Japan, traditionally a tea-consuming nation and home of the green tea that is fast proliferating in tea markets across the West, might not naturally be considered a coffee-loving nation. But coffee is not only more popular in both volume and value terms, overall tea sales are continuing to lose ground to coffee, with volume sales exhibiting consecutive decline between 1997 and 2002 (with only black speciality tea exhibiting strong growth).
As the third largest importer of coffee, Japan is also the seventh largest coffee retail market in the world, snapping at the heels of more traditional coffee lovers, including the Italians, according to global market analyst Euromonitor.
Starbucks: the fresh coffee educator
Japan has seen the number of coffee shops mushroom in recent years. Different types of coffee shops have also been developing rapidly. Apart from the no-frills local coffee shops, chain coffee operators from America and Europe are filtering into urban areas at a fast pace.
Although suffering from intensified competition from players such as Doutor Coffee and Tully’s Coffee over recent months, Starbucks has played a key role in shaping coffee demand through both on-trade and indirectly off-trade channels also. The company’s new coffee concept and espresso culture has been effectively capturing Japanese consumers’ imagination since the late 1990s: Japan is the company’s first and best performing overseas market outside North America and the number of outlets there is expected to reach 500 in 2004.
Females are Japan’s main coffee consumers and many have learned about the variety of fresh coffee from their experience with Starbucks. Indeed, the desire to repeat the ‘real’ coffee experience at home has helped boost retail sales of coffee and coffee accessories over the past few years, with the trend expected to continue.
Fresh ground coffee: the growth catalyst
Although instant coffee still accounts for the bulk of sales in the coffee market, fresh coffee has been the main driver of coffee sales as a whole. The boom in sales was further fuelled by Japanese manufacturers launching new products, as well as repackaged existing brands, especially in the fresh ground coffee category that tapped into this trend for authentic coffee.
The growing number of speciality coffee retail outlets also helped spur this growth. Fresh ground coffee saw the fastest growth (around 4%) in both volume and value terms in the coffee market during the period 1997-2002. It is evident that a more sophisticated consumer base of coffee drinkers is currently migrating from instant coffee to fresh ground coffee. They wish to emulate in the home what they are served in chained coffee shops.
Fresh ground coffee brands have proved popular, as they provide a high quality cup of coffee without the need for a grinder in the home, given that most Japanese live in small-sized accommodation. Fresh ground coffee would appear to have struck the optimum balance between authenticity and flavour against ease of preparation.
Nestlé: established brands still effective
Nestlé continued to dominate the instant coffee sector in Japan, with 66% of volume sales (and just over 40% of total coffee sales). Despite that fact that instant coffee has reached saturation point, Nestlé has invested less in the fresh coffee category, where it had a marginal share and which was led by domestic companies.
Instead, Nestlé has developed a range of liquid concentrate teas and RTD coffee as well as single-serving sticks in line with established trends. The high demand for instant drinks in Japan has helped maintain Nestlé’s Excella and Nescafé brands market position. To put the dominance of instant coffee brands into context, Nestlé’s best selling Excella brand alone had sales of ¥73 billion in 2001, which equated to half the sales of total ground coffee and almost double that of fresh beans.
UCC: integrated coffee player
Japanese players lead the fresh coffee sector. The top four players, UCC Ueshima Coffee Co Ltd, Key Coffee Inc, Art Coffee Co Ltd, and Unicafe Co Ltd account for over half of fresh coffee retail sales. UCC is one of the oldest coffee suppliers in Japan and continued to lead the fresh coffee sector in Japan in 2002, with its well-established brands UCC and Crestia.
UCC is one of the largest integrated coffee producers in Japan, running three coffee plantations in Jamaica, Hawaii and Indonesia. They are all directly operated plantations, which ensure UCC have total control of the product in the value chain. UCC has also expanded its influence beyond Japan and into other Asian countries, by establishing various types of coffee shops in Taiwan, Hong Kong, Thailand, Korea, and other parts of Asia, ensuring a ready market for its retail brands.
Continued growth may be limited
Japan’s coffee market is expected to continue to grow steadily over the next five years, however, that potential is likely to be constrained by several factors:
- Limited consumer base - the target consumers of fresh coffee are young female consumers within the 25-39 age group. Starbucks’ "soft touch" has worked well with females but male consumers are still regular drinkers of RTD coffee – and the companies mixed fortune’s recently are testament to the challenges it faces
- Competition from other beverages, including RTD coffee, hot and RTD tea, still coffee’s biggest competitors.
Whether the growth of chained coffee shops and the popularity of ‘real’ coffee can further drive retail coffee sales over the next few years is in doubt, and multinationals have started to target China in an attempt to emulate Japan’s love affair with coffee.
China’s domestic coffee production has boomed over the past few years, with Nestlé and Kraft investing in plantations, both of which have seen profits grow. As is the case with Japan, speciality coffee shops have been springing up across China, as a middle class emerges. Starbucks is at the forefront of this development, having arrived in China in 1998 and totalling 50 outlets by 2002.
Although per capita consumption in China is still extremely low, industry sources quote the 15-20 years of promotional activities coffee companies undertook in Japan before its coffee per capita rose to present levels, and claim the potential in emulating the same scenario as in Japan is huge.