Coffee culture comes to the boil in Shanghai

Consumer base

Dave Seminsky, the founder of Sumerian Coffee, offered some statistics that show why Shanghai is "ripe for the picking" by coffee companies.

He said the city's disposable per capita household income last year stood at 58,988 yuan ($8,796), more than twice the national average of 25,973 yuan. This level of disposable income in Shanghai, combined with a large workforce, shows that the city is a consumer base that has cash to spend.

Gavin Pathross, CEO of RATIO, a coffee and cocktail bar, cited another reason behind the coffee boom－the allure of a "pay to sit" culture that Starbucks brought to China.

"Like the United Kingdom－traditionally a tea-drinking market－Chinese consumers have been switching to coffee for a variety of reasons, one of which is that there are few other places serving beverages in the city that have invested as heavily in interior design and areas for people to sit down and hang out," he said.

"The only exception is perhaps TWG Tea. Most milk tea places are low capital expenditure models that are purely takeaway businesses."

Tim Hortons' entry into the burgeoning Chinese market comes amid a high-profile battle for business between Starbucks and local entity Luckin Coffee, one of China's latest unicorns, which raised $200 million in its latest funding round in December. A unicorn is a privately held startup valued at more than $1 billion.

Both companies have been rapidly expanding their footprint. According to Reuters, Luckin took just six months, between January and July last year, to open 660 stores in 13 Chinese cities. It took the market leader Starbucks 12 years to open the same number.

Starbucks, which according to market intelligence company Euromonitor holds a 58.6 percent share of the market, has also been stepping up its expansion. The US coffee giant, which has about 3,400 stores in China, is aiming to have 6,000 outlets in the country by the end of 2022. Costa Coffee is planning to have 1,200 stores by 2022.

Tim Hortons will open about 30 stores in Shanghai this year as part of its plans to have 1,500 outlets in the country within a decade.

[Photo provided to China Daily]

Although the streets of downtown Shanghai are already dotted with coffee houses, some industry players do not appear too concerned about oversaturation. Rather, it is consumption levels that are giving players cause to be optimistic. According to the International Coffee Organization, the average consumption in China is only about five cups a year. In contrast, the global average is 240.

Seminsky said the current consumption levels give a company such as Starbucks a growth strategy that cannot be matched elsewhere in the world.

"If China's per capita consumption climbs from five to 10 cups per year, which is a plausible scenario, all their (Starbucks') bets will have paid off. This rise in consumption won't happen in the coming year, but possibly in a decade," he said.

A search for "coffee shop" on the consumer review site Dianping.com yields more than 7,500 results. In addition to the host of outlets operated by major chains, there are dozens of smaller local coffee entities such as Greybox Coffee, Coffee Box and Manner Coffee, many of which have only emerged in the past two years.

Despite only opening in the middle of last year, RATIO, a high-tech coffee and cocktail establishment that uses a robotic arm to prepare its beverages, has been warmly received by consumers. Pathross said he is relatively pleased with the welcome given to his brand and technology.

Regarding the competition, he believes the number of coffee outlets in Shanghai's central business district is nearing saturation point.

Nils Weisensee, the founder of Cafe del Volcán, said players in the specialty coffee market have been facing the issue of oversaturation. Specialty coffee refers to that which achieves a score of more than 80 points on a scale set by the Specialty Coffee Association of America. It is also generally considered to be of higher quality and more expensive than commercial options.

"I think Shanghai's specialty coffee market entered a bit of a bubble last year. The actual consumption of specialty coffee in the city center is not quite catching up with the supply," Weisensee said.