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Untapped Potential in China's RTD Coffee Market

12/27/2013
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In 2012, Chinese per capita coffee consumption was just slightly over two cups per year. This low rate of consumption, along with China’s status as the most populous nation in the world, render the Chinese market a clear opportunity for coffee manufacturers seeking to expand outside the saturated European and American markets. Thus far, the most significant strides have occurred in the instant coffee market, which reached over US$1 billion in retail sales in 2012. However, since 2011, RTD coffee – packaged ready-to-drink liquid coffee products – has consistently boasted the strongest volume growth of any Chinese beverage category. In fact, China ranks as the fourth largest global market for RTD coffee in terms of volume and fifth in terms of value. Interestingly, the success of RTD coffee in China stems largely from those attributes it shares with instant coffee: convenience and a malleable flavour profile.

Instant Coffee Still Key

The dominance of instant coffee in China – fresh coffee remains a very niche product, accounting for under US$20 million in 2012 – stems from both its easy preparation and flavour versatility. The convenience of instant coffee is attractive because the vast majority of Chinese coffee drinkers are recent adopters and thus tend to be unfamiliar with fresh coffee preparation methods and often lack the necessary appliances.  In terms of flavour, instant coffee’s ability to be packaged as a mix with sweetener and other additives appeals to the Chinese palate which generally prefers milder, milkier coffee to the stronger, acid profiles often evoked by fresh coffee. Indeed, the most popular type of instant coffee in China, which accounted for 52% of instant coffee sales in 2012, are 3-in-1 mixes that include a mix of instant coffee, creamer, and sweetener.

RTD Coffee’s Appeal: Convenience and Flavour

While instant coffee continues to record strong value growth in China, the most robust growth in coffee beverages is occurring in RTD coffee, which grew by 22% in value in 2012 to exceed US$414 million in retail sales. Many of the drivers behind the success of RTD coffee are similar to those behind instant coffee.  Packaged in can or PET bottles, RTD coffee provides convenience to Chinese consumers with busier and busier lifestyles. RTD coffee is especially appealing to students and young professionals who perceive it as more convenient than instant tea (since they don’t need to add water) and a rival to energy drinks thanks to its caffeine content.

In addition to its convenience, RTD coffee, like instant coffee, appeals to Chinese consumers because of the versatility of its flavour profile.  To appeal to local preferences, the vast majority of RTD coffee products in China taste more akin to sweet, dairy-based drinks than standard fresh brewed iced coffee. The milky base makes RTD coffee products even more amenable to flavour varieties including traditional coffee flavours like mocha, to less traditional ones such as Tiramisu. As the Chinese RTD coffee market continues to expand, Chinese preferences for flavoured RTD coffee are also growing. In 2012, flavoured RTD coffee products accounted for 52% of the total market, up from a 32% share of the market in 2007.

Chinese RTD coffee.png

Source: Euromonitor International

Nescafé the Undisputed Leader

The similarity between the appeal of instant coffee and RTD coffee in China is also reflected in the competitive landscape as Nestlé’s Nescafé is the dominant player in both markets.  In 2012, Nescafé accounted for 50% of the entire RTD coffee market and 74% of the instant coffee market. Nescafé hegemony in the instant coffee market is unsurprising as it is also top ranked brand in the world with a market share of 46%.  However, in the global RTD coffee market, Nescafé ranks ninth, with only a 3% share in the global market. Accordingly, Nescafé’s success in the Chinese RTD coffee may be viewed as less the product of its particular expertise in the category and more the result of its long history and high reputation in the Chinese market, which enables it effect strong marketing campaigns and increase penetration in second and third tier cities.  As such, there is still potential for other RTD coffee manufacturers to increase their presence in the Chinese market. Suntory Holdings, the number two player in the Chinese market, and second in the world, is attempting to do just that through the expansion of its existing Suntory Rich line to include flavours that are designed to appeal to specific demographics including a stronger-tasting, less milky product aimed at hard-working professionals and a mellow-tasting mocha drink to appeal to younger consumers.

Potential for Premium RTD Coffee Products

According to Euromonitor International’s preliminary findings, in 2013 RTD coffee will continue to post the strongest volume growth of any beverage category in China. In fact, by 2017, the Chinese RTD coffee market is projected to increase by 129% in volume, topping instant coffee in terms of absolute ready-to-drink volume growth. However, as disposable incomes continues to increase, further success for RTD coffee may be threatened by consumers looking to trade up to specialist coffee shop purchases. To combat a similar threat from increasing Chinese interest in fresh coffee, instant coffee manufacturers have begun introducing more premium products that use higher quality beans and reduced-fat whiteners. In order to maintain momentum, RTD manufacturers, may likewise consider launching value-added products.

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