Tea-loving China warms to coffee

Tea is ingrained in the culture of China as a beverage and the stuff of legend, but coffee shops of the Starbucks variety are cultivating an appetite for their products in an enormous market.

Starbucks, the world's biggest coffee chain, plans to quadruple the number of outlets in China, from 400 to 1,500, by 2015, with much of the expansion to take place in smaller cities.
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Tea-drinking in China began almost 5,000 years ago when, according to legend, some tea leaves fell into a pot of water the emperor Shen Nong was boiling.

This quaint tale, more legend than historical fact, illustrates the central role tea plays in Chinese history and culture.

Steaming cups of jasmine, green or oolong tea have been the accompaniment to countless meals, conversations and business deals.

Yet even China is proving receptive to the all-conquering coffee shop juggernaut. Many seem happy to trade in their pu-erhs and oolongs in favour of lattes and Frappuccinos.

Starbucks, which has about 17,000 stores making it the world's biggest coffee chain, this month announced plans to almost quadruple the number of outlets it operates in mainland China, from 400 at present to 1,500 in 2015, with much of the expansion of the franchise chain occurring in smaller cities.

"Coffee has been embraced by Chinese consumers," says Caren Li, the company's China spokeswoman. "The Chinese market represents huge, huge opportunity and potential. We don't want coffee to replace tea, but to offer people another choice."

Indeed, to tap into local tastes Starbucks introduced a range of Chinese teas a year ago.

Starbucks' situation in China resembles that of KFC 15 or 20 years ago, says Jessie Guo, a retail analyst with Pacific Epoch in Shanghai.

KFC's expansion in China is the stuff of business legend. The chain opened its first store in Beijing in 1987, 12 years before Starbucks launched in the country, and now has 3,200 outlets across the country.

"Starbucks is getting really great traffic here. People think it's the fashion to drink there," Ms Guo says.

But research by Morgan Stanley suggests Starbucks stores in China average US$600,000 (Dh2.2 million) a year in revenue, compared with $1m for US stores. Given that drinks in Starbucks' China outlets are about the same price as in western markets, where per capita incomes average close to 10 times incomes in China, the disparity is perhaps less than might be expected.

Customers say visiting a coffee shop is a different experience from savouring Chinese tea.

"You can sit here for an afternoon with a laptop," says Zhang Yujie, 28, an IT company employee visiting a Starbucks in the east of Beijing.

"I prefer to go to a tea house but coffee is faster and convenient, while for tea you have to take a long time to taste it."

A fellow customer, Yang Qing, 45, who works at an import-export company, says coffee shops trump tea houses for meetings.

"The service is better and it is very convenient for businessmen or women," Ms Yang says.

Even if the coffee shop market is expanding dramatically in China, the Seattle-based Starbucks is not having it all its own way. Costa Coffee, a British company, aims to have 60 outlets in Beijing and Shanghai by the end of this year, and more than 250 within three years. Caffe Nero, another British company, is keen to open in China. Blenz Coffee, based in Vancouver, has been operating in China since 2003.

Fast-food chains such as Burger King and McDonald's have introduced coffee shop-style lattes and cappuccinos in some of their stores, although it remains to be seen how many people are prepared to pay higher prices to drink in a budget restaurant.

There are significant Asian rivals, too. Pacific Coffee Company, which originates in Hong Kong, is expanding its presence in China, while UBC Coffee of Taiwan, although it has a low profile globally, has about twice as many outlets in China as Starbucks.

Just as the coffee shop market is expanding, so are sales of instant coffee. Analysis by Euromonitor suggests sales could reach $3.6 billion this year, up from $2.4bn last year.

Nestle, which produces Nescafe, holds a 70 per cent share of the instant-coffee market in China and has had a manufacturing plant in Guangdong province for nearly two decades. Kraft Foods, the maker of Maxwell House, has 15 per cent of the instant-coffee trade. Starbucks wants to muscle in, and next month it is to begin selling instant coffee at its stores.

With average per capita coffee consumption in China estimated at just only cups a year, there is plenty of room for growth, especially given that in neighbouring South Korea the consumption figure is 140 cups annually and in Japan it is higher still at 360.

To cap it all, China is becoming an important grower of coffee beans. Reports indicate the authorities are keen for farmers to replace tea plantations with coffee trees, as coffee offers higher returns and therefore greater tax receipts for the government.

Yunnan in the south is the key province and its arabica coffee beans have been attracting the interest of the international market for more than two decades. More than half of the province's production goes overseas.

Late last year, Starbucks signed a deal with the provincial authorities to set up its own farm there. As other coffee giants have already been doing, the company aims to encourage local farmers to introduce better coffee-growing practices to improve yields and cut costs.

According to Starbucks, Yunnan aims to invest 3bn yuan (Dh1.68bn) to increase the province's coffee output to 200,000 tonnes from 38,000 tonnes by 2020. Over the same period, the land area devoted to coffee will expand to 100,000 hectares from 26,700ha.

The project, says Ms Li, is "a long-term partnership". Initially, beans will be sent to the US to be roasted and then sold on the global market, but later a local plant will be set up.

"Last year and this year we're focusing on introducing different varieties of coffee," she says. "We're … testing these coffee trees to see what will be suitable for Yunnan."

In several years, Ms Li says, the plantations could be producing coffee for sale worldwide. Starbucks already buys some coffee from Yunnan, and since 2007 its purchases have increased twentyfold. This coffee is used in a blend called South of the Clouds.

"We want to source more coffee in Yunnan and bring it to more stores worldwide," Ms Li says.