How did the coffee market recover after 2020?

In 2020 the pandemic and financial scandals pushed the coffee industry into store closures. Starbucks suspended most China stores on January 28 and later shut 200 in Canada; Luckin Coffee and Coffee Box also scaled back offline. Despite that, the consumer base kept expanding and new brands and sales channels pushed the market back into the spotlight.

Rapid capital-backed growth had followed Luckin Coffee's arrival, drawing many new brands and even unrelated businesses into the field. Competition stayed fierce, so standing out became the core problem for cafe owners. Coffee knowledge exchange now centers on how offline chains rebuild traffic and how online channels carry the next stage of growth.

In 2020, the impact of the pandemic and financial scandals plunged the coffee industry into a wave of store closures, with brands such as Starbucks, Luckin Coffee, and Coffee Box scaling back their offline operations. Yet amid all the doubts, the coffee market quietly grew stronger, driven by an expanding consumer base, an influx of new brands, and innovative sales channels that together pushed the industry into the spotlight. This article reviews the ups and downs of the past year, analyzes how the coffee market gradually won attention, and explores its future prospects.

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Since the rise of Luckin Coffee, which attracted a large number of high-frequency consumers with its philosophy of "good coffee doesn't have to be expensive," the coffee industry suddenly became a focal point. Internet coffee brands represented by Coffee Box and Luckin Coffee expanded rapidly with the help of capital, and some even claimed that "China's coffee market will reach a trillion-yuan scale." As a result, numerous emerging coffee brands rushed in, aiming to carve out market share, and even businesses unrelated to coffee ventured into the field in hopes of profiting from it.

However, as all parties entered the fray, a practical problem presented itself: although the market potential is huge, competition is exceptionally fierce, and standing out has become a difficult problem that every café owner must solve.

Looking back at the past year, the sudden outbreak of COVID-19 in 2020 pushed many brick-and-mortar stores to the brink of closure, and the two major domestic chains, Starbucks and Luckin Coffee, also fell into crisis. To sum up that year's coffee market in one sentence: the entire industry experienced a "wave of store closures" and once fell into a trough.

On January 28, 2020, Starbucks was the first to announce the suspension of operations at most of its stores in China, and it was not until early August of the same year that it revealed only 1% of its Chinese stores had yet to reopen. During this period, Starbucks also closed many overseas stores, for example shutting 200 stores in Canada in March and urgently closing another 200 in June, in order to cut operating costs. Under the heavy pressure of the pandemic, small independent cafés also had to suspend business, and because of their small scale and weak risk resistance, once they closed they faced the prospect of direct bankruptcy.

During the pandemic, another major domestic chain brand, Luckin Coffee, was shrouded in negative news for a long time due to a financial fraud scandal.

On September 8, 2020, the internet coffee chain brand Coffee Box announced the closure of its offline brick-and-mortar stores; in addition to Coffee Box, COSTA also joined the ranks of large-scale store closures.

Against this backdrop, people could not help but ask:

Can the coffee market really not take off?

However, amid all the doubts, what everyone saw was this: the coffee market is growing bigger and stronger! (Portal: Coffee brand MANNER secures another round of financing, the coffee market is growing bigger and stronger!)

So how did the coffee market gradually become "prominent"?

One

Support from the consumer base

As mentioned at the beginning of the article, Luckin Coffee attracted a large number of high-frequency consumers through the lure of "freebies." Although negative news has still not dissipated to this day, it cannot be denied that Luckin's birth indeed provided good education for China's coffee market. Though it remains highly controversial, it helped drive market development to some extent. Coupled with the widespread popularization of "specialty coffee culture," consumers' overall attitude toward coffee consumption underwent a shift: from initial instant coffee to pour-over coffee, from a single purchasing scenario to a more diversified consumer scenario experience, and they began to place higher demands on coffee products (such as quality, packaging, etc.). Driven by the consumer base, the coffee market was able to open up, and at the same time gave rise to more innovative coffee brands.

Two

An infusion of new blood in coffee brands

According to statistics, more than 10 coffee brands secured financing in 2020, and China's coffee market sales exceeded 11.5 billion US dollars. In addition, with the backing of capital, entrants from multiple new fields joined the coffee track and quickly seized the market. Through different coffee categories and by constantly breaking with tradition, the coffee market gained an injection of more new blood, further driving its development.

Three

New approaches to sales channels

According to data from the Qianzhan Industry Research Institute: China's coffee market sales scale is expected to reach 300 billion yuan in 2020, and is expected to exceed 1 trillion yuan by 2025. These figures show that the coffee market has enormous room for development. In today's consumer market, it is almost impossible to gain public recognition without breaking with tradition. If major coffee brands want to shine and dominate the market, they must stand in the most "prominent" position among consumer groups, and must adopt new approaches in marketing strategies, new product rollouts, and store operations.

I wonder if everyone still remembers that a term was very popular last year called "private domain traffic" (that is, traffic that a brand or individual owns and can freely control). Before private domain traffic became prevalent, most cafés' online customers were mostly public domain traffic—simply put, wherever there was a price advantage, they went there. Perhaps because of the pandemic, the coffee industry's sales channels underwent a major shift last year. For example, the operating model of cafés was no longer just single-store operation, but placed more emphasis on the relationship chain between the brand and consumers, that is, building private domain traffic, establishing one's own brand purchase entry points, and carrying out digital transformation, such as mini-programs, APP purchases, and unmanned retail.

In digital transformation, Starbucks took the lead by introducing a new retail store format: opening "Fei Kuai" concept stores in the Chinese market, changing its previous focus on the third-space experience, and stating that in the future it would present a trend of the third space and the fourth space developing in parallel. As for private domain traffic, Luckin's previous data showed that the brand had 1.8 million private domain users, contributing 35,000 cups in direct orders per day and 100,000 cups in indirect orders. Private domain orders became the third-largest order source channel after the APP and mini-programs (Luckin's APP and mini-program pages have entry points for giving coupons, which is its third-largest order source channel). Private domain operations greatly improved Luckin's operating efficiency. In addition, Luckin also conducts precise analysis of user behavior based on various types of data, and on that basis carries out marketing activities such as SKU adjustments, store promotion plans, and supply chain adjustments. Of course, in addition to these two giants, many coffee brands also integrate and apply APP user traffic pools with food delivery platform user pools, constantly breaking boundaries in marketing strategies, new product rollouts, and store operations to create new highlights belonging to their own brands, such as the e-commerce-oriented Saturnbird.

Compared with traditional offline retail coffee experience stores, internet coffee consumption has become a trend, and its digital transformation approaches can be said to be very successful.

Finally

At present, as the pandemic improves, Starbucks said last December that its China business had fully recovered by the end of the quarter, and the Chinese market had achieved positive growth; and at the end of last year, Luckin Coffee also took the initiative to pay 180 million US dollars to reach a settlement with the SEC, and opened new stores and launched new products, while its WeChat groups continued to distribute discount coupons, hold lotteries, livestreams, and so on. Luckin's management expects that, based on current operating progress, it is expected to achieve overall profitability this year.

But the market changes rapidly, and only adapting to circumstances is the best way to respond. As for how the coffee industry's market will develop later, everyone should just wait and see.

*Image source: Internet

The above content is compiled by CoffeeHunters, a coffee news website.