A taste of Hawaii is now a part of life at the White House in Washington

Grown exclusively within the borders of North and South Kona on the Big Island of Hawaii, 100% Kona Coffee has a delicate, aromatic flavor that is often used as a blend with harsher, foreign coffees.

                

November 18, 2007

McDonald's eyes ballooning coffee market By ASHLEY M. HEHER AP Business Writer

McDonald's Corp. executives came out swinging when they announced their assault on the comfy world of coffee shops. After the success of its upgraded drip coffee - which even managed to snag a thumbs-up from testers at Consumer Reports earlier this year - the fast food chain known for super-size meals is gearing up for a massive expansion into the world of lattes. "We want to move from beverages as an accompaniment to being a beverage destination," Don Thompson, president of McDonald's USA, said in a meeting with analysts Tuesday. "Our speed, our convenience, the value that we can afford to customers without quality comprise will make us a formidable player."

Restaurants will offer lattes, mochas, cappuccinos and espressos with a choice of different flavorings and milk. Industry watchers say the drinks cost about 50 cents less than at Starbucks.

But as it tries to cash in on the fast-growing specialty coffee market, the world's largest restaurant chain is already finding itself at odds with the unlikeliest of groups: Its own franchise owners. "There's a real groundswell of resistance among the franchisees about this," said Richard Adams, a consultant for McDonald's franchise owners. He estimated the effort has a 50-50 chance of getting off the ground because of franchise opposition. Store owners are balking at the plan's estimated $100,000 price tag to cover renovations and initial new equipment. And many are concerned that little customer interest in McMochas means it will could take years to recoup their investment, even on the famously high-margin coffee drinks. "They're going to have whipped cream on their face," Adams said.

McDonald's said it's confident the new coffee will win over new customers and help individual stores boost annual revenue by about $125,000 once the coffee products, along with new bottled drinks, smoothies and other beverages are added to stores. Zachary Aisley, a 27-year-old from Woodland Hills, Calif., has been impressed with the value and taste of McDonald's attempts at premium drip coffees and iced coffees. Now he's looking forward to sampling the company's lattes and mochas to see if they merit more frequent visits. "I think their addition could bring me into the store," he said. "And I would definitely be likely to go in and try it."

If McDonald's can persuade its franchisees to sign on, analysts say it can likely thrive in the growing $12 billion specialty coffee market, which includes both brewed coffee and beans. About one in five Americans drinks some kind of espresso-based coffee each day, and the market is supposed to grow by at least 4 percent each year until 2011.

"With coffee gaining so much ground, McDonald's almost has to go there," said Sharon Zackfia, a restaurant and retail analyst with William Blair & Co. "The feeling that the coffee business is a single pie and everyone is fighting for different slices doesn't seem to acknowledge that the pie is growing." In response, companies are scrambling to offer more steamy drinks and snacks.

Dunkin' Brands Inc. added espresso beverages to Dunkin' Donuts shops in 2003 and credits the full-line of coffee drinks with helping its aggressive growth plans. And Canadian coffee chain Tim Hortons, which is expanding its own U.S. presence, said customer demand for one-stop food and coffee shopping is growing. "I think we're all now competing in the same space," said spokeswoman Rachel Douglas. "I think the lines are blurring, and I think consumers are demanding that."

A full-court press by McDonald's couldn't come at a worse time for Starbucks Corp., the world's largest chain of coffee houses, which is struggling with rising dairy prices, growing competition and flattening store traffic in the U.S. In a conference call with analysts last week, executives with Seattle-based Starbucks said they welcomed the competition. Then they threw in a subtle jab. "We understand all too well that we have built a very attractive business for others to look at and try and take away, whether it's 1 percent on the margin or big companies that are trying to take more," Starbucks Chairman Howard Schultz said. "We are up for the defense and we are going to get on the offense."

McDonald's first launched its so-called premium coffee about 18 months ago, followed by limited tests of sweet tea and iced coffee. Since then, it has added the specialty coffee drinks at about 800 U.S. stores, and it announced Tuesday that it intends to add the beverages to locations nationwide by early 2009.

A Starbucks spokesman declined to comment on the news, offering a company statement that it remains "focused on exceeding ... customers' expectations."

In a seemingly coffee-saturated society, there's little chance of a full-fledged coffee war between McDonald's, Starbucks and the myriad of other coffee purveyors like Dunkin' Donuts and Caribou Coffee Co.

"I think that they appeal to two different types of customers," said Morningstar analyst John Owens. "I think there's room for both McDonald's and Starbucks to be successful in selling coffee. This isn't something where one is going to be completely victorious over the other."

