the majority of the Shanghai youth we interviewed, drink Coffee on a regular basis. Brands Shanghai youth prefer include Starbucks, Nestle and Maxwell. Coffee brands that offer high quality also include Starbucks, Nestle or Maxwell. From our quick surveys, it’s clear that the Hangzhou lifestyle supports a larger tea-drinking sect compared to Shanghai’s youth coffee drinkers.

(photo credit, balzaraikin)

Shanghai is China’s largest city as well as having a large international influence. We attribute this as being a large reason for the spread of coffee culture. But another reason could also be a larger market supply of coffee and coffee shops. From our survey, most Shanghai youth drink coffee in coffee shops such as Starbucks or Chamate. Hangzhou youth prefer drinking coffee or tea at home, in school, or in teahouses. The opinions of Coffee and Teashops in both of these cities vary as well. Opinions in Shanghai range from, “not enough stores” to “expensive” and a “lack of culture”. In Hangzhou, people indicated they are “very good”, “lots of room for development”, “too commercial” or most interestingly having “strong history” and strong culture”. In Hangzhou there appears to be more of a resentful attitude to commercial coffee shops and more appeal for shops with history and culture.

(photo credit, d’n'c)

The most fascinating comparison lies in the reasons for drinking coffee and tea in Shanghai and Hangzhou. The Shanghai youth noted that they prefer coffee for more energy, relaxation, and because of boredom. The youth in Hangzhou had more idealistic answers. They indicated a tea preference because of the health benefits, for rest and relaxation, and because of the good environment to chat with friends and family. We’ve seen from other youth studies that many Chinese youth are idiosyncratically ideal, but in the case of coffee or tea, Hangzhou youth appear to link tea to its idealistic attributes; an interesting connection.

This is Li Ziyin, a fourth year law student at Peking University (Beida), swotting for her mid-terms. She is easy to talk with and quick to smile, delighted that I know well the area of Beijing in which her family lives. She enjoys dressing prettily and will pay extra for it, and likes Western food more than her mother’s cooking – “yesterday, I had a sandwich for lunch” she tells me proudly. But today I’m on a mission, and not to be distracted. I’m to ask her a simple question: coffee or tea?

“Coffee” is the resounding answer from Ziyin. I might have guessed this from the two coffe cups in front of her (one sit in, the other take away – a one for the road affair?). “But my parents’ generation can’t stand the taste, they only drink tea.” Behind Ziyin, I notice another Beida student who has been eavesdropping and ask her opinion. “I also like tea better. In fact, I think most Chinese don’t like the taste of coffee.”

This was what I had been expecting to hear. In my experience, students at my old university Beida were much more likely to be clutching a thermos of tea in the library or lecture-hall than a cup of coffee, which is famously scarce in China. But it seems that some campus necessities transcend cross-oceanic palettes. Both Ziyin, her neighbour, and a variety of other contacts I put this question to at Beida agreed on one thing: most Chinese students drink coffee for its caffeine benefits more than for its taste.

“Ao ye” (熬夜) is a Chinese phrase often heard on campus. It translates literally as “boil the night”, or more correctly as “stew [oneself] through the night”. The pressure on students to perform at China’s top university is intense: it is not an exaggeration to say that many if not most students work well over ten hours a day. To sustain (or ‘stew’) themselves through those all-nighters, coffee is a popular solution. For the large part, this means instant coffee packets (generally one yuan a pop) or chilled coffee bought in cans from vending machines on campus.

This isn’t to say that there is no ‘coffee culture’ among students, besides this starkly utilitarian approach to caffeine. I chatted with Ziyin in a popular undergoround coffee house on a central location on campus, right next to Beida’s main auditorium. ‘Café Paradiso’ was established in 2006, and obviously fills a gap in the student market. It is pointedly Western: its walls plastered with movie posters (‘Cinema Paradiso’ their flagship), 50s jazz simpering out from the stereo system. Ziyin loves it for all these reasons, and for its tasty coffee (cheapest cup: ‘Daily Coffee’ for 5 yuan; most expensive: ‘Ice Caramel Macchiato’ for 25).

But Ziyin admits she is an exception. A large proportion of the patrons at ‘Café Paradiso’ are foreign students, or Chinese meeting them for language exchange. The majority of Beida’s Chinese student population will meet each other in dorms or restaurants and not in these expensive, copy-cat coffee houses (whose appeal as ‘fashionable’ on merit of their looking Western has been fading ever since the 80s). Outside of the ‘ao ye’ culture, when Chinese students are drinking non-alchoholic beverages purely to relax, tea or ice tea is still King.

