Against Gravity of the History – China’s Style

         China’s economic boom is the start of a new era of the world economy. It has less to do with China being anything special, but more about it is so representative of changing of the world economy, structurally different from even 30 years ago.  Although the market fundamentals will always be the same, the tsunami of new technology and speedy ‘globalization’ can hit hard on people’s common sense and logics, from business mentality to consumer behavior. As a well-known Chinese pop song said, it is not I don’t understand, it is the world changing fast.

         About a year ago, I wrote an article, China's Coffee Market: Waiting for the Tipping Point or Pushing for it, in which I concluded that the stagnation of China’s coffee market is due to high coffee price at coffee house and China has yet to close in on the tipping point for the growth of its coffee market. Once if the tipping point is reached, the growth of the overall coffee market will accelerate significantly.

Somehow, as dramatic as so many other sectors in China’s economy, China seems to be very close to being on the tipping point for its coffee house business, which is also a reflection of general China’s consumer market. It is a change of consumer mentality – a change faster than Tsunami.

Starbucks Coffee and Costa Coffee lead this wave of new boom. Starbucks has been in China’s market since 1999. Before 2010, except Shanghai market, it has limited success. Mr. Schultz announces his ambition to open 1500 Starbucks by 2015 even though it only opened 400 stores before 2011 after 11 years in China. However, based on its current store performance, it is no longer just an ambition but also reachable if it plays all its cards right. Costa Coffee is not far behind. Two years ago, Costa Coffee cannot be mentioned in the same breath as Starbucks, but now, it is a serious contender and even outperforms Starbucks in many important aspects. In addition, there are other newcomers who strive in this new oasis. Their same store revenue is on par with two giants and their potentials as serious contender has no limit.

China’s coffee house business is never a coffee-centric business, but a life style business. We need deep appreciation how magical the word, coffee, means to this business and to Chinese, and how little many people in China understand the roots of coffee house business, which will separate good from others in the ongoing competition.

The prices at both Starbucks and Costa are more expensive than ever. As long as the atmosphere and brand are right, Chinese are willing to line up buying a 4 dollars Americano. Somehow, China's housing market doom coincides with consumer market boom. The middle class suddenly has money to 'irrationally' spend on that 4 dollar dark coffee. It is the phenomenally important – western style coffee house starts to attract somehow so-called China’s white collar class instead of just foreigners and riches.

Nevertheless, the success of Starbucks and Costa is by no means that many other foreign companies will also strive in China. Dunkin Donuts, for instance, has ambiguous market position. In America, it is posited to be more of a bakery plus coffee for everybody, from rich to poor. In China, coffee house is not selling coffee or donuts but selling life style. Thus, how to translate its strength into China’s market competition requires much thoughts, efforts, and positioning in this market.

China is constantly in drastic transition phase. Even though it is too early to tell what will happens next in China’s coffee market, one thing we can be certain is that consumer market will soon become driving force behind China’s economic growth after years relying on export, real estate and government spending.  International companies have set the bar high for China’s competition from the beginning, but whoever sticks with market fundamentals will be the ones to win the market. For now, there is just so much of intensity and drama in the market that we can hardly hold our breath – don’t blink eyes.