In recent years, both coffee production and consumption in China have been growing at double-digit rates, although there are signs of slowing growth. It is estimated that China now produces more coffee than Kenya and Tanzania combined, and consumes more than Australia. As China’s economy continues to grow, consumer incomes rise, and so does the demand for coffee. Coffee shops, once a novelty, have now become a significant feature of the urban landscape. Although tea remains the dominant beverage, coffee consumption is increasing rapidly, which could have important implications for the global coffee market.
This new study by the International Coffee Organization (ICO) on China’s coffee consumption and production was presented at the 115th meeting of the International Coffee Council in Milan, from September 28 to October 2, 2015.
Coffee Consumption in China
Table of Contents
Overview
Estimating coffee consumption in China is somewhat challenging due to a lack of reliable statistics. However, estimates can be based on available data for production, export, and import. According to this analysis, coffee consumption in China was around 1.9 million bags (1 bag = 60 kg) in the 2013/14 coffee year, with an annual growth rate of approximately 16% over the past decade.
With this level of consumption, China has become the 17th largest coffee consumer in the world. However, with a population of 1.4 billion, the per capita consumption is only 83 grams, which equates to 5-6 cups per year, although this is steadily increasing. Furthermore, per capita consumption is considerably higher in urban areas, with an estimated 2 kg in Hong Kong, compared to 4.9 kg in the European Union or 4.4 kg in the U.S.
Market Structure
According to market research company Euromonitor, the Chinese coffee market is primarily made up of instant coffee. In fact, instant coffee accounts for around 99% of retail sales by volume and 98% by value, although roasted coffee is growing at a faster pace. The most popular types of instant coffee are 3-in-1 products, which contain coffee, sugar, and creamer, along with flavored varieties.
However, coffee shops and coffee culture in general have driven the growth of roasted coffee. Moreover, sales in coffee shops are growing faster than retail sales, with an estimated 13,834 coffee shops in China by the end of 2013. As incomes rise, consumers are increasingly opting for higher-quality products. Sales of coffee pods are seeing dynamic growth, although they remain a niche market.
Although coffee consumption has grown impressively, China is still primarily a tea-drinking country, with retail tea sales being nearly 10 times higher than coffee. However, coffee holds a significant share in the food service industry, accounting for 44% in 2013. The food service industry is still modest but reflects the growing popularity of coffee outside of the home. Furthermore, the rapidly developing coffee shop chains indicate further growth potential in the future.
Imports
China’s total coffee imports in the 2013/14 coffee year were 1.4 million bags, compared to 418,000 bags in 2004/05. Coffee imports have grown significantly, with an average annual increase of 15% over the past decade. The majority of imports are green coffee, unprocessed coffee beans, which have accounted for around 69% of total imports over the past 5 years. In the 1994/95 coffee year, a larger share of coffee imports was made up of instant coffee, but this shift can be attributed to the development of local processing industries, with Nestlé’s investments to meet domestic demand. However, over the past 5 years, instant coffee imports have grown rapidly, likely due to domestic demand growing faster than local processing capacity.
In terms of origin, the largest supplier of coffee to China is Vietnam, accounting for nearly half of total imports from the 2009/10 to 2013/14 coffee years. More than 80% of imports come from just five countries (including re-exports from the U.S.).
Given the origin of imports and other external information, it seems that Robusta accounts for a significant share of China’s coffee imports, reflecting the preference for instant coffee. However, it is notable that imports from Colombia and Central America have been increasing significantly in recent years, growing at over 25% annually since the 2009/10 coffee year, and now accounting for about 5% of total imports.
Coffee Consumption in Japan
The development of the coffee industry in China over the past 10 years can be compared to the development of coffee demand in Japan 50 years ago. As shown in the graph below, coffee consumption in China and Japan grew at similar rates over the past decade.
Japan continued to experience strong growth until the mid-2000s when it surpassed 7 million bags, becoming the fourth-largest coffee-consuming country in the world, with a per capita consumption of 3.5 kg. Japan now has a sophisticated coffee culture, primarily consuming Arabica coffee, with a highly developed processing capacity. This process took 30 to 40 years in Japan, and China is still in the early stages of developing its coffee industry.
Coffee Production in China
History
Coffee was first planted in China in the late 19th century by a French missionary in Yunnan Province, located in southwestern China. Coffee production then languished for more than a century until 1988, when the Chinese government, in collaboration with the World Bank and the United Nations Development Programme, launched a project to revive the industry. Large companies such as Nestlé also encouraged coffee cultivation in the region, resulting in a dramatic increase in production.
