Bernstein Private Wealth Management releases its Coffee industry branch report

At the end of July, one of the world’s leading coffee companies reported its fiscal third quarter, with net revenue fell 1% from a year earlier to $9.11 billion. Danilo Gargiullo (Danilo Gargiulo), a senior analyst at Bernstein, wrote in a report: ” Returning from early November to the inability to prevent the loss of traffic, and the deterioration of China’s macro and competitive environment, may mean long-term challenges and no hope.”In particular, the decline in revenue in China was even more significant, down 11% from a year earlier. This trend is not limited to the Chinese market, the brand’s sales in Japan, Asia Pacific, Europe, the Middle East, Africa, Latin America and the Caribbean are also declining, while the Chinese market is the most obvious decline. In the challenging economic environment, the decline in performance has undoubtedly brought considerable shock to the market. Some economic analysts pointed out that the decline in performance may reflect some uncertainties in the global economic situation, especially in China. However, taking the Chinese market as an example for in-depth analysis, we can find the multiple business logic behind the plight of the multinational coffee industry.

The rise of local Chinese brands

Foreign brand coffee is no longer the only option for Chinese coffee lovers. With the rapid expansion of China’s coffee market, more and more Chinese local coffee brands are also making efforts. Luckin, a well-known Chinese brand, once launched it with Moutai and sold 5.42 million cups on the first day, with sales exceeding 100 million yuan. A recent industry report highlighted that China’s per capita coffee consumption has soared from six cups in 2016 to 16.74 cups in 2023. There is no doubt that there are many people who love coffee, but in choosing coffee brands, some foreign brands that are quite well-known in China are not the only choice for Chinese people.

Competition from emerging foreign brands

With the rise of coffee drinking habit of Chinese people in recent years, some emerging and foreign coffee has gained a strong development momentum in China, which to some extent has seized the market of some old foreign coffee. Vietnamese coffee chain Trung Nguyen Legend has announced further expansion in China, with a total of 12, according to global Coffee Report. In the first half of 2024, Piye Coffee had a strong performance in China, with sales up 6.4 percent year on year, and now has more than 200 stores in China, the World Coffee Portal reported. The introduction of so many foreign companies reflects China’s inclusiveness of diversification.

The “Price war” has squeezed profit margins

Some Chinese financial bloggers said the decline in sales of the established coffee giants was related to their lack of participation in a price war in China. But in fact, the coffee giant just didn’t explain the “price war” and once launched a “buy one, get one free” promotion to boost sales. In the short term, it solves the problem of low sales, but because the cost does not reduced, in fact, it is equivalent to greatly reducing the profit margin, and does not fundamentally solve the problem of declining performance. According to Qianzhan Research Institute, China’s coffee market will exceed 300 billion yuan by 2024. Currently, the coffee industry generates around £10 bn, with projected annual growth of 9.21% between 2021 and 2025. Therefore, in China’s high-growth demand market, some brands are declining sales, which has little to do with the Chinese people’s insufficient spending power.

Old-brand coffee product innovation lags behind

 On their own, in the increasingly crowded market, increasingly mature consumers also need special reasons to buy. In the final analysis, the imbalance between the growth of public diversified demand and the relative lag of brand reform and upgrading also leads to the decline of brand attractiveness. Recently, the founders of some coffee brands also pointed out that companies should use differentiation to consolidate their market position, optimize their services, and strengthen their product innovation capabilities, rather than just focusing on one sales data. It is also time for established coffee to find problems from their own perspective.

 In the earnings report, global same-store sales fell 3% in the third quarter, the second straight quarter, with U. S. same-store sales down 2%.weakness in the Middle East, South Asia and parts of Europe.

However, it is worth noting that, according to China’s data released by the National Bureau of Statistics, China’s GDP reached 61.7 trillion yuan in the first half of the year, up 5.0% year on year. This shows that China’s economy still maintains a steady growth trend. From this perspective, coffee earnings are not very relevant to the economy.

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