Nestle grows China coffee investment
Nestle's new commitment in Yunnan reflects the rapid rise of coffee in China, which could split the market with tea in the next 20-30 years
Coffee lovers in China will be excited to hear about a major new initiative by Nestle (Zurich: NESN) to grow coffee beans in southwestern Yunnan province, in the latest challenge to the nation's traditional tea-drinking culture. Nestle's choice of the area known as Pu'er for its latest move is highly symbolic in the brewing battle between these two popular beverages, since that particular region is already famous in Chinese for its namesake tea leaves.
As a regular coffee drinker, I'm personally quite excited by this new initiative, which could really help to put China on the global coffee map by bringing new sophistication to its bean-growing culture. An interesting offshoot of this new development could also be a boom in tourism for the area, since Yunnan province is already one of China's most scenic areas that is quite popular among both domestic and international travelers. Thus I wouldn't be surprised to see entrepreneurs try to combine all these elements to create a new kind of coffee and tea-drinking tourism experience, much the way the Napa Valley in California has become a major tourism center for wine tasting.
But I'm digressing from the more immediate news, which has Nestle, the world's biggest food company, signing a memorandum of understanding (MOU) with the local Pu'er government to boost the local coffee-growing culture. Among other things, the deal will see Nestle build a coffee farming institute to train local growers on the latest techniques for improving the quality of their crops. Nestle, whose Nescafe instant coffee is already well established in China, will also build a warehousing and testing laboratory and a "consumer experience center" Pu'er.
Nestle's new commitment looks remarkably similar to another big announcement nearly two years ago from Starbucks (NYSE: SBUX), one of the coffee industry's other major boosters and a big investor in China. That move saw Starbucks set up a joint venture to process, purchase and export locally grown arabica coffee beans from Yunnan. That announcement followed an earlier commitment by Starbucks to work closely with the government in Pu'er to help develop the local coffee growing culture.
These commitments from two of the world's biggest coffee companies are hardly a selfless act, as both Nestle and Starbucks do huge business in China already. Accordingly, both want to show that they are not only taking money from Chinese consumers but are also helping the country's economic development by promoting its coffee-growing culture. Nestle said it will massively boost its coffee buying in Yunnan from 10,000 tonnes of beans in the 2010-11 growing season to 70,000 tonnes in the 2012-13 season. Starbucks said its coffee buying from the region has increased by more than 20 times since it started buying Yunnan beans in 2007.
While this kind of announcement is a public relations exercise in many ways, it also does symbolise the growing stature of coffee culture in China, both in terms of bean planting and also consumption. Coffee sales in China reached the US$1 billion level in 2011, and were on track to double within the next five years. Both Nestle and Starbucks are helping to drive that trend, with Starbucks alone planning to double its China store count from present levels to 1,500 stores nationwide by 2015.
Only history will tell if coffee can ultimately grab a major share of a market that has been dominated for centuries by tea. But if current trends persist, I could envision coffee and tea ultimately splitting the China market for hot drinks 50-50 within the next 20 or 30 years, providing a nice boost for companies like Nestle, Starbucks and also the Pu'er region.
Bottom line: Nestle's new commitment in Yunnan reflects the rapid rise of coffee in China, which could split the market with tea in the next 20-30 years.
To read more commentaries from Doug Young, visit youngchinabiz.com