Table of Contents
In China, where tea remains traditional and national beverage, the coffee is becoming more and more popular indicating one more globalization trend. United States, Japan and Germany are the leaders of coffee consuming, but China can overtake these countries in the nearest future. Coffee market as well as the coffee demand is growing every year. Comparing to the past, when China had to import all the coffee into the country, now it raises its own coffee plantations. Considering all that, one can conclude that the coffee business in Hong Kong as the capital of China is supposed to be a very profitable one. Nevertheless, the question can be very disputable.
In this report we will evaluate the coffee market in Hong Kong, estimate market size, trends, analyze possible competitors and consumer preferences. It is important to find out opportunities and threats expecting the new founded company. We can balance it strengths and weaknesses comparing to those of other companies. The target audience will be two divergently different segments of sit-in and takeaway coffee customers. This research should result in making the decision whether it is worth to start coffee business in Hong Kong. The research will be based on statistics, international reports, interviews and others.
According to researches of Euromonitor International, sales of coffee beans in China increased by 50% in 2011; compared with 19% growth for ordinary ground coffee. Nevertheless, they represent tiny part of the country’s coffee market (0,1%), demonstrating the range of opportunity for traders. Jon Cox, who is Kepler Capital Markets analyst, describes the coffee market as following, “There may be a bit of a fight in China as the coffee market there generally is embryonic” (Doherty). Another expert Hope Lee, an analyst at Euromonitor in London, says, “Beverage companies seeking to capitalize on the growth of China’s coffee market have to be prepared for a long haul. China is definitely one of the major growth markets, but it has still mainly young urban consumers and the majority of Chinese still prefer to drink tea, so companies will need to be patient” (Doherty).
Coffee market is going to expand further. Jonny Forsyth, an analyst at Mintel in London, believes, “once people get used to having a fresh cup of coffee in places like Starbucks, it is very hard to go back” (Doherty). One of the trends is that coffee is usually associated with western lifestyle in China. Treatment coffee as a western beverage is easy to understand. There is a custom to make coffee only to foreigners during negotiations in China companies. Meanwhile, coffee shops become more and more popular considering all the customers’ needs: making fitting environment and free Wi-Fi access. Coffee shops are the new trend among middle-class youth providing a new type of environment and conditions for social communication.
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The most serious competitors for each new coffee company in Hong Kong are Nespresso (by Nestlé), Starbucks, Pacific Coffee Company and Caffè Cova. All these companies were established in 1990s and had noticeably expanded in last five years. Some of them (Nestlé and Starbucks) are going to make China their second-largest market after the U.S. Nestlé, which is the coffee market leader (nearly 68% of the trade rate of the coffee market in China), has been advancing local production and cooperates mostly with local sources. It is widely known and available throughout China. Still, according to International Trade Center data, “over the last ten years the number of new American-style coffee bars has increased. Starbucks alone has opened more than 400 new shops in different cities throughout China since 1999, and other similar companies have also been expanding at the same rate. As a result, coffee is acquiring a more modern image and is becoming a very popular drink with the young”.
In 2011-2012, the Pacific Coffee company conducted a study with data analysis to discover consumer preferences. The company experts made a small sample questionnaire in order to find main attributives of a coffee shop to analyze the coffee market in Hong Kong. They questioned 56 respondents, who had to name the most important attributes of a coffee-shop and describe their purchasing habits. The survey showed that quick service time was admitted to be the most important; the next attributives were environment, variety and convenience of location. To conduct primary customer segmentation analysis in Hong Kong, the customers were divided into two groups: sit in and takeaway customers. While sit-in customers gave importance of the environment and variety of drinks; however, takeaway customers emphasized the importance of quick service in coffee-shops.
My company will have its unique place in the Hong Kong market, meeting the increasing demand for quality coffee beverages at affordable prices. As a local company, it possesses better understanding of its customer needs and can quickly react to the market demand of its selected target market. Its main competitor Starbucks is unaware of that, because it just follows the American example. As a result, it lacks the flexibility. Our prices will be lower than those of competitors. My company will also have a unique design environment. Furthermore, my company can afford free internet access to its customers and maintain the most up-to-date technologies.
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It is difficult to be creative and to come up with some new product, because all the variety is already presented by other companies. Our competitors, for instance, Starbucks can boast with a variety of drinks, convenience of location and fast service.
