China’s coffee craze is transforming global markets

Hapag-Lloyd is one of the biggest coffee transporters in the world – including for Starbucks. For almost 30 years, China has been the second-most-important market for the American coffee specialist, whose largest shop is in Shanghai. But its new Chinese competitor Luckin Coffee has announced plans to challenge Starbucks for market dominance. This could change the flows of coffee beans worldwide.

In the late 1990s, Starbucks was one of the first companies to successfully market aspects of the Western lifestyle to people living in big Chinese cities. And the American coffee giant almost monopolised the market in this huge country. But those days have been over ever since Luckin Coffee arrived on the scene. Founded just two years ago, the Chinese start-up has turned many young city dwellers into avid coffee drinkers. In fact, if demand continues to grow, the consequences could be felt worldwide – by coffee farmers, exporters, roasters and shipowners. Coffee imports to China are growing annually by 16 percent, whereas the figure for the United States is only 2 percent.

While Starbucks operates 3,600 shops in China’s 18 largest cities, Luckin already has 2,370 shops – and the figure is expected to rise to 4,500 by the end of the year. Luckin’s success relies on high-tech and low prices, such as with drinks that cost a third less on average than those at Starbucks. At present, a latte in Shanghai’s giant Starbucks, the biggest in the world, costs 49 yuan (6.30 euros).

In the rather smaller Luckin shops, there isn’t even a cash register. Instead, coffee, cocoa and snacks are ordered and purchased via an app. One can also opt to have everything delivered, which takes only 16 minutes on average. This recently made a particularly strong impression on investors during the company’s very successful IPO on New York’s Wall Street. The Chinese coffee supplier uses data analysis and artificial intelligence to closely analyse customer behaviour and transaction data. Credit Suisse wrote that Luckin’s in-house-developed app has created “significant advantages in costs and customer engagement to drive mass market coffee consumption in China.”

China now accounts for around 2.5 percent of global coffee consumption and ranks eighth among the coffee-drinking nations. The top two places in the ranking of global coffee consumption are held by consumers in the EU, at 29 percent, and the United States, at roughly 16 percent. But the Chinese are catching up fast. And Qian Zhiya, Luckin’s 43-year-old founder and CEO, plans to expand her coffee-tech concept into the Middle East and India. In just a few years, coffee could become a huge business there.

Young Chinese, in particular, currently find it hip to drink coffee instead of tea as part of their embrace of Western lifestyles. Not even 20 years ago, most office workers had what was usually an ugly tea pot or a thermos flask covered with colourful flowers holding water to prepare green tea at their desks.

Today, the equivalent of almost USD 10 billion is already being spent on coffee in China each year, and experts expect annual growth of 6 percent over the next four years. “We forecast per capita consumption of freshly brewed coffee to accelerate from 1.6 cups per/year per capita in 2018 to 5.5 cups per capita per year in 2023,” the market research company Frost & Sullivan has written.

Where the coffee will come from for this country of billions is still unclear. Starbucks gets most of its unroasted green coffee beans from South America, has them roasted in the United States, and then ships them on to China – including on Hapag-Lloyd ships.

As demand increases, Luckin will look around in neighbouring Vietnam and in Africa. But this might also create entirely new business opportunities for German coffee roasters. China has reportedly already put out feelers to Hamburg, Europes´s key coffee-trading hub, as as there are not yet many roasting facilities in China. Hapag-Lloyd could also benefit if the raw arabica beans from South America land in Germany, are roasted here and then shipped on to China.

Hamburg ships have already been transporting coffee beans across the globe for a long time. Hapag-Lloyd transported 59,821 containers full of green coffee last year – and the figure is rising. If things continue as they have in recent months, Sales Executive Daniel Levenhagen expects the figure to reach around 73,000 containers this year. Almost a quarter of them sailed on routes between the east coast of South America and North America, and roughly a quarter travelled from South America to Europe.

Plus, at least 16 percent of the coffee-filled containers arriving in Europe came from Asia. But these transports, in particular, could shrink. A large part of the coffee exported from Asia to Europe comes from Vietnam. And these beans are also highly attractive for the Chinese because they are grown not far from the Chinese border. “The main cultivation areas are very close to the border in northern Vietnam,” Levenhagen says. About 630,000 hectares (1.56 million acres) are under cultivation there – producing mostly the somewhat more bitter robusta beans, but also more and more of the more flavourful arabica beans. This puts Vietnam in the premier league of coffee producers. In fact, with around 18 percent of the global coffee harvest, the country ranks second behind Brazil, the world market leader. At present, the Vietnamese export more than 23 million 60-kilogramme sacks of coffee beans each year. And more and more of them are heading to China.

But there is another way to satisfy the growing demand of coffee drinkers in China. Hapag-Lloyd manager Levenhagen can imagine the Chinese government backing an effort to expand the existing coffee plantations in Yunnan Province, which borders Myanmar, Laos and Vietnam. This is because parts of southwestern China, like parts of South America and Africa, lie in the “coffee belt” that stretches around the globe north and south of the equator.