Coffee consumption has been rising exponentially in China over the past few years, and industry players have forecast that this growth will continue for years to come as more coffee companies and startup cafés are poised to make their entry into smaller cities. According to Daxue Consulting, Chinese coffee consumption saw a staggering 500% increase between 2006 and 2018. Business intelligence service provider China Briefing also reported that China’s coffee market surged by 31% over the previous year in 2021, and is likely to have a compound annual growth rate of 9.63% between 2022 and 2025. Though the number of coffee drinkers in China has ballooned in recent years, most coffee consumers are from well-developed tier-1 and tier-2 cities like Shanghai, Beijing, and Shenzhen, and this explains why top domestic coffee brands like Manner Coffee and M Stand have just a few stores in lower-tier cities.
But as an increasing number of people across the country develop a taste for coffee, smaller cities and towns are being viewed as gold mines. Furthermore, statistics from Meituan, a major online food and beverage delivery platform, show that the growth of cafés in lower-tier markets, including small cities, towns and even rural areas, was much higher than that in major cities last year. Starbucks’ expansion plan for the Chinese market calls for opening new stores in nearly 3,000 counties, county-level cities and city districts. It has also been reported that local coffee giant Luckin will be opening new stores in small cities like Xinxiang in Henan, Daqing in Heilongjiang, and Dezhou in Shandong province.
One such city where the popularity of coffee has been steadily growing is Zhejiang province’s Tongxiang, which is a 52-square-kilometer county-level city famous for its wool fashion industry and ancient water towns. One of the key coffee promoters in the city is He Jie, Owner of Xiaoman Café, which is located in a charming century-old two-story house with a small courtyard. “At the beginning, my cafe had almost no local guests – most of the customers were tourists from big cities, such as nearby Hangzhou and Shanghai,” she said. “Gradually, more and more young locals started coming. Now, I get dozens of locals ordering coffee every day.” She took two and a half years to recoup her investment of nearly CNY500,000. In recent months, June Café, which is located in a village in Guangdong’s Dongguan, Kahf Café in Sangpo village of Jiaozuo in Henan province, and Two Tree Coffee in a village near Xian in Shaanxi province, have all gone viral on China’s social media platforms because they are located in scenic and tranquil locations. In Tongxiang several new cafés have opened in recent years after Xiaoman. Some are community cafés selling specialty coffees and some focus on delivery services.
According to market data tracker GeoHey, Starbucks, the world’s largest coffee chain by annual revenue, opened 654 stores in China in 2020 and 229 new stores within the 90 days preceding the end of November 2022. Starbucks’ latest expansion in the country is mainly located in lower-tier cities, such as Qingyuan in Guangdong province and Xinyu in Jiangxi province. This is in line with Starbucks’ long-term plan for China. At a global investor meeting held in mid-September, the Seattle, United States-based coffee company announced that it will open 3,000 new stores in China by 2025, which comes to one new store every nine hours. Based on this bold plan, Starbucks will have opened 9,000 stores in 300 cities in China by the end of 2025. It is the largest expansion plan that the 51-year-old Starbucks has rolled out for a single market outside of North America. Reaching into smaller Chinese cities is the plan’s core.
According to market consultancy iResearch, well established companies such as Starbucks, have focused more on third- and fourth-tier cities due to the intense competition in big cities. They have provided coffee at more affordable prices in the smaller cities to attract more consumers. According to the iCanData Research Center, the growth rate of new coffee shops in third-tier cities was 18.52% between 2021 and 2022, overtaking the 15.91% growth rate in first-tier cities. The expansion rate in lower-tier cities, and even counties, was 11.51%, overtaking second-tier cities, which reported a 10.62% growth rate over the past two years.
Data released by on-demand online retail platform Meituan in June showed that there were 7,857 coffee shops in Shanghai, more than in all other cities in the world. It means that there were three coffee shops for every 10,000 people to choose from. Hangzhou in Zhejiang province was home to more than 4,000 coffee shops, while the number in Beijing was over 2,200. Third-tier cities accounted for 20.6% of all the food and beverage chains in China in 2022, with their market share up 0.6% from a year earlier. Fourth-tier cities also saw their market share up 0.1 percentage point year-on-year to come to 14.3%, the China Daily reports.