The company may become successful with inventing new kinds of coffee drinks, setting low prices and making a better environment, optimal for close communication.
The company possibly will have problems in price setting for its stress on providing quality coffee for reasonable prices. Therefore, the company may reveal as the uncompetitive one, because the other companies have grabbed the majority of the target coffee consumers. With a small budget, the promotion may appear as ineffective.
Decision of the Coffee Business
I would not start coffee business in Hong Kong, because it is very risky. Firstly, I doubt that coffee would ever be as popular as tea here. China as a country with an ancient tea tradition started to grow coffee trees just a century ago. People are just getting used to that. First coffee plantations were established in China in the early 20th century in Yunnan province. But even after 60 years later, the tea was still in value. Only when Chinese government understood that coffee is a profitable business; it started to invest money into it. Raising Arabica was encouraged at that time, so China assigned 4000 hectares of land for coffee plantations. In the next decade coffee business dropped off.
Only in 70s, Swiss company Nestle furthered the development of the industry and reestablished plantations in Yunnan province. This corporation realized that Chinese population is open to buy and get accustomed to everything new, especially when it comes from the West. Hence, for a majority of Chinese people, Nestle is a synonym of the word “coffee”. In its turn, Starbucks is a symbol of espresso coffee. Just after tasting western coffee, the Chinese government made the decision to “raise” national coffee market.
Secondly, despite the increasing demand for coffee in China, the coffee magnates that have settled down here years ago satisfy it completely. It is worth to add that even such company as Starbucks had problems here. As Howard Shultz, the head of the company, stated, that before 2014 Starbucks net is supposed to become the second size after the U.S. still the net that become so popular among the tea lovers nation faced with particular problems in China. Many local consumers spend most of their time sitting in the coffee shops, but as they have no high revenue they usually spend a little of money or do not buy anything at all. It leads to much lower revenues comparing to the U.S. (Doherty).
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As far as I considered the opportunity to open my coffee business, my decision was not to create a coffee retail net, but to establish an alternative, small and cozy coffee shop with a nice atmosphere there. So I made a research about the company that we were told by the speaker – Hiang Kie Coffee Group. The results of my scrutinizing research appeared to be the following. This coffee company claims that, “with the help of quality supplies, equipment, professional service and innovative ideas, they can facilitate our customers to explore the new world of business opportunities” (Hiang Kie Coffee). However, their range of the good is very limited, but the range of tea is very high comparatively. They have nearly 19 kinds of coffee. Their site is incomplete hence all that I can assume that this business is not so profitable in Hong Kong for small companies either.
Thirdly, drinking coffee is a modern trend in China and market trends are depending on different factors. It depends upon the demographics and technology as well as the consumer behavior. It is thought that market trends go behind one direction over a matter of time. Besides, there are other factors apart of it. Today Chinese people may want to purchase coffee, but tomorrow they can change their mind. To my mind, tea traditions in Hong Kong are much stronger and they will always prevail upon coffee consuming.
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As far as I understood, the optimal variant in China is to establish cappuccino retail business. According to the research results made by Synovate (Patton), “cappuccino was the most popular coffee bought by Hong Kong consumers. The firm spoke to 501 respondents in Hong Kong as part of the survey that also included consumers from Australia, Brazil, France, Morocco, Serbia, Singapore, the United States and the United Kingdom”.
Cappuccino was named the favorite drink for 29% of coffee consumers in Hong Kong and this beverage was followed by mocha (24%); the regular coffee, however, is preferred by 17% of people surveyed. “Given that many Hong Kong consumers are relative novices to coffee when compared to populations in other countries, drinks like cappuccino and mocha are preferred as they are relatively diluted, sweet coffees that suit local palates and are easily recognizable”, summarized Synovate’s managing director in Hong Kong, Jill Telford (Patton).
The coffee market in Hong Kong expands every year. People are gradually getting used to purchase coffee beverages on the constant basis. They prefer modern coffee retail companies as Starbucks and Pacific Coffee for giving them opportunity for social communication. Coffee is a new western trend in China, an inevitable part of the globalization process. Still even large companies have business difficulties there. Their main clients are mainly young people that prefer to pay less and to get more. There are also other hindrances for a new entrance company: there are strong tea traditions, negative attitude to western trends and powerful competitors. To assume the stated above, the coffee market is not as profitable in China as in other countries around the world. It might become as such later, but for that to happen many years will be needed.