• Consumers in smaller Chinese cities drink far less coffee than first-tier city residents and visit coffee shops far less often, according to the latest FTCR consumer survey. Global chains are seeking to narrow the gaps in consumption rates through aggressive expansion plans.
  • Starbucks dominates our latest quarterly brand survey of coffee shops, visited by 55 per cent of respondents. UBC Coffee came a distant second while Whitbread’s Costa Coffee was the eighth most popular brand in our survey.
  • Global chains such as Starbucks offer affordable luxury as the Chinese economy slows. They are treading paths first beaten by McDonald’s and KFC, both of which have suffered for failing to adapt to the rapidly evolving tastes of Chinese consumers.

China’s second- and third-tier cities are thirsting for coffee, an FT Confidential Research survey has found, and the big global chains, led by Starbucks, are rushing to meet this demand.

A survey of 1,000 consumers across this predominantly tea-drinking market has found reasonably robust coffee consumption rates in smaller cities; a comparison with more developed Chinese urban areas highlights the potential for growth.

FTCR found 39.9 per cent of respondents in second-tier cities, such as Chengdu, and 31.2 per cent of those in third-tier cities drink coffee frequently — defined as at least once a week (see chart). In first-tier cities, 62.6 per cent said they were frequent coffee drinkers. Although Chinese coffee consumption has almost doubled since 2012, per capita consumption is still just 83g a year, compared with 2.3kg in South Korea.

Our survey also found consumers in lower-tier cities only visited coffee shops 2.5 times a year on average, compared with 18 times in first-tier cities. We believe the 43.5 per cent of respondents in first-tier cities who said they buy their coffee “to go” reflects the more rapid pace of life for white-collar workers in these cities. Just 27.9 per cent buy takeaways in third-tier cities, according to our survey.

Brewing up big plans for the provinces

Smaller Chinese cities like Chengdu, at the foot of the Tibetan plateau in western China, are now the focus of Starbucks’ expansion plans. From 2012 to 2015, the number of Starbucks stores in central and western China tripled to 300 across 23 cities. The company has continued to grow in these regions, looking to tap unmet demand (see map).

Other international coffee chains are also expanding in China — Whitbread wants to double its Costa Coffee outlets in China to 700 by 2020 — though none match the scale and ambition of the Seattle-based giant, whose growth plans mirror those of McDonald’s and KFC in the previous decade.

Even by the standards of the Chinese market, Starbucks’ ambitions in the country stand out. It plans to open 1.3 new stores each day between now and 2019, when the company intends China to be its biggest market outside the US. By 2021, it wants 5,000 stores open across the country.

Starbucks is selling more coffee in China even as the competition stumbles. In its latest quarter, the company reported that same-store sales growth in China was 6 per cent, against just 3 per cent in the US and a 1 per cent drop in Europe, the Middle East and Africa. Korea’s Caffe Bene has been closing outlets in China after overexpanding and failing to turn a profit. UBC Coffee, the once-dominant Taiwanese chain, has slashed its store count by half from a peak of 3,000 in 2011.

Starbucks’ grip on the Chinese market is evident in FTCR’s latest brand survey, which found 55 per cent of urban coffee drinkers said Starbucks was the coffee shop chain they visited most often, rising to 66.8 per cent in first-tier cities. UBC came a distant second at 25.2 per cent while Costa was in eighth place, chosen by just 3.5 per cent of respondents.

Selling a lifestyle in a cup

To successfully sell $5 coffees to a nation of tea drinkers, where annual disposable incomes are still below $5,000, speaks of Starbucks’ ability to offer affordable luxury in the face of an economic slowdown. This is a market in which instant coffee still dominates, accounting for 96 per cent of sales last year, according to Euromonitor, though growth slowed to just 4 per cent while fresh coffee sales surged 23 per cent (see chart).

McDonald’s and KFC have been providing the western fast food dining experience in China for nearly three decades, but a Rmb30 ($4.40) iced caramel frappuccino comes with the soft lighting, light jazz and cushioned armchairs that are hallmarks of the Starbucks experience. Per capita disposable incomes in Chengdu are half those of Beijing and Shanghai, and in smaller cities are a good deal lower. But coffee shops are ubiquitous in first-tier cities along the east coast, prompting the push inland.

A Chengdu outlet visited by FTCR on a Friday afternoon was bustling, with around half of the 60 seats taken and staff busy serving a small queue of customers at the counter. A more dimly lit Costa Coffee outlet in the same shopping mall that same afternoon was only around 10 per cent full. There were no customers at all in UBC’s last remaining outlet in the Sichuan capital.

The problems faced by McDonald’s and KFC in China in recent years highlight the dangers of failing to respond to the rapidly evolving tastes of Chinese consumers. But the gap in consumption habits between coffee drinkers in first-tier cities and those in smaller Chinese cities makes a case for building more extensive chains, particularly as sales outside China remain so weak.