Coffee war heats up in China - A coffee war is brewing in China, LU HAOTING, China Business Weekly staff

As in many other markets, Seattle-based Starbucks is the industry Goliath who claims to be the first to introduce the so-called "coffee culture" to fashionable crowds in major Chinese cities.

Now, Starbucks' dominance is under challenge by many new comers, including Blenz Coffee from Vancouver, McCafe, an up-market coffee shop from fast food king McDonalds and a host of other foreign and domestic coffee houses.

Those who used to complain it was impossible to get a cup of good coffee anywhere in China may soon be spoiled by the number of coffee choices. Just take a look at Oriental Plaza in Beijing. The premium shopping centre is home to three Starbucks Coffee shops, one Blenz Coffee store, one McCafe outlet, and a slew of Hong Kong-style bistros serving coffee alongside Chinese and Western dishes. The chic shopping boulevard itself is a small-scale breakneck competition for coffee makers.

Starbucks Coffee used to fight face to face with Danesi Caffe on the ground floor of Oriental Plaza. But the Italian coffee shop disappeared last summer. Now exhausted shoppers, looking for a comfortable couch to have a rest, just stride directly into Starbucks without thinking of a second choice.

"I hope in China, when people think of coffee, Starbucks jumps into their mind first," said Charles C. Wang, acting president of Beijing Mei Da Coffee Co Ltd. Mei Da is Starbucks' authorized developer in northern China. "Up till now we haven't seen large rivals who can compete with Starbucks at the same level," Wang said. "But I'm sure there will be challengers in the near future as more and more coffee brands come to grab a share of the Chinese market."

The Chinese coffee market is expected to grow by 70 per cent in total sales volume between 2003 and 2008 to reach 11,073 tons, Euromonitor's findings indicate. Bai Ning is one of those who are ready to challenge Starbucks.

"In Vancouver, if Starbucks is at this corner of the street, we are at the other corner. It doesn't matter. Both brands survive. I don't see why that cannot happen in China as well," said Bai, president of China Coffee Holdings Co, Blenz Coffee's authorized licensee in China.

The returnee from Canada was wowed by Starbucks' popularity in China when he was back visiting Beijing a few years ago.

"That is exactly what I was looking for," Bai said. Bai opened the first Blenz Coffee store in China at Oriental Plaza in July 2003.

There are now 18 Blenz outlets in China, five of which are in the capital city. The Canadian coffee maker is expected to open an outlet at the Beijing Capital International Airport in March.

"We also plan to open a coffee shop in the Poly Theatre so audiences can enjoy a cup of tasty coffee during the intermissions of each performance," Bai said.

But compared with the coffee shop network woven by Starbucks, Blenz is still in the initial stage and is fighting an uphill battle. Starbucks' trademark of a green and white mermaid has been featured in more than 110 outlets in China, most of which are in Beijing and Shanghai, since it entered the country in 1999.

The Seattle-based coffee giant has opened two stores at the Beijing airport and will eventually have four in total.

Mei Da's sales revenues exceeded 100 million yuan (US$12 million) in 2004, a year-on-year growth of 35 per cent, according to Wang. And that is just what the northern China market is brewing.

The annual sales revenues of Blenz in China stand at about 20 million yuan (US$2.4 million), according to Bai.

"Our biggest challenge right now is that we don't have that much capital," Bai said.

"Starbucks (in North China) introduces venture capital. It has the money to secure the best locations to open its own corporate stores. A good location makes it easier for you to succeed."

Mei Da is 90-per-cent owned by a Hong Kong-based firm, of which H&Q Asia Pacific controls 77 per cent. H&Q Asia Pacific is one of the largest venture capital companies in the Asia-Pacific region.

Unlike Starbucks' "no franchising" strategy, Bai's tactic is to expand Blenz' network through franchising.

Blenz has percolated into in-land Chinese cities such as Chongqing Municipality in Southwest China; Shenyang, in Northeast China's Liaoning Province; and second-tier cities such as Dongguan in South China's Guangdong Province.

"Every city definitely has the market for one shop or two no matter how small they are," Bai said.

Starbucks is considering opening outlets in some inland capital cities, Wang said. "But we will seriously consider the economic conditions and local people's consumption power in those cities," Wang said. "Running a Starbucks coffee shop in a city without good economic conditions and relatively high consumption power is very difficult. Poor business operation will tarnish the brand image of Starbucks," Wang added.

Just coffee?

To most Chinese people, who grow up in a tea-drinking culture, coffee is still a nouveau fashion statement. Although China has a quarter of the world's population, it consumes less than 1 per cent of the world's coffee.

"Coffee is just an excuse for people to come to our store," Bai said. "Nowadays people get together more often. They need places where they can chat or just relax."