According to a group on Douban, titled, “Creative Ways to Drink Coffee”, there are many interesting ways. A few of the ways include:

• Youtiao with Coffee (a deep-fried twisted dough stick)
• Coffee with Salt
• Coke and Coffee
• Coffee and Yingyang Kuaixian (a milk beverage)
• Chivas and Coffee
• Baijiu and Coffee
• Bitter Melon and Coffee
• Instant Coffee, Green tea powerd, and yogurt

As one can see, many of these flavors represent localized hybrids of coffee, tea, and traditional Chinese favorites. We feel that the flavor of coffee is becoming a popular flavor and trend in the snacking and beverage industry and clearly other beverage markets, such as alcohol, tea, milk, yogurt, and soft drinks would be wise to begin experimenting with coffee flavors.

“We hope to have more competitors in the coffee area, everyone works together to make the cake bigger. Compared with tea in the Chinese market, coffee is just only a small part of the beverage market.” – David Sudan, Nestle Coffee China Business Director

Right now in China, it is felt that coffee is a high class beverage, but the reality is not entirely like this. In Shanghai, income levels are able to support the “higher than tea” coffee prices as long as the quality matches the price, or “性价比”. We feel this is a strong sign of the maturing coffee market in China. The sales and penetration of tea beverages are much more than coffee; not only in the supermarket but also in China’s cafes and tea houses. The reasons indicate cultural differences between China and the rest of the world.

(photo credit, loonyhiker)

Lifestyle

Coffee, rich and mellow. Tea, fresh and pleasant. The first time I discovered coffee is from a the novel “第一次亲密接触” (“First Intimate Contact”). The young actress use different types of coffee to describe the colors of clothes; she must be a coffee drinker. While I don’t like drinking coffee all of the time, I often long for the coffee sensation. Under the sunshine on Huaihai Road Having a cup of cappuccino with a blueberry cheese cake and chatting with friends is really “小资”.（”Xiao Zi” references the influence of materialistic things, i.e. coffee on the communistic society, making things more capitalistic.） This is the lifestyle and culture of young ladies drinking coffee. This elevated societal status of coffee then filters to the Chinese business elite. Demand grows and one Starbucks after another opens in the Shanghai commercial districts near Huaihai road, West Nanjing Road and Xujiahui. China’s young “white collar’s” then become coffee addicts.

Tea is often inseparable with chat and is more welcomed by the civilian population. Tea is also one of China’s oldest and most elegant art forms. Tea culture is a long shared and social custom in China’s streets, living rooms, and tea houses. Today, a local tea house is not only a place to enjoy tea, but also a place for young guys to play cards such as 斗地主、80分 and the fashionable desk games such as 狼人、三国杀. So during this period, 避风塘 and 圆缘圆 become much more popular. But there are also a number of tea houses (RBT, 一茶一坐), that are popular with young guys because they sell tea and coffee with creativity.

(photo credit, charles chan)

Diet habits

Chinese people are accustomed to having a pot of tea when they have dinner, and in different regions people prefer different kinds of tea. The most common types are chrysanthemum tea, oolong tea, pu’er tea, Kungfu tea, and Chaozhou tea. In Southern China, food habits and culture are different, so they also have the morning tea and afternoon tea with lunch.

As influences from Europe creep into China, people from Hong Kong often mix milk tea and coffee to make a special drink called, 鸳鸯. Hong Kong tea houses and restaurants also serve Chinese food and Western-style food. This is their unique combination of Chinese and Western cultures.

Tea and coffee each have their own culture, their own emotion, and their own market. Coffee is more refined and has small minority market share, while tea is more popular. Coffee is a product of Western culture and tea is a crystallization of Chinese civilization. In order to make coffee popular in China, coffee makers should adapt to local Chinese cultures, but also keep in mind the lifestyle and diet changes that are happening in China. If they can balance the advantages and the disadvantages, the tea and coffee cultures can co-exist in China’s crowded beverage market.

(written and compiled by enoVate team member and moderate coffee and tea drinker, Sunnie Qin)

It’s no secret that instant coffee is cheap, convenient, easy, and well, of course, instant. Nestle details the production process on their website, and it combines a process of selection, blending, grinding, evaporation, and blast drying to end up with the granular powder we all know and love and pour into our cups of steaming water.

