Shanghai’s Coffee Market Is Heating Up.

Tuesday, July 21, 2009 7:48
Posted in category Going to Market

There was a time when the only coffee outfit was Starbucks, and its knock off SPR.

Along Nanjing Road, the highest concentration existed with 5 stores between the Portman hotel and People’s park, and in total there were roughly 80 by the end of last year (as you can see from the map above).

Over the last 18 months though Starbucks’s hold on the market changed. Dramatically.

Leaving aside the recession for a moment, and the fact that a tall latte goes for 28RMB, the growth of Starbucks has been eclipsed by the by new entrants: Costa Coffee, 85c, Dunkin Donuts, and others. It is a market that in many ways was made by Starbucks, that others have learned from, and in the case of the Taiwanese 85c brand, looked to take away.

At first, 85c was a single store on the less than traveled corner of Maoming Road and Weihai Road (.5 km south of Nanjing road). A store that perhaps drew few glances at first from the folks at Starbucks, but within a week, it was probably clear to executives on Yishan road that they were witnessing the birth of a strong competitor.

The cakes themselves were measurably better than the local alternatives one would find at some of the other cake shops, and the bread variety was quite good (the Parmesan bread is fantastic!), but it was the 7RMB bubble teas and coffees that were growing in popularity. Everyone was talking about it, and myself and a few others quickly looked at the website and talked about taking up some of the licenses that were being offered up for the new stores.

It was the birth of what will shortly be the largest cafe in Shanghai, and the recent CHAINA article Watch out Starbucks, 85c is the new kid in town in China has a very interesting interview with one of its executives detailing its recent growth,

Q: When did you start the business in China?
PZ: We opened our first store in Shanghai 2 years ago. We now have 42 stores, 31 are in Shanghai and the rest are in Hangzhou and Suzhou. We are planning to open another 91 stores in Shanghai by the end of the year. We built our factory in Song Jiang in June last year.

What it is going to take to support that growth.

Q: Why did you choose Song Jiang as the location of the factory?
PZ: We needed a place big enough to accommodate us. We have around 6,500 square meters, which has the capability to supply 60 stores. Since we are growing so fast, a key issue that we face is how to supply the growing number of stores. We have already found a venue in Hangzhou which is 10,000 square meters in size and we’ll soon build an-other factory there.

.. and the logistics that goes into supporting the stores

Q: How do you manage logistics to each store?
PZ: Currently our 42 stores make their orders every day before 10 a.m. based on their previous day’s sales. Then our factory works 24 hours a day to make the delivery be-fore the following morning since our products have a short shelf-life. We need to pre-set product specifics on each item into our ERP system. So if I need to produce 1,500 pieces of cake today, then the system will tell me how much butter and dough we need and so on. Before 4:00 pm the same day, the products will be ready and around 7:00pm, we’ll make the delivery of the frozen cakes from factory to each store. At 2:00 am, we’ll make the second delivery of the day of normal-temperature cakes.

An interview that is interesting from many angles (Successful China business case, Retail Logistics, Branding, and real estate), I found the dialogue very interesting, telling, and was amazed to see just how profitable one of these stores could be:

What’s the average sales revenue of a store?
PZ: The best shop can have revenue of RMB1.9 million per month in Shanghai, while our store in the US, can do in excess of USD 400,000 per month.

Read the rest of the article here

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3 Responses to “Shanghai’s Coffee Market Is Heating Up.”

  1. David says:

    July 23rd, 2009 at 6:12 am

    Richard,

    Nice insight. This story is an example of why I regularly visit your blog. All MNC’s operating in China can learn from this situation.

    David

  2. TheCappucinoKid says:

    July 26th, 2009 at 8:56 am

    Bullshit. The first coffee company in China was Swiss Nestle with their Nescafe horrible little sachets for about ten years. Then Illy with the first stores. Starbucks was much, much later, same as always in China the market entry at high street level is 20 years after all the entreprenuers….and that includes Starbucks. Latecomers to an already proven market. Get your facts right, or stop talking about “experience”. Usually good, but this time very wrong and do your research properly next time instead of sucking up to corporate America. Cafe Europe got there first. Eat some humble pie with that Latte amigo, you’re getting cocky.

  3. Rich says:

    July 26th, 2009 at 9:14 am

    @ TheCappucinoKid

    Thanks for the post. Let me clarify that I never claimed to be a 20 year expert. If I got some of the facts wrong, I am definitely open to being corrected.

    I’ll look into the examples that you’ve listed. I was writing about branded coffee stores, of which I thought Starbucks was the first. If Illy were the first to have stores in China, then you are right, the story begins there. My post wasn’t about who was the very first, but I’d like to get the facts right. Thanks again, and please let me know where I can confirm that data.