That is also why Starbucks has been promoting the idea of "the third place."

"We hope people will come to our store if they think it is inappropriate to have a talk at home or in the office," Wang said.

The cozy wood-paneled dcor, Western music and ground coffee aroma are appealing to many Chinese, who are looking for venues for intimate dates, business meetings - or just relaxing with a good book.

Blenz differentiates itself from Starbucks by allowing consumers to smoke and have more choices of tea, which is obviously against Starbucks style. Blenz also plans to invade into the territory of teahouses that are usually located in residential neighborhoods. "We will look at those areas where people lack a particular place to meet with one another. If we just concentrate on large and expensive office buildings and shopping malls, we don't have much room to grow, " Bai said.

While these Western coffee brands continued fighting neck and neck, Zheng Yan quietly opened her first caf at the Asian Games Village in November 2004. Her store, named Flower House, offers both tea and coffee as well as kungpao chicken and beef steak.

"If our customers get hungry when chatting here, isn't it great to have a good selection of tasty dishes for them?" Zheng asked.

Flower House's daily sales were 6,000 yuan (US$726) in its first three months. Coffee accounts for 60 per cent of the sales.

Sitting in a red couch, with Chinese silk gauze hanging behind her, Zheng categorized her caf as "fashionable and cozy", neither Western nor Chinese.

The 25-year-old woman is now busy looking for a location for her second and third cafes.

September 13, 2004

Coffee brews a future in China? Author: Hope Lee

Coffee marketers are working on transforming China – the homeland of tea – to a coffee drinking nation. Coffee remains a statement of fashion although consumption is growing rapidly.

Starbucks is suing a rival local Chinese chain (Shanghai Xingbake Co) whose name in Chinese characters is virtually identical to that of the U.S. giant that introduced coffee culture to a nation of tea lovers. The global spread of coffee-houses is touching down in China, with coffee consumption increasing year after year. Euromonitor, the world’s leading market intelligence provider, reports on the latest trends in coffee consumption in the homeland of tea.

Domestic production expands - Total volume sales of coffee in China grew by nearly 90% between 1998 and 2003, to 6,504.5 tonnes. Domestic production of coffee beans also expanded rapidly. China Agriculture Yearbook reports that China produced a modest figure of 3,573 tonnes of coffee beans in 1997, but by 2000 this had risen to 11,568 tonnes. The United States Department of Agriculture (USDA) estimated that this figure had risen to 13,000 tonnes by 2001.

The expanded local production of coffee beans coupled with the low price of green coffee in international markets has contributed to the reduction of the retail price of coffee in China. This situation encouraged investment in coffee, which in turn resulted in a higher visibility in the retail market, particularly in large cities. The level of publicity and media interest in coffee also notably increased.

Coffee consumption - a cosmopolitan lifestyle - Coffee is a Western concept to most Chinese consumers, who associate it with Western lifestyles. Unsurprisingly, coffee consumption in China is highly concentrated in large cities such as Beijing, Shanghai and Guangzhou. Coffee appeals to adventurous, open-minded, young, affluent, urban consumers. These consumers are more exposed to Western influences and tend to look up to Western lifestyles. Manufacturers have targeted Westernised young professionals as the main target market for coffee. The key issue is how to convince these consumers that coffee is a beverage to be drunk regularly rather than just a passing fad.

Another large consumer group, which influences the coffee consumption, is returnees. China has seen an influx of returnees (mainland Chinese students returning from Western countries) over the last five years. Many of these returnees have lived in Western countries for a decade and they have become accustomed to the coffee culture. Upon their return to China they have carried on living in this fashion. Visiting cafés and drinking coffee at breakfast is not a novelty for these consumers. Their strong earnings mean that they can afford to pay a premium price for a lifestyle to which they aspire.

Foreign ex-pats also comprise a large proportion of coffee consumers in China. China’s high growth economy and improved investment has attracted substantial foreign direct investments, which has led to rapid increases in the number of ex-pats. Shanghai’s official statistics show that the number of Taiwanese living in Shanghai for short periods (at least three months) is estimated at 230,000. The figure is expected to increase each year. Ex-pats are at the high-end of coffee consumption and are also regular patrons of cafés. It is reported that Westerners and businessmen from Hong Kong and Taiwan represent 30% of customers at chained cafés such as Starbucks.

Instant coffee leads the way - In terms of market composition, instant coffee dominates the Chinese coffee market. In this tea-drinking nation, coffee culture is just starting to touch down. Most Chinese do not fully appreciate the taste of coffee and they are content with the taste of instant coffee.