Coffee Growing Regions
Coffee is mainly grown in Yunnan Province, which accounts for over 95% of China’s coffee production. Yunnan has a long tradition of tea cultivation, notably producing the famous “Pu’er” tea. However, the province’s mountainous terrain, with an average elevation of around 2,000 meters, and its temperate climate are ideal for coffee cultivation. Yunnan also borders Vietnam, Laos, and Myanmar, making it a central area for coffee production. The province only grows Arabica coffee, and although there is some small-scale production of Robusta coffee in Hainan Island and Fujian Province, Arabica is the dominant variety.
Coffee Planting Situation (1994/95 – 2013/14)
Coffee production in China has grown rapidly over the past 20 years (see graph). According to the Food and Agriculture Organization (FAO), production in the 2013/14 coffee year reached 1.9 million bags, nearly doubling every 5 years. This has made China the 14th-largest coffee producer in the world, ahead of Costa Rica but behind Nicaragua, compared to its position as the 30th largest producer a decade ago with 361,000 bags.
The growth in coffee production is due to significant investments from both the private sector and the government. The Yunnan Coffee Association recently announced a 3 billion yuan (480 million USD) investment plan for the coffee industry over the next 10 years. This investment will be used to improve soil quality, build research and training centers for coffee farmers, and expand both the growing area and production.
Coffee production in Yunnan has also been spurred by the decline in tea prices, which has led farmers to switch to coffee for better profitability. Farmers in the region are believed to be able to double their income compared to growing tea on the same land. Additionally, farmers are transitioning from growing maize or rice to coffee due to higher expected profits.
Private Sector Investment in China’s Coffee Industry
Private sector involvement in China’s coffee industry has been increasing in recent years. Nestlé has been in Yunnan since the late 1980s, but its purchasing and investments have increased significantly in recent years. In 2013, Nestlé signed a memorandum of understanding with the local government of Pu’er to invest in a coffee center in the region. Starbucks has also sought to expand its presence in the region, opening a farmer support center in 2012 and piloting the cultivation of alternative coffee varieties to improve quality. Furthermore, in October 2014, coffee trader Volcafe announced plans to partner with a local company, Simao Arabicasm Coffee Company, to supply, process, and export Chinese coffee to international markets.
Exports
In line with increased production, China’s coffee exports have grown significantly over the past 20 years. From just 58,000 bags in the 1994/95 coffee year, China exported 1.2 million bags in the 2013/14 coffee year, nearly a 20-fold increase. About 90% of China’s coffee exports consist of unprocessed green coffee, with instant coffee and roasted coffee accounting for about 4% of exports over the past 5 years.
In terms of destinations, over the past 5 years, China has exported coffee to 97 different countries worldwide, with 71% of exports going to just 5 countries (as shown in the graph below). Germany is currently the largest importer, accounting for 40% of total exports over the past 5 years, where coffee is processed and re-exported.
Outlook
It is no surprise that the coffee industry in China is attracting significant interest, as its extraordinary growth in both production and consumption could potentially change the coffee market in unforeseen ways. Based on official government statistics and estimates, production is estimated at just over 1.9 million bags, with consumption also near 1.9 million bags, with both production and consumption growing at double-digit rates. However, these estimates are significantly higher than other sources, which estimate production and consumption to be between 1.1-1.5 million bags. This could be explained by increased domestic consumption of locally produced coffee, but it suggests that all figures need to be treated carefully.
Looking back to the growth of coffee consumption in Japan, China’s coffee consumption may follow a similar trajectory. Japan’s coffee consumption has recently stabilized at over 7 million bags, or 3.5 kg per capita. With China’s population being 10 times larger than Japan’s, although coffee consumption is mainly concentrated in urban areas (about half the population), by the end of this decade, China could be consuming over 4 million bags annually, with substantial growth potential.
Similarly, Arabica production in Yunnan Province has grown significantly, and the Yunnan Coffee Association has set a target of 4 million bags by 2020. Furthermore, China’s import/export data shows that an increasing proportion of domestic production is being consumed domestically. This trend aligns with companies involved in both supply and demand in China, such as Nestlé and Starbucks, increasingly investing in domestic coffee production to cater to the local market with specific blends and products. As the preference for Arabica coffee grows in China, this model is likely to continue.
In conclusion, the overall impact of China’s coffee industry on the global coffee economy remains uncertain. With both production and consumption increasing at relatively corresponding rates, China is not yet a dominant player on the global balance sheet. However, the dynamics of two very different trends—production nearly entirely made up of Arabica, while consumption leans toward Robusta—require more data to analyze these trends in depth.