China’s New Love of Coffee Is Coming for Yours

Invariably, my Spanish breakfast consists of toasted bread with a dash of olive oil and fresh tomato — plus a strong coffee. For months, I had gone easy on the olive oil after prices surged to an all-time high. Now the price pain is spreading into my caffeine fix. Sigh!

The cost of robusta coffee, the bean variety used in instant coffee and some espresso blends, has surged 60% over the past year, reaching recently its highest in nearly half a century. Soon, that jump in wholesale costs will be reflected in supermarket shelves.

Ask any commodity trader why, and the answer is unanimous: a combination of bad weather in Vietnam, the world’s largest grower of robusta, plus competition there with another fruit crop, namely the durian for export into China. Alongside, robusta beans had been in demand as roasters last year anticipated that the cost-of-living crisis would prompt consumers to switch toward cheaper coffee blends.

Left unsaid, however, is a notable development that’s reshaping the market: China is now developing a strong taste for the beverage, heralding an era when coffee prices probably will be higher for longer than in the past. The new equilibrium level is unlikely to be as high as prices had been recently, though.

First, a look at the market: In London, the cost of robusta has climbed to more than $4,200 a metric ton, the highest in nominal terms in 45 years. Still, prices remain below the all-time high set in March 1977 at $6,788 a ton. Adjusted by inflation, that peak equals to more than $35,632 a ton in today’s money. Robusta prices have moderated somewhat in most recent days on signs of better weather in Vietnam.

The market for Arabica — the typically more expensive and higher-quality bean — is less convulsive. In New York, prices have risen to $2.5 a pound, among the highest over the last decade. But prices remain below the peaks set in 2011, 1997, 1986 and 1977 when poor crops in Brazil sent the market into the stratosphere.

Now a look at what awaits: The market should start to ease in the coming months as the weather improves in Vietnam. Sky-high prices are likely to dent demand growth too. But on the other hand, growing Chinese demand is likely to put a floor under the prices.

The coffee industry for some time has seen the Asian giant as its next chapter. Yet China has stuck with tea until recently, and confidence about its prospects as a coffee-quaffing nation suffered a major blow after the accounting scandal in 2020 of Luckin Coffee Inc., by far the largest branded coffee chain in the country.

Since then, however, demand there has increased significantly, making China an important variable in the global supply-and-demand balance. Year to date, Chinese imports have soared, reinforcing the sense that the market is changing.

Last year, China became the world’s seventh top coffee-drinking nation, a remarkable achievement for a country that wasn’t among the top 15 a decade ago, or even in the top 30 two decades ago. “The Chinese coffee industry is undergoing a period of rapid expansion,” says Jinyi Guo, the chief executive officer of Luckin Coffee, calling 2024 a “pivotal” year to confirm the trend.

Chinese coffee consumption last year hit five million bags (each of 60 kilograms), more than double what it was a decade ago. And demand will rise: With average annual per capita consumption of just 13 cups, the country trails regional heavy-drinker Japan (280 cups), and it’s well behind the US (380 cups).

Enter the fastest buildup of branded coffee shops ever witnessed anywhere on the planet. With nearly 50,000 outlets, last year China overtook America as the country with more branded coffee shops. Starbucks Corp. alone is opening two every day in China in 2024. Others, like Luckin Coffee, Tims China and KCoffee, are expanding too.

Even if their profitability is patchy, it’s clear that more coffee shops mean more coffee cups. Yet Judith Ganes, a veteran coffee consultant, warns against being “fooled” by the openings: Many shops sell other drinks, chiefly tea. And in several cities they are more of an “experience,” with young couples sitting for hours sipping a single cup, rather than the quick turnaround of drinkers more akin to North America and Europe.

The key is whether China manages to take coffee from “trendy drink” into “daily beverage” — and whether high prices derail that shift. Last quarter, Chinese coffee shops reported a significant drop in footprint — a sign that consumers are price sensitive. On the other hand, survey after survey indicates the drink’s popularity is increasing, and not just the milky beverages long favored by Chinese consumers, but even the stronger espresso and Americano brews. In the first quarter, Chinese coffee imports averaged double the level of the same period of 2019.

For long, coffee was one of the few commodities that one could still analyze without paying much attention to China. That’s not the case anymore.

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