How China’s ‘great reopening’ has affected the coffee sector

china coffee shop starbucks
  • China has relaxed its zero-Covid policy after nearly three years
  • Oxford Economics estimates China has forgone around $1trn of GDP
  • Coffee shops are expected to bounce back; but there may be short-term complications

FOR MUCH of China’s population, “zero-Covid” felt like a nightmare that would never end. The policy, which saw cities locked down and millions under quarantine, had a simple objective: to keep the spread of infections at bay.

However, after spending more than 1,000 days closed to the outside world, China is finally opening up. Last month, growing frustrations about a policy that had no end in sight while the rest of the world was back to normal culminated in a series of landmark protests.

The logic of “zero-Covid”, which is estimated to have cost China’s economy $1 trillion, was put under serious questioning and piled pressure on President Xi Jinping to review his stance.

And, in early December, he did. The government swiftly relaxed the country’s most severe restrictions and started toning down the language around the dangers of the virus.

While some aspects of the policy remain, people can now go into shopping malls or on public transport without a recent negative test, enter parks and supermarkets without checks, and can quarantine at home rather than in a state-run centre if they have an infection.

For China’s coffee industry, the lifting of restrictions feels like good news. Coffee shops and roasters have taken a big hit over the last two-and-a-half years, with both domestic and international brands expressing concern about falling footfall and logistical problems due to restrictions.

Now, the opening up of the economy is expected to reinvigorate the economy – and, in turn, help boost out-of-home coffee consumption.

According to recent estimates, household consumption will grow by 9% in 2023, as China’s working population looks for ways to spend income saved during periods of lockdown. The freedom around mobility is also expected to boost coffee shop visits.

For example, Cowen, an investment banking company, predicted last week that the policy change will help Starbucks grow its per-share earnings by as much as 20% through 2025.

“Now that China has largely abandoned its zero-Covid policy, [Starbucks] appears poised to benefit from the country’s long awaited economic reopening,” Bank of America analysts said on Wednesday.

Meanwhile, Luckin Coffee, China’s biggest coffee shop chain, saw shares rally last week to $24.66, just short of $25.08 highs. This illustrates confidence in the health of out-of-home coffee sales.

china's coffee sector

Short-term complications

As China looks forward to celebrating the New Year later this month, there is extra reason to rejoice as the country appears to be finally moving on from the turmoil of Covid-19.

However, some are viewing the reopening with a degree of caution. James, who works as general manager of Yunnan Yongman Coffee Farm, says that compared to the rest of the world, China’s coffee sector could still lag behind in the first quarter of the year.

“China is the last country to open up,” he says. “So it won’t be booming. But half the coffee shops that have been closed will slowly recover. Since the liberalisation of restrictions, we are seeing peak epidemic, so business is not good. But we expect it to recover in March.”

Indeed, shortly after the widespread reopening of the country, China was hit with a wave of Covid infections. According to a study by Peking University, around 900 million people in China have been infected as of January 13.

The peak of China’s Covid wave is expected to last two to three months. But, as James points out, this could stall the coffee sector’s anticipated rebound, particularly if coffee shop staff are forced to quarantine.

“It’s deeply frustrating,” Noah Fraser, Beijing-based managing director recently told Reuters. “Businesses are having to close due to staff being sick, even though they can legally be open.”

In the light of the huge surge in infections, a number of countries, including the UK, announced travel restrictions for those arriving from China. Naturally, this has quelled some of the optimism around the end of the “zero-Covid” policy.

That said, the country’s major cities, such as Beijing, Shanghai, and Chongqing are now said to have seen the worst of the Covid outbreaks, which should pave the way for a much stronger second quarter for China’s coffee sector.