The popularity of instant coffee can also be attributable to its convenient preparation. This appeals particularly to white-collar workers who have busy lifestyles and cannot afford the time to prepare fresh coffee. Price-wise, fresh coffee is expensive when compared with instant coffee. Additionally, the availability of fresh coffee is highly limited. It is found only in select stores and expensive foodservice establishments and hotels.

The convenience of 3-in-1 instant mixes (coffee, milk powder and sugar) has resulted in robust growth in volume sales. However, coffee mixes do not contribute much to overall value growth due to their low price.

Starbucks: a representative of on-trade channel - China doubled its on-trade coffee consumption between 1998-2003. This is a mostly urban phenomenon with most rural areas largely untapped. On-trade sales of coffee mainly go through three types of establishments: coffee shops/cafés (independent and chained), Internet cafés and fast food restaurants.

Euromonitor’s figures show that chained coffee shops, such as Starbucks and Manabe (Japanese style café), saw spectacular growth in unit sales, up by 814% between 1999 and 2003. Starbucks stands as a statement of modern lifestyles and affluence in today’s China. The company has opened over 90 outlets in the country.

However, Starbucks faces increasing competition from other foreign players. China’s accession to the WTO has led to the gradual relaxation of the policy governing foreign owned retail outlets, and will lead to more foreign investment and new market entrants. The reduction of import tariffs on coffee will also encourage foreign investment in coffee. Canadian chain Blenz Coffee for example, plans to open 50 outlets by the end of 2004 in China, where consumers can smoke on the premises. China, reportedly, has at least 200 million smokers. Blenz Coffee’s move obviously serves to differentiate itself from Starbucks.

Local coffee shops seem unable to compete with Starbucks directly. While the local players are busy cashing in on the café trend, some imitate Starbucks’ operations, which has caused uneasy experience. This is highlighted in the high profile lawsuit between Starbucks and Shanghai Xingbake Co. Starbucks is suing Xingbake (whose name in Chinese characters is virtually identical) for trademark infringement after the two sides failed to settle out of court. The court has yet to make a ruling. Starbucks cannot afford to lose the lawsuit, as Shanghai is the core market for its mainland Chinese operation. To gain a firm management control in China, Starbucks increased its stake in President Coffee Co. (a joint venture between Starbucks and the Taiwan based company Uni-President) from 5% to 50% in the middle of July 2004.

Nescafé has the first mover advantage - The Chinese coffee market is highly consolidated, with multinationals controlling the market. Nestlé was the first multinational to establish a coffee processing plant in China. Nestlé’s Nescafé brand is a long-running favourite in the instant coffee sector in China and Nescafé has now become a generic name for coffee. In 2002, Nestlé accounted for 46% of retail value sales. The company runs continuous above-the-line and below-the-line marketing and promotional campaigns in the country. Kraft is trailing Nestlé considerably, holding a 20% share in 2002.

Multinationals have made a positive contribution to the development of the Chinese coffee industry with both Nestlé and Kraft utilising domestically grown coffee to supply the local market. Nestlé also sent technical staff to the Yunnan province (one of the major coffee-producing provinces in China) to help growers produce coffee beans which meet their own production requirements.

Exciting potential but a lengthy transformation period ahead - The Chinese coffee market is expected to grow by 70% in total volume sales between 2003 and 2008 to reach 11,073 tonnes. Euromonitor findings show that, within Asian countries, affluent consumers with a high degree of Western influence are more likely to accept a coffee culture.

Coffee consumption in Japan (1.4 kg per capita) and Singapore (1.9 kg per capita) are far higher than that in the UK (1.2 kg per capita). In the Greater China area, Hong Kong stood at 0.8 kg per capita, higher than the world’s average at 0.7 kg. This is positive news for the Chinese coffee industry and coffee marketers are now working on persuading Chinese consumers to increase their coffee consumption significantly in the next two decades.

Concerted efforts have been made to promote coffee consumption within China. In 2001 the International Coffee Organisation organised coffee festivals in both Beijing and Shanghai. Some coffee marketers believe they can eventually persuade every Chinese citizen to drink a cup of coffee a year. If they succeed, this would translate into substantial market demand for coffee, thus benefiting local and international coffee manufacturers.

Despite the potential of a 1.3 billion population base, coffee marketers are wary of the difficulty in transforming a tea-drinking nation into a coffee-drinking nation. Tea is the Chinese national drink and will continue to be an integral part of Chinese daily life in the next two or three decades. Further to this, tea is seen as a drink, which has health benefits, while coffee is marketed as no more than a lifestyle drink. The price of coffee is still out of reach for the average Chinese consumer, while tea is a cheap indigenous product. Most Chinese consumers still have little or no knowledge about coffee. Therefore, the transformation hoped for by coffee marketers is not impossible, but it will not be easy and will not be rapid despite the recent growth.

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