Instant coffee has perhaps been both a bane and boon for university student coffee drinkers in China. On one hand it has introduced the coffee taste and concept into the lifestyle of young Chinese, but on the other hand, it has diluted the knowledge and surrounding culture of quality coffee taste.

We’ve conducted some quick surveys with Chinese university students and the majority of them drink instant coffee or tea. Another informal glance into the Douban group, “Drink Coffee to Death” which has over 2550 members, lists their favorite instant coffee brands. These are:

1. Nestle
2. Maxwell House
3. Ben Cafe
4. UCC
5. Klassno

Nestle and Maxwell House (part of the Kraft Foods stable) are from the American coffee Market. Interestingly, Ben Cafe and Klassno are from Singapore, and UCC is a popular Japanese brand. And as recently as 2003, Nestle and Maxwell House combined held a 70% market share.

(photo credit, emerson.catarina)

Something also interesting to note is the prevalent use of 3+1 (or 2+1) on the packages of these instant coffees in China and other parts of Asia compared to the more lavish descriptions of the same instant coffee in European and American markets. Is there a way that instant coffee can transcend its functional and convenient perception in China with this 3+1 on the packaging? Perhaps companies could additionally experiment with re-branding and re-designing the “instant coffee” name in China to further the progression to more traditional coffee drinking avenues. This is where the future growth of Coffee drinking amongst Chinese youth lies.

With over 35,000 attendees, including over 3,000 Chinese government procurement officials, Healthy Coffee was one of the most sought out and popular displays in the show. Chinese consumers are developing a taste for high quality coffees and beverages and their fixation on the health issue was particularly interesting. The added feature of affordably owning their own mobile retail stores were also of great interest as many attendees wanted to sign up for the business on the spot!

I thought to myself, “Wow, this is a great lead, combining upcoming trends of health and wellness with traditional Chinese ingredients into coffee sounds like it might have success in China.”

So, heading over to Healthy Coffee’s website, I began to dig a little further. Immediately the concept of “direct selling” was indicated many times on the website. The opportunity to be a “founder” and make boat loads of money in emerging markets was also lauded.

However, I hadn’t yet questioned the legitimacy of this company because of the rational that Healthy Coffee is seeking to capitalize on the three mega-billion dollar markets of Coffee, Wellness, and Energy drinks. From our initial research in the Chinese coffee and tea market, this seems to represent an appropriate gap. And the combination of traditional Chinese ingredients including Lingzhi Mushrooms, and Ginseng would appeal greatly to those inside and outside of China who are attracted to these types of elements.

Even their product packaging and designs look like something that one would find in most supermarkets, or convenience stores without much thought.

However, I was still skeptical of this company. My thoughts were further verified by a simple Google search of Healthy Coffee founder, Rick Aguiluz. This led me to a BBS by the name of Scam.com and a specific post detailing the shady operations of all of those involved.

According to the allegations in the post, CEO and Founder Rick Aguiliz is guilty of this:

Ricky ran a nice pump and dump scam to raise money to buy his coffee beans. He pumped the health benefits of the coffee, while slowly dumping his portion of 4,000,000,000 shares on the market (that’s not a typo). Of course, there was no product. The beans “were tied up in customs” according to his story. So after running the stock down to .0001 cents a share earlier this year, Ricky did a 10,000 to 1 reverse merger.

Hmmm. This obviously raises a lot of serious legal and ethical questions regarding this “coffee” business. But what’s even scarier is that this “company” is actually attending import fairs in China, selling both their product and the opportunity to be sales representatives. Healthy Coffee even offers photographic evidence on their website from an import fair in Shenyang:

I’m not a lawyer. I’ve never taken a business ethics class. But this is shady. From a few other trends we’ve been tracking including the recent upsurge in fake wine’s, and the success of actual direct selling companies such as Amway and Avon, let’s hope that this company does not fool anyone in China with a plausible product and sales scheme.

We are officially back for another enthralling week of research for our readers to enjoy. This week enoVate is diving into coffee and tea mugs to discover what Chinese youth are actually drinking these days. We’ll also be examining the surrounding cultures of coffee and tea in China, the societal perceptions and drinking influences of coffee and tea, as well as many other topics.

If this topic is of interest to you and you would like to contribute blog posts or have us look into a specific topic, feel free to leave a comment or contact Joey